2024/2025 AUDITING 1 ABA
REAM EXAM SUMMARIZED CLASS
NOTES
GUARANTEE PASS 100%
INTERNAL CONTROL/ INTERNAL CHECK
4.1INTERNAL CHECK
Internal check is a method of internal control enforced in
business under which the recording of business
transactions
is arranged in such a manner that the work of one staff
member will automatically be checked by others in the
course
of recording of the transactions itself.
Spicer and Pegler have defined internal check as "an
arrangement of staff duties whereby no one person is
allowed
to carry through and record every aspect of a transaction
such that without collusion between two or more persons,
fraud is prevented and at the same time possibilities of
errors are reduced to a minimum".
De Paula has defined internal check as "a continuous
internal audit carried on by the staff itself by means of
which
,the work of each individual is independently checked by
other member of the staff." Thus, under internal check
system, the staff duties are so arranged that no one
person is allowed to record every aspect of the
transactions and
the entire work is distributed among the various members
of the staff in such a manner that the work of one person is
automatically checked by others. The essential elements
of internal check are as under;
• Existence of checks on day to day transactions.
• The check is to be carried out continuously as a part of
the routine system.
• The work is divided among the staff and each staff is
assigned a specific task.
• The work of each staff though independent is
complementary to the work of another.
The system of internal check is increasingly recognized by
the auditor especially when the size of the concern is
large. The existence of effective internal check system
relieves the external auditor of detailed checking to a
larger
extent. The extent to which an external auditor can
depend upon the system of internal check is based on the
procedural tests applied by him to find out the
effectiveness of the system. However the auditor cannot
be relieved of
,his responsibility if he was found guilty of negligence
regardless of the fact that he had tested the internal check
in
existence in the organization before he had accepted it as
correct.
4.2 OBJECTIVES OF INTERNAL CHECK
• To reduce chance of fraud and errors that may be
committed by any member of the staff and make it more
difficult. If any fraud is to be committed two or more
persons must collude together.
• To detect fraud and errors easily and correct them
promptly.
• To exercise moral pressure among the members of the
staff.
• To allocate duties and responsibilities of every person in
such a way that he can be taken to task for any
lapse on his part.
• To increase overall efficiency of the members of the staff
by assigning duties based on the principle of
division of labour.
• To have an accurate and reliable record of all business
transactions.
•
4.2.1 Essentials of a good internal check system
• No single staff shall have absolute control over recording
of all the aspects of business transactions by
himself.
, • The same staff shall not be allowed to have access to all
books of accounts as well as physical custody of
the assets.
• Each member of the staff should be made responsible
for a specific work.
• All officials and employees holding responsibility towards
cash, securities or stock should be encouraged to
proceed on annual leave to prevent the concealed fraud.
• The duties of the members of the staff should be
changed from time to time. Attempt should be made to
introduce mechanical devices to prevent mis-appropriation
of cash.
• Each transaction should pass through a definite route
and through several hands.
• All books, vouchers, documents should be classified and
made available for easy reference.
• Proper record must be maintained of the incoming and
outgoing of goods from the business premises.
• Self-balancing ledger system should be introduced to
make the system more efficient and effective.
• No undue importance should be given to any staff
member and too much reliance on any staff member
should be avoided.
• Division and allocation of duties among the staff
members must provide for an automatic check by others
4.2.2Distinction between internal check and internal
control
REAM EXAM SUMMARIZED CLASS
NOTES
GUARANTEE PASS 100%
INTERNAL CONTROL/ INTERNAL CHECK
4.1INTERNAL CHECK
Internal check is a method of internal control enforced in
business under which the recording of business
transactions
is arranged in such a manner that the work of one staff
member will automatically be checked by others in the
course
of recording of the transactions itself.
Spicer and Pegler have defined internal check as "an
arrangement of staff duties whereby no one person is
allowed
to carry through and record every aspect of a transaction
such that without collusion between two or more persons,
fraud is prevented and at the same time possibilities of
errors are reduced to a minimum".
De Paula has defined internal check as "a continuous
internal audit carried on by the staff itself by means of
which
,the work of each individual is independently checked by
other member of the staff." Thus, under internal check
system, the staff duties are so arranged that no one
person is allowed to record every aspect of the
transactions and
the entire work is distributed among the various members
of the staff in such a manner that the work of one person is
automatically checked by others. The essential elements
of internal check are as under;
• Existence of checks on day to day transactions.
• The check is to be carried out continuously as a part of
the routine system.
• The work is divided among the staff and each staff is
assigned a specific task.
• The work of each staff though independent is
complementary to the work of another.
The system of internal check is increasingly recognized by
the auditor especially when the size of the concern is
large. The existence of effective internal check system
relieves the external auditor of detailed checking to a
larger
extent. The extent to which an external auditor can
depend upon the system of internal check is based on the
procedural tests applied by him to find out the
effectiveness of the system. However the auditor cannot
be relieved of
,his responsibility if he was found guilty of negligence
regardless of the fact that he had tested the internal check
in
existence in the organization before he had accepted it as
correct.
4.2 OBJECTIVES OF INTERNAL CHECK
• To reduce chance of fraud and errors that may be
committed by any member of the staff and make it more
difficult. If any fraud is to be committed two or more
persons must collude together.
• To detect fraud and errors easily and correct them
promptly.
• To exercise moral pressure among the members of the
staff.
• To allocate duties and responsibilities of every person in
such a way that he can be taken to task for any
lapse on his part.
• To increase overall efficiency of the members of the staff
by assigning duties based on the principle of
division of labour.
• To have an accurate and reliable record of all business
transactions.
•
4.2.1 Essentials of a good internal check system
• No single staff shall have absolute control over recording
of all the aspects of business transactions by
himself.
, • The same staff shall not be allowed to have access to all
books of accounts as well as physical custody of
the assets.
• Each member of the staff should be made responsible
for a specific work.
• All officials and employees holding responsibility towards
cash, securities or stock should be encouraged to
proceed on annual leave to prevent the concealed fraud.
• The duties of the members of the staff should be
changed from time to time. Attempt should be made to
introduce mechanical devices to prevent mis-appropriation
of cash.
• Each transaction should pass through a definite route
and through several hands.
• All books, vouchers, documents should be classified and
made available for easy reference.
• Proper record must be maintained of the incoming and
outgoing of goods from the business premises.
• Self-balancing ledger system should be introduced to
make the system more efficient and effective.
• No undue importance should be given to any staff
member and too much reliance on any staff member
should be avoided.
• Division and allocation of duties among the staff
members must provide for an automatic check by others
4.2.2Distinction between internal check and internal
control
