INTERNAL CHECK SYSTEM

Unit :2
 Routine Checking
• Whatever may be the size, constitution and
nature of activities and transactions of
a business, there are certain records and
books which are common to all types of
business organizations.
• The checking of such common records and
books which is carried on by the auditor as a
matter of routine is known as routine checking
in auditing
• Routine checking can verify the arithmetical
accuracy of the entries made in the books of
accounts. It can help in checking, casting and
postings and, as such, can ensure that no
alterations are made in the figures after they
have been checked and ticked accordingly.
 Routine checking involves normally
four types of functions
(i) Checking of casts, sub casts, carry-forwards
and other calculations in the books of original
entry.
(ii) Checking of postings into the ledgers
(iii) Checking of casts and balances of various
accounts in the ledger.
(iv) Checking of transfer of balances from the
ledger on to the trial balance.
 Advantages of Routine Checking
(i) The books of original entry can be thoroughly checked and the errors and fraud can
be easily detected.

(ii) Postings (i.e., matters taken from records made in the books of original entry to the
ledger) can be checked.

(iii) The checking of castings and postings done in routine checking is the very basis
upon which the final results of audit depend. Hence, it helps in the checking of
final accounts ultimately.

(iv) It reveals the errors and fraud of a simple nature and, if done with care and
caution, it helps in the verification of the arithmetical accuracy of the entries.

(v) Routine checking is a simple job which can be done easily by a person with an
ordinary knowledge of accounts.

(vi) It is the simplest device for audit work.

 Disadvantages of routine checking
• Routine checking is practically a mechanical process and
hence, it can cause monotony.

• Only minor cases of fraud can be detected by routine checking.

Major items of fraud cannot be brought to light.

• Routine checking is not always considered important in the

audit of a business where self-balancing system is used.
 INTERNAL CHECK

• Internal check is an accounting procedure

whereby routine entries for transactions are
handled by more than one employee in such a
manner that the work of one employee is
automatically checked against the work of
another.
 Objectives Of Internal Check
• Division of work – It is based on individual’s ability.

• Minimization of errors and frauds – The work performed by

each individual is checked by another individual.

• Reliability – If the internal check is very good then the

auditor will reply upon the books of accounts.

• Preparation of final accounts – With an effective internal

check system the final accounts can be prepared safely.
 ADVANTAGES

• Fixation of responsibility – A Proper internal

check system will ensure accountability and
responsibility of the employees.
• Prevention of Errors and Frauds – Under this
system no one employee is allowed to record
more than 1 aspect of the transaction.
• Increase the efficiency of clerks – The work is
divided among the employees according to
their Qualification and experience.
• Reliability of information – The aim of this
system is to have an accurate record of all the
transactions.
• Reduces the workload of auditor – In relation to
the extent of audit procedures followed or
adopted.
• Increases the overall efficiency of the business –
By preventing occurrence of the frauds, proper
segregation of duties which will increase the
efficiency
 limitations

• Expensive – It is applicable only for large

business concerns.
• Does not reduce the liability – It will help the
auditor in reducing his work but it will never
reduce the liability.
• Carelessness – Sometimes employees may
become less serious towards the work.
 Duties of an Auditor as Regards
Internal Check System
• Examination -First of all an auditor should satisfy
himself about the working of proper internal control
system.
• In Case Of Satisfactory System - If the auditor is
satisfied about the effectiveness of internal control
then he should check the efficiency and its existence by
checking various items from different place.
• Unsatisfactory Case - If the auditor feels that internal
control system is not satisfactory then he should check
those accounts where errors are likely to exist.
• Some Sections Are Inadequate - If auditor
feels that over all system is satisfactory but
certain sections of the system appears to be
inadequate then he should inform the client
about the dangers.
• Suggestions -Auditor should also give
suggestions that how weaknesses can be
removed if he is asked by the client.
INTERNAL CHECK AS REGARDS

• RECEIPTS

• PAYMENTS

• SALES
 RELATION TO RECEIPTS OF CASH
Receipts of a cash must be handled by a separate clerk
known as cashier.
Bank reconciliation statement should be prepared by
the cashier to reconcile bank and cash balance.
All debtors or customers requested tomake payments
by crossed cheques.
Automatic bills or cash registers are useful forchecking
receipts.
The counter-foils of all the receipts issued should be
properly maintained.
 RELATION TO PAYMENTS OF
CASH
All payments should be made by cheques.
Petty cash payment should be handled by the
petty cashier.
Names, numbers and the status of persons
authorized to sign cheques must be decided.
Confirmation of accounts with creditors should
be made to maintain up-to-date records.
A proper system must be adopted for controlling
the supply and issue of cheques.
 RELATION TO CASH SALES
• Separate salesman should be appointed to carry out sales at
different counters.

• The salesman should prepare sales invoice into four copies.

• The accountant must make the entries in cash book.

• Salesman should prepare a summary showing cash sales.

• Copies of the sales summary sheet should be sent to the

officer-in-charge of the trading house
 Test Checking
• Test checking in Audit means checking a few transactions
selected at random from a large number of transactions. It is
also known as “Selective Verification” or “Sampling Process“.

• In simple words in test checking a representative number of

entries of each class is selected and checked and, if they are
found correct, the remaining entries are also taken to be
correct. Test checking is an accepted substitute of detailed
checking, which in most of the cases from the economic point
of view is unwarranted
 Safeguards for the Application of Test Checking
• As far as possible sample transactions should be selected from every book.

• The selection of transactions should be so distributed that the work of

almost all the clerks of the client is checked.

• The items should be selected at random.

• As fraudulent manipulations are common during the first and last months
of the period under audit, the entries made during these periods should be
checked thoroughly.

• In the selection of entries and accounts for applying test checks, care
should be taken to check the different portions of the work at each audit.

• Cash book and pass book should be checked thoroughly.

 Advantages of Test Checking

• It saves time and energy.

• If the selection of transactions is done intelligently, test
checking is useful and purposeful.
• The volume of work is reduced. So the auditor can carry on
many audit simultaneously.
• It helps the auditor to arrive at a definite conclusion in regard
to the true and fair view of the state of affairs of the concern.
• It helps in reducing the cost of audit.
 Disadvantages of Test Checking
• It is not possible to detect all the errors and fraud.

• The clerks of the client may become careless because they know that
their work will not be checked in detail.

• Under test checking, although the auditor checks the whole of the
work through test checking, and doubt will remain in his mind.

• It is of no use if proper and effective systems of internal checks and

controls are not being adopted in business.

• It is not suitable for small business concerns.

 Internal control
• Internal control is a broad term with a wide coverage.
It covers the control of whole management system.
Internal control involves a number of checks and
controls exercised in a business to ensure its efficient
and economic working.

According to The American Institute of Certified

Public Accountants, “Internal control comprises of the
plan of organization and all the coordinate methods and
measures adopted within a business to safeguard its
assets, check the accuracy and reliability of its
accounting data to promote operational efficiency and to
encourage adherence to prescribed managerial policies.”
 Objectives/Need of the Internal
Control
• Providing reliable data

• To promote operational Efficiency

• To encourage for the prescribed policies

• Safeguarding assets and records

 Types of Internal Control System

• Preventive Controls: These controls are

introduced in the firm to stop errors and
irregularities from taking place.
• Detective Controls: These controls are
implemented to reveal errors and irregularities,
once they take place.
• Corrective Controls: These controls are designed
to take corrective action for removing errors and
irregularities after they are detected.