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Advantages and Disadvantages of Internal Check

Internal checks are "an arrangement of bookkeeping so that mistakes and frauds are likely to be prevented or identified by the bookkeeping process itself," according to L.R. Dicksee. It refers to a routine internal audit conducted by the staff, which other staff members use to review each employee's work independently.

"The checks on day-to-day transactions which operate continuously as part of the routine system, where the work of one person is proved independently or in complementary to the work of another, the objective is the prevention or early detection of errors or frauds," is how The Institute of Chartered Accountants of England and Wales (ICAEW) defines an internal check.

An ongoing procedure that is a common component of daily life is an internal check, and it has to do with every transaction that happens every day. An internal check is accomplished by the complementing assignment of tasks and the independent review of one person's performance by another.

Advantages and Disadvantages of Internal Check

Characteristics or Features of the Internal Check System

1. Division of Work

An item may need to be displayed by staff, and an invoice may need to be prepared by another; cash may need to be received against the invoice by a third clerk, an item may need to be delivered against a receipted invoice, an item may need to have its outward movement checked against a delivery order, and so on.

Such specialized jobs speed up operations in large organizations and immediately incorporate internal controls.

2. Giving a Check

The company should establish such rules so that other employees may review the job. By switching to the staff, an officer can check the work of one staff member.

3. Use of Equipment

Devices may carry out various tasks in this modern environment, such as time clocks and salary calculators. An organization ought to make use of tools that facilitate internal audits.

4. Autonomous System

An organization can use self-balancing ledger accounts to facilitate internal audits. Its management determines how effective it is.

5. Rotation of Jobs

No employee should be permitted to stay in one area of work for an extended period. People have more freedom to manipulate the system when they are familiar with it and have exclusive access to it.

6. Specialization

Not every employee may have a particular expertise needed to keep accounts correctly. Therefore, a firm should provide training to improve employees' abilities so that internal controls may be enhanced.

7. Control

Where there is direct interaction between customers and the public, fraud is more likely to occur. So that the internal check system is more effective, a manager can keep a watch on such works.

8. Authority Level

Precise authority levels that correspond to the various transactions' punishments are required. Responsibility must be extracted in proportion to the power granted. The existence of authority levels causes an evaluation of subordinates' operations.

Objectives of Internal Check

  1. The internal check has several goals. Here are several examples:
  2. To apply moral pressure on employees
  3. To make sure the accounting system generates accurate and sufficient data.
  4. To defend against fraud, negligence, and inefficiency of the business's resources.
  5. The decision to share the work in a commercial deal is left undocumented.
  6. Assign each clerk's tasks and responsibilities in a way that makes it possible for him to be held accountable for a specific fraud or error.
  7. To reduce the likelihood of mistakes, frauds, or irregularities in the business based on the division of labour concept.
  8. It is simple to spot errors and fraud if they are committed since an effective internal check mechanism is built on the division of labour concept.
  9. To readily identify errors and frauds if they are committed, independent checking is a feature of an effective internal check system.

Fundamentals of Internal Check

A check conducted internally is founded on a set of rules, and an internal check is useless without that. The following are these guidelines:

  1. The business employees should distribute the process by the obligations, rights, and responsibilities. No room exists for intervention.
  2. No individual should be in charge of the crucial facets of the company on their own.
  3. The tasks assigned to the company's employees should be rotated periodically so that nobody is stuck doing the same thing for an extended period.
  4. It should be recommended that each employee take a vacation at least once a year, and this will aid in identifying covert fraud.
  5. An adequate system of internal checks should enable others to review an assistant's work automatically.
  6. The division of labour shouldn't be excessively costly.
  7. The self-balancing system must always be employed.
  8. The financial and administrative authority should be wisely distributed among several officers.
  9. Access to the account records must not be granted to anybody who possesses assets.

Advantages of Internal check

1. Moral sway over workers

The system of internal controls keeps staff members' morale in check and teaches them the value of honesty, diligence, and straightforwardness.

2. Assessment of Employee Responsibility

The internal check system determines employee duties. The employee may be held accountable for any irregularity that he engages in.

3. Frauds are less likely to occur

The internal check method reduces the likelihood of fraud since mistakes and frauds may be caught early.

4. Enhanced Effectiveness

Because the internal check system is based on a division of labour, it ensures higher efficiency and speed.

5. Making Auditing Simple

Due to the internal checks system's ability to rely on test checking, auditors' job is greatly facilitated.

6. It is possible to create final accounts

The "Profit and Loss Account" and Balance Sheet are quickly created in an internal check system.

7. Complete and accurate records of every transaction

The internal check system may also provide accurate and comprehensive records of all transactions on each bookkeeping balance.

8. Identification of Fraud or Unregularity

Before they assume any complications, staff workers might have any dishonesty or irregularity in the concern caught.

9. Testing Possibility

Let's say the internal cheek system is deemed adequate by the auditor. Then he may use test checking to aid him by thinking about flaws or weak places.

Disadvantages of Internal check

Dependence on one another is detrimental to doing the task quickly. There will be a significant disruption to daily operations if even one employee is missing. The following are a few drawbacks of an internal check system:

1. Expensive

The internal check system is more time- and money-consuming.

2. Lack of Motivation at Work

The auditor can be unfocused at work and rely on the internal check blindfold system, which might negatively impact the audit work's quality. This is another significant flaw in the internal check mechanism.

3. Not Appropriate for Small Issues

Small businesses should not use the system of internal checks since they may find it uneconomical.

4. Organization Among Employees

If the worried employees band together, they may conceal several anomalies from the boss and prevent their detection. It could not be suitable for the workers to assemble like this.

Despite these four drawbacks, performing internal inspections is essential for all kinds of businesses.

5. High-ranking officials' negligence

There is a chance that some of the responsible and high-ranking officials may get complacent because they think-perhaps incorrectly-that nothing can go wrong with a strong internal check mechanism.

6. Risky for an auditor

If the auditor depends on the system's output and does not apply his checks and procedures, his work cannot be free from errors if the system turns out to be flawed.

7. Quality is traded for Promptness

In an internal check system, the quality of work suffers because company clerks prioritize being quick and don't care if doing so results in subpar work.

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