Objectives of Internal Check
The objectives of internal check are as follows:
1. Early Detection of Errors and Frauds:
The main objective of internal check is to detect and prevent the occurrence of errors and frauds at an early stage. This is possible as the work of each and every person is independently checked
2. Minimization of Errors and Frauds:
It is one of the primary objectives of internal check. As the work performed by each individual is checked by another person, there is a check on errors and frauds. Hence, the possibility of errors and frauds are minimised to a greater extent.
3. Division of Work:
Internal check provides for proper division of work based upon each and every persons skill, ability, specialisation and effectiveness.
4. Fixation of Responsibility:
The total work is divided into smaller units and assigned to different persons. Each and every person knows what is expected from him/her and he/she will be held responsible for any errors or fraud which takes place in it. Internal check provides clear determination of responsibility.
5. Reliability of Records:
The system ensures that the books of accounts and other records maintained provides reliable source of information.
Advantages of Internal Check
The main advantages of Internal Check are given below.
1. Proper Distribution of Work:
Internal Check helps in proper distribution of work among employees based on their qualification and experience. It enables the employees to perform the work efficiently.
2. Detection and Prevention of Errors and Frauds:
The main object of internal check is to minimize the occurrence of errors and frauds, as no individual person does the work from the beginning to the end and the work of one person is checked by another person.
3. Increases Efficiency:
A good system of internal check, increases the efficiency of work of employees as the right work is allocated to the right person taking into account his skill and experience.
4. Determination of Employees Liability:
Internal check system clearly determines the responsibilities of the employees. Hence, the liability of the employees can be easily fixed due to irregularities or negligence caused by the employee.
5. Proper Maintenance of Books of Accounts:
Internal check system helps to maintain proper records and ensures accuracy of the entries in the books of accounts.
6. Easy and Quick Presentation of Final Accounts:
Internal check enables quick presentation of final accounts i.e., Profit and Loss Account and Balance Sheet immediately after closing of the accounting period.
7. Facilitates the Auditor:
When there is an effective internal check system the statutory auditor can rely on the system. He can avoid detailed checking of transactions. He can select limited sample of transactions. This enables him to finish the audit work within time.
8. Increases Profitability:
Overall efficiency and economy of operations leads to increased earnings for the owners of the enterprise.
Disadvantages of Internal Check
The disadvantages of internal check are given below.
The system of internal check is more expensive and time consuming.
2. Not Applicable for Small Organization:
T his system is not applicable for small organization where there are only few employees. Only large organization having number of departments and complexity of jobs can get benefit of this system.
3. Monotonous for the Workers:
As same work is done by the employees continuously the job becomes boring and the employees lose their creativity.
4. Risky for the Auditor:
When the auditor relies on the system of internal check and does not conduct tests he will be charged for negligence.
5. Disorder in Work:
If the system is not fully organized and if there is any failure in the system, it creates disorder and confusion hence, chances of errors and frauds increase.
6. Chances of Collusion:
Though internal check system prevents errors and frauds but in reality there may be chances of collusion between two or more employees to indulge in frauds or malpractices.
Duties of an auditor with Regards to Internal Check System
The system of internal check in an organisation determines the scope of work of a statutory auditor. The duty of an auditor is to verify the effectiveness of the system of internal check in operation. However, the auditor should perform the following work in this regard.
1. To Obtain Written Statement:
An auditor should obtain a written statement about the working of the internal check system from the business concern.
2. To Examine the System in Operation:
The auditor should carefully examine the existence and operation of the internal check system.
3. To Identify the Weaknesses:
The auditor should identify the weakness of the system which will result in occurrance of errors and frauds taking place.
4. To Suggest for Improvements:
If the system of internal check is ineffective, the auditor should make suggestions to strengthen the system of internal check.
5. To Analyse the Extent of Reliance:
The auditor should carefully analyse the extent to which he can rely on the effectiveness of internal check. If the system of internal check is effective, he can check sample transactions thus devoting his attention on other important audit areas.