Chapter 7 -Internal check

An internal check is an arrangement of duties of the staff members in such a way that the work performed by one person is automatically and independently checked by the other staff; the salesman negotiates with a client across the counter, the cashier receives cash, an accounts clerk transfers the transaction to the journal… an so on.

1. EELO UNIVERSITY FACULTY OF MANAGEMENT SCIENCE BACHELORS’ – PROGRAMME Subject : Principles of Auditing © Buyera Saidi - E-mail: [email protected] - Phone : [phone] CHAPTER SEVEN INTERNAL CHECK

2. WHAT IS INTERNAL CHECK? Internal Check is an integral function of the internal control system. It is an arrangement of duties of the staff members in such a way that the work performed by one person is automatically and independently checked by the other staff; the sales man negotiates with a client across the counter, the cashier receives cash, an accounts clerk transfers the transaction to the journal… an so on.

3. OBJECTIVES OF INTERNAL CHECK To protect business from carelessness, inefficiency and fraud . To ensure and produce adequate and reliable accounting information. To keep moral pressure over staff. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

4. OBJECTIVES OF INTERNAL CHECK To minimize the chances of errors and frauds and to detect them easily on early stage if it is committed. To divide the work in such a way that no business transaction should be left unrecorded. To fix the responsibility of every clerk according to the division of work. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

5. PRINCIPLES OF INTERNAL CHECK i. Responsibility − Allocation of business work amongst the various staff members should be done in such a way that their duties and responsibilities should be judiciously and clearly divided. ii. Automatic check − Automatic checking of work of one employee by another forms part of a good Internal Check system. iii. Rotation − Transfer or rotation of employees from one seat to another must be followed under good system of internal control. iv. Supervision − Prescribed procedures and Internal Check should be strictly supervised.

6. v. Safeguard − To safeguard files, securities, cheque books is also recommended in Internal Check. vi. Formal Sanction − Without formal sanction, no deviation should be allowed from the established procedures. vii. Reliance − Under good system, too much reliability on one employee should not be there. viii. Review − From time to time, system of Internal Check should be reviewed to introduce improvement. PRINCIPLES OF INTERNAL CHECK © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

7. ADVANTAGES OF INTERNAL CHECK From the Owner’s Point of View i. Good system of Internal Check provides accurate, reliable and genuine accounting record and data to the owner of the business on which he can rely upon. ii. Economy in operations and overall efficiency in system due to good Internal Check may result in more profits. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

8. From the Auditors Point of View Due to efficient system of Internal Check, the statutory Auditor can avoid deep and detailed checking of transactions. He may rely on test checks, hence Internal Check provides convenience to Auditor. Since the Balance Sheet and the Profit and the Loss account is prepared without wasting of time, hence quick preparation of final accounts is possible.

9. For the Business i. Moral Check − Great check to commission of errors and frauds is possible with knowledge of subsequent checking of work of each employee by others. ii. Detection of Errors and Frauds − This helps in early detection of errors and frauds because work of each clerk is checked by another automatically and no one is allowed to do complete work from the beginning to the end. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

10. iii. Proper Division of Work − According to qualification, experience and area of specialization of work, proper and rational distribution of work among the members of staff is done. iv. Increases Efficiency − A good internal control system provides increased efficiency of work coupled with overall economy. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

11. Disadvantages of Internal Check It is  costly  for small business units. If Internal Check system is not properly organized, there are chances of disorder in the working of business. There might be instances where the quality of the product and the work is compromised with by the staff members due to greater importance to faster results. An Auditor cannot be relied on if he does not conduct tests with procedures of his own.

12. Internal Check and Auditor The nature and extent of the scope of the Auditor’s work depends upon the system of Internal Check in an organization. The system of Internal Check will determine the reliability on work which an Auditor can place. The External Auditor is ultimately responsible for the final accounts. The Internal Check system cannot relieve the Auditor of his contractual responsibilities in case anything goes wrong in the final accounts, therefore it is the duty of the Auditor to check the whole transaction in detail. A good Internal Check system may relieve the Auditor of detailed checking and he can utilize the saved time to any other work of more importance.

13. We will further discuss Internal Check related to different aspects − v. Cash Receipts Vi. Purchases vii. Sales viii. Stores ix. Fixed Assets x. Investments Cash Payments Cash Sales at Counter Cash Sales by Salesmen Postal Sales © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

14. Cash Payments Consider the following points while doing Internal Check for cash payments − i. Excluding petty cash payments, all payments should be made through Cheques, Demand Drafts, RTGS (Real Time Gross Settlement), NEFT (National Electronic Fund Transfer) or any other banking mode as available time to time. ii. Person making payments should have no connection with the receipt of cash.

15. iii. Every paid bill or voucher should be stamped as “Paid” to avoid double payments for same bill or voucher. iv. Confirmation of balances from creditors should be made directly. Cash Payments: Consider the following points while doing Internal Check for cash payments −

16. Cash Payments: Consider the following points while doing Internal Check for cash payments − v. Cash receipt should be obtained for each payment. vi. For petty cash payments petty cashier will be responsible instead of main cashier. vii. Petty Cash should be maintained on Imprest system. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

17. viii. In absence of cash receipt, proper bill or voucher should be obtained from the petty cashier. ix. Petty cash book should be checked by the Cashier frequently. x. Bank reconciliation should be done on a regular interval. xi. Pay-in slip to deposit cash in bank should be filled by the Cashier not by the person who is going to deposit the cash. Cash Payments: Consider the following points while doing Internal Check for cash payments − © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

18. Cash Sales at Counter i. Every Salesman who is authorized to do cash sales should be specifically demarcated. ii. Four copies of cash receipt should be generated out of which three will be handed over to the customer out of which customer will give one copy to cashier at the time of payment and one copy to gatekeeper at the time of delivery of goods and exit from gate and one copy will be retained by the customer. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

19. iii. Three sales summaries will be prepared, one by the Salesman, second by the Cashier and the third by the Gatekeeper to tally the cash sales on daily basis. iv. All Cash Sales should be deposited into bank on daily basis without any failure without deducting any expenditure or commission out of it. v. Cash received (as per cash recording machine), cash sales and amount deposited into bank should be same. Cash Sales at Counter

20. Sales by Travelling Salesmen i. Pre-numbered rough cash receipt book should be issued to every salesman for the collection of debt or advance from customers. ii. Final receipt should be sent to customers directly. iii. Without making any deduction, salesmen should deposit all the cash at the head office on daily basis without any fail. iv. Regular reconciliation of account should be made with customer. v. To avoid any fraud every salesman should be replaced and transferred regularly to other areas. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

21. Postal Sales i. Postal sales should be recorded in separate register. ii. A separate register should be maintained to record the cash received against postal sale. iii. Cash received through postal sale should be deposited into bank separately. iv. Regular and careful checking of the sale and payment register should be done by an officer of the company. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

22. Cash Receipts: A Cashier deals with the following tasks concerning cash receipts: i. Record cash receipts immediately upon the receipt of cash. ii. He is not authorized to keep cash with him. iii. He is not allowed to make any expenditure out of it. iv. Cash receipt should be deposited in to bank on daily basis. v. Cashier should not be allowed to do primary entry in the books. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

23. Purchases i. Requisition slips duly signed by the head of the department should be issued and sent to the purchase department, clearly mentioning the quantity, quality and the delivery date on the requisition slip ii. Enquiry about the required material should be done by the purchase department from different suppliers of the material iii. Purchase order should be issued on the basis of the lowest quotation received from the suppliers. There may be four copies of the purchase order, one for the supplier, second for the stores department, third for the accounts department and the fourth copy should be retained by the purchase department © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

24. iv. Goods should be sent to store after proper examination at the time of receipt of goods. Store department will inform concerned department for the same. v. After proper verification of purchase invoice same should be sent to accounts department for their accounting and payment purpose vi. On the basis of the purchase order, the accounts department will book that invoice in our books of accounts and if there is any discrepancy, debit note should be issued to the supplier under intimation to the purchase department. vii. Payment is made to the supplier according to the due date. Purchases © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

25. Sales i. After receipt of the sales order, one copy of it should be sent to the dispatch department for further process. ii. The dispatch department after receipt of the sales order packs the material according to the order. iii. Preparation & verification of Invoice is done based on the sales order. iv. Entry is done in goods outward register before sending it to customers. v. Sales return is entered in goods inward register and a credit note for the same is issued to customers accordingly. © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

26. Stores: P roper control over store is very much essential to prevent theft, pilferage and misuse of inventory. Following points need to be considered for Internal Check on Stores i. Every store must be equipped with all the facilities as require keeping inventory in order and convenient location of store is also important for any industry. ii. Triplicate copy of G.R.N. (Goods Receipt Note) should be issued on receipt of material, one to be sent to purchase department along with invoices, second for accounts department and third will be retained by store department.

27. iii. Receipt goods should be stored at proper place. Proper stock accounting should be there for receipt of goods and on issue of goods. iv. Physical stock taking at regular interval should be carried out and reconciliation of stock with books should be done without any fail. There should be a proper and quick action in case of any discrepancy. v. If material is issued to any other department, it needs to be specified on “Material Transfer Note”, the return of Material should be on the MRN (Material Return Note) and the material being issued to the customer should be on the basis of Sales Invoice only. Stores: P roper control over store is very much essential to prevent theft, pilferage and misuse of inventory. Following points need to be considered for Internal Check on Stores

28. Fixed Assets Purchase of Fixed Assets may be for normal addition to Fixed Assets, for new project or for expansion of business. Fixed assets are of permanent nature to earn income, i.e., Land, Building, Plant & Machinery, Furniture & Fixtures, computer and vehicles, tools and so on. See next slide © Buyera Saidi - E-mail: [email protected] - Phone : [phone]

29. Following are the important checks related to fixed assets i. Sanction of capital expenditure should be done by a committee may be set up for this purpose or by the proper authority. Same procedure should be followed in case of transfer or discarding of any assets. ii. Distinction between Capital and Revenue expenditure is must for proper accounting records. iii. Fixed Assets register should be maintained giving all the description about qty , cost and location etc of fixed assets. iv. Physical verification of fixed assets should be there from time to time. v. Accounting and depreciation of fixed assets should be done according to accountants association of Somalia.

30. Investments Following points need to be considered while dealing with investments − i. Sale and purchase of investment should be done by an authorized person only. ii. Detailed investment register should be prepared and physical verification of the document of title on periodically basis to be done. These documents of title should be kept in safe custody of company. iii. Correctness of charges of brokers should be checked. iv. Checking of accounting entries on account of dividends interest, bonus and capital repayment should be done. v. Physical verification of investment should be done.