An internal check is an essential part of the internal control system. It is an arrangement of staff members' responsibilities in which one person's work is automatically and independently reviewed by the other.
Internal Check's Advantages
The following are some of the well-known benefits of a well-functioning internal control system:
1. Advantages for Business
(A) Division of Work
Internal control comprises an appropriate and sensible distribution of work among the members of the company's personnel, taking into account their particular qualifications, experience, and area of specialty.
(B) Detection of Errors and Frauds
because no single worker is allowed to handle a job from start to finish, and each clerk's work is automatically checked by the other, this aids in the early detection and discovery of errors and frauds, and the chances of errors and frauds being committed are reduced.
(C) Increased Efficiency Combined with Cost Savings
A solid internal control system improves work efficiency among employees while also reducing costs.
(D) Moral Check
Knowing that others will be examining each employee's work works as a solid deterrent to the commission of errors and frauds.
2. For Auditor
(A) Quick Final Account Preparation
The Profit & Loss Account and the Balance Sheet are prepared without delay.
(B) Auditor Convenience
When an organization conducts an internal system audit, the statutory auditor may find it more convenient to avoid a complete examination of the transactions. He can run a few tests here and there and not have to worry about the details.
3. For Owner
(A) Account Accuracy may be Depended Upon
If an internal check mechanism is in place, the business owner can rely on the accounts' genuineness and accuracy.
(B) More Profits
Overall efficiency and operation economy result in higher earnings, which means higher dividends for owners or shareholders.
Internal Checking's Disadvantages
An internal check is a business structure of staff duties in which the next staff member automatically checks work while they are completing their job. Dependence on one another is a recipe for disaster when it comes to getting the job done quickly. The day-to-day job will be severely disturbed if one employee is missing. It is a system or process that is implemented with specific instructions given to employees regarding their areas of responsibility, with the ultimate goal of controlling and verifying their work and maintaining accurate records.
Even while the internal check system is beneficial to all stakeholders in the business, it does have some drawbacks, which are as follows:
1. Quality is surrendered in the name of expediency
Every employee strives to finish their work on time under the internal check system. The quality of work suffers in an internal check system because business clerks place a higher value on speed and are unconcerned if their work becomes sub-standard in the process. As a result, they rush through work, resulting in mistakes.
2. Chances of Collusion
An internal check system detects faults and frauds once another employee examines work. As a result, there is a risk of conflict amongst or among the employees. Though the internal check mechanism protects against errors and frauds, there is a potential that two or more employees will collude to commit frauds or malpractices. Employees may create a group for personal gain, causing delays in work and an increase in errors and fraud.
There will be chaos and disorder in the operation of the business if there isn't a well organized internal check mechanism in place. If the system is not adequately organized or a failure in the system, it produces chaos and confusion, which increases the risk of errors and fraud.
3. Confusion is Created
The internal check may cause confusion among employees, resulting in conflict. As employees perform the same tasks daily, the job gets monotonous, and employees lose their inventiveness.
4. Expensive
The internal check system is more costly and time-consuming. Internal auditing methods are highly costly, especially for small businesses.
5. An auditor's Job is Dangerous
If the auditor does not conduct his tests and procedures and instead relies on the system's output, his work will be prone to errors if the system itself proves to be flawed.
6. Small Businesses Should Avoid It
This technique is not appropriate for small businesses with only a few employees. Small businesses cannot use the internal check system since it requires more personnel, which raises costs. Internal auditing involves additional effort, time, and personnel. Only large firms with a large number of departments and jobs with a high level of complexity can benefit from this approach. As a result, it is unsuitable for small businesses with limited transactions and resources.