Difference Between Internal Check and Internal Audit

Introduction

The primary difference between internal checks and internal audits is that internal checks are routine checking processes that involve cross-checking every component of the task accomplished at the time of execution and documenting the findings. Internal auditing monitors every area of the work by an unbiased employee who has been specially recruited for the job.

The goal of an internal audit is to provide independent and objective assurance that the company's risk management, governance, internal check, and internal control systems are operating properly. Furthermore, it is vital to highlight that the efficiency of any system deployed in the business is heavily reliant on the personnel assigned to carry it out.

What Do You Mean By Internal Check?

Internal check is a method of organizing factory, office, warehouse, retail, and other operations in which one employee's work is routinely reviewed by another to reduce the risk of errors and fraud. Thus, in order for one employee to commit fraud, another must conspire with them.

It is a major component of the internal control system enforced in the firm, in which no single individual is authorized to undertake and enter into every aspect of financial transactions. Consequently, the task is separated into multiple components, with each component assigned to a distinct employee. This allows one employee's work to be reviewed by another employee.

Features

The key characteristics of Internal Checks are:

• Part of the Internal Control System.
• Work is divided, and responsibilities are allocated.
• Identifies and prevents errors and fraud.
• Ensures that no employee has full authority over a transaction.

Objectives

The objectives or goals of Internal Check are:

• To reduce the possibility of mistakes or fraud.
• To decrease the possibility of an employee stealing funds or merchandise.
• To guarantee that the firm's accounting system provides reliable, comprehensive, current, and accurate information for all business transactions.
• To discover mistakes or fraud at an early stage and correct them quickly.
• To protect the company's assets from theft, carelessness, and inefficiency.
• Assign jobs such that no area of the business is overlooked or unrecorded.
• Use independent checking to uncover mistakes and fraud as they occur.

Advantages

The advantages of Internal Check are:

• Work is properly divided among the employees.
• It provides prevention from fraud and error.
• It increases efficiency.
• Convenience for the auditor.
• Accounts are accurate, which increases profits.

Example

An accounting department's system of checks and balances is an example of an internal check. Different staff are assigned distinct roles in the financial reporting process, such as recording transactions, rectifying bank statements, and preparing financial statements. A distributed financial reporting approach decreases the possibility of errors or fraud because no single person has complete authority over the process.

Independent audits are another type of internal check. An independent auditor is a person or firm who is not associated with the company being audited. They analyze the company's financial statements and records to ensure that they are correct and in accordance with applicable laws and regulations. This ensures that investors and other stakeholders may trust the company's financial reporting.

What Do You Mean By Internal Audit?

Internal auditing is a systematic and ongoing assessment activity that occurs within an organization. A team of auditors examines accounting and finance processes to provide protective and constructive service to the company's management and guarantee that business transactions are accurately recorded.

Account books are maintained systematically in accordance with the relevant regulations. There is no potential for account manipulation or misappropriation of business property.

An internal audit is a sort of control that aims to measure and evaluate the efficacy of other types of controls. It comprises the verification of business activities by personnel particularly designated for the task.

Features

The salient features of internal audit are:

• It is a component of the internal control system.
• It is a type of continuous audit.
• It follows usual audit techniques.

Objectives

The objectives or goals of Internal Audit are:

• To prove the accuracy and authenticity of accounting records provided to management.
• To guarantee adherence to conventional accounting principles and practices.
• To identify fraud and mistakes as soon as possible.
• To analyze the internal check system at regular intervals in order to recommend changes, as well as conduct specific investigations for management.
• To ensure that the liabilities were maintained for valid and legitimate activity.
• To ensure that the transactions are carried out by an authorized person and under the appropriate authorization.

Advantages

Internal audits help in:

• Detecting mistakes and frauds.
• Quick presentation of accounts and reports.
• Management consulting.
• Proper coordination and control.

Example

A financial audit is an example of internal auditing in which a team of internal auditors checks and evaluates an organization's financial records and reports to ensure their accuracy and completeness. As part of this procedure, internal controls over financial reporting are assessed, transactions are checked for accuracy and authorization, and the financial statements are reviewed in general.

Internal auditors may also perform operational audits, which examine the efficiency and effectiveness of an organization's processes and systems, and legal audits, which assess whether laws, regulations, and internal policies and procedures are followed.

Internal auditing's ultimate purpose is to provide objective, independent assurance about an organization's risk management, control, and governance systems and to recommend improvements when needed.

Key Differences

• Internal Check is a system used in the firm in which the work completed by one employee is independently checked by another employee to reduce the possibility of error or fraud. Internal auditing, on the other hand, is an audit that is carried out within an organization. It refers to the systematic critical inspection of the company's books of account by its employees.
• In an internal check, the entire process is logically organized by dividing the labor so that no single person has complete control over every aspect of the transaction. Internal auditing, on the other hand, examines and cross-verifies the work of employees by a distinct group designated particularly for the purpose.
• The internal check begins when a transaction is entered. In contrast, an internal audit begins when the transaction is documented in the books.
• Internal checks ensure accounting and administrative accuracy, whereas internal audits examine the effectiveness and scope of management controls.
• The internal check is carried out by current personnel. In contrast, for internal auditing, the corporation selects a dedicated team of auditors.
• There is no additional expense associated with an internal check because it is performed by current employees. Internal auditing, on the other hand, is slightly more expensive because the task is performed by a team recruited specifically for the purpose of performing an audit.
• Internal checks avoid errors and fraud, whereas internal audits discover them.
• The internal check is well-known for work arrangement (design) through the allocation of duties and tasks. In contrast, an internal audit includes an evaluation of work.
• The internal check is run concurrently, i.e., at the same time as the job is completed, ensuring that errors are detected early on. On the other hand, an internal audit is conducted after the transactions have been recorded.
• In an internal check, the summary of daily transactions serves as a report to the supervisor. In contrast, an internal audit requires the auditor to present the audit report to management.

Comparison Chart

Conclusion

Internal checks and internal audits are separate but complementary components of an organization's internal control system. Internal checks aim to avoid mistakes and fraud by ensuring that no single person has total authority over a transaction, allowing for constant cross-verification across employees. This solution is cost-effective and integrates seamlessly into regular activities. On the other hand, internal audits are carried out by a specialized team of auditors who evaluate the overall efficacy of management controls and adherence to policies with the goal of identifying mistakes and fraud. Internal checks provide instant monitoring and mistake prevention during transaction processing, whereas internal audits provide a periodic, in-depth review of the organization's financial and operational operations. Both approaches improve the integrity and efficiency of an organization's procedures.