Introduction of Internal Check
Internal Check is a fundamental component of an organization's internal control system, designed to enhance accuracy, prevent errors, and detect fraud. It refers to the systematic arrangement of accounting and clerical duties among employees in such a way that the work of one individual is automatically checked by another. This continuous cross-checking process not only ensures the reliability of the financial records but also promotes operational efficiency by reducing the likelihood of errors and irregularities.
Meaning of Internal Check
Internal Check refers to a system within an organization where the duties and responsibilities related to financial transactions are distributed among different employees in such a way that the work of one individual automatically serves as a check on the work of another. This arrangement is designed to minimize the risk of errors and fraud by ensuring that no single person has complete control over all aspects of any significant financial process.
The primary purpose of internal check is to create a self-regulating mechanism where discrepancies, whether intentional or accidental, are more likely to be detected early. For instance, if one employee is responsible for recording transactions, another may be tasked with reconciling accounts, and yet another with authorizing payments. This division of duties ensures that any mistakes or irregularities are identified promptly, promoting accuracy and reliability in the organization's financial records.
Internal check is a preventive measure that not only strengthens the internal control system but also enhances operational efficiency by ensuring that tasks are completed correctly and in a timely manner. It is particularly important in organizations where large volumes of transactions occur regularly, as it provides a structured approach to monitoring and verifying financial activities.
Example of Internal Check
To illustrate the concept of internal check, let’s consider a typical scenario in a retail business involving the handling of cash sales.
Cashier's Role
In a retail store, the cashier is responsible for receiving payments from customers and issuing receipts. The cashier records each sale in the point-of-sale (POS) system, which automatically updates the sales ledger.
Daily Cash Reconciliation
At the end of the day, the cashier counts the cash in the register and compares it to the total sales recorded in the POS system. The cashier then prepares a daily cash report, documenting the total cash received.
Supervisor's Role
A supervisor or manager, who is independent of the cashier's role, verifies the daily cash report. The supervisor checks the cash count against the sales records and ensures that the totals match. If there are discrepancies, the supervisor investigates the reasons behind them.
Bank Deposit
Once the cash is reconciled, the supervisor or a designated employee prepares the bank deposit slip. The cash is then deposited in the bank, and the bank deposit slip is retained as proof of the transaction.
Accounting Department's Role
The accounting department, which is separate from the cashier and supervisor, receives the bank deposit slips and daily sales reports. The accounting staff enters these records into the accounting system and ensures that the bank deposits match the recorded sales.
Internal Check in Action
Segregation of Duties: The cashier, supervisor, and accounting department each have distinct roles. No single person handles all aspects of the transaction, which reduces the risk of fraud or errors.
Cross-Verification
The supervisor’s review of the cashier’s report serves as a check on the cashier’s work, while the accounting department’s reconciliation of sales records with bank deposits provides an additional layer of verification.
Error and Fraud Prevention
If the cashier makes an error in recording sales or if there is an attempt to misappropriate cash, the discrepancies are likely to be caught by the supervisor during the cash reconciliation or by the accounting department when matching bank deposits with sales records.
This system of internal check ensures that cash sales are accurately recorded, cash is properly accounted for, and any discrepancies are promptly identified and resolved. It exemplifies how internal check operates within an organization to maintain the integrity of financial transactions.
