Internal Checking System

Internal Checking System — Definition, Objectives, Advantages, Limitations

Definition. Internal Check is a specific, narrower part of the overall internal control

system. It is the arrangement of accounting and clerical duties in such a way that the work of one employee is automatically and continuously checked by the work of another, in the ordinary

normal course of business, without any duplication of effort or any special/separate checking

staff being employed for the purpose. Internal check is built INTO the day-to-day routine of

recording transactions itself — it is not a separate review carried out afterwards (that would

be internal audit, discussed in the next section).

Objectives of Internal Check:

1. To prevent errors and frauds from occurring in the first place, by making it structurally difficult for any one person to manipulate a transaction unnoticed.
2. To detect errors and frauds quickly, if they do occur, since the very next person handling the same transaction would normally notice something wrong.
3. To ensure the accounts are accurate and reliable on a day-to-day, transaction-by- transaction basis, not only at the end of the year.
4. To fix responsibility clearly — because duties are divided, if an error or discrepancy is found, it is easier to trace exactly at which stage, and by whom, the mistake was made.
5. To increase efficiency, since dividing work among different employees according to their specialisation tends to speed up processing (a genuine, non-fraud-related benefit of internal check).

Advantages of Internal Check:

1. Reduces errors and frauds since no single person completes a transaction unsupervised end-to-end.
2. No extra staff or separate checking department is needed — the checking happens as a natural, built-in by-product of the normal division of routine work, so it is comparatively inexpensive.
3. Fixes individual responsibility clearly, which itself has a strong deterrent effect on carelessness or dishonesty.
4. Saves audit time and cost, since an auditor who finds a sound internal check system in place can reasonably reduce the extent of independent testing (test-checking, Class XII Ch4).
5. Improves the general efficiency and morale of the accounts department, since work is divided along clear, sensible lines.

Limitations of Internal Check:

1. Collusion between employees who are supposed to check each other's work defeats the whole system — this is the same weakness internal control as a whole shares (Section a above), and it is the single most-cited limitation of internal check specifically.
2. Not suitable for a very small business, where there simply aren't enough staff to divide …