It is the division of responsibilities among employees so that the others automatically and independently check the work of one person.
In simpler terms, it's a mechanism set up within a company whereby one employee's work is automatically double-checked by another, reducing the risk of error or fraud to a bare minimum.
The Institute of Chartered Accountants of England and Wales (ICAEW) defines an internal check as "the checks on day-to-day transactions that operate continuously as part of the routine system, where the work of one person is proven independently or in complement to the work of another, the object is the prevention or early detection of errors or frauds."
Internal check is a continual procedure that is carried out daily. It refers to all of the transactions that occur daily. An internal check is accomplished through a complementary assignment of responsibilities and independent verification of one person's work by another.
Characteristics of Internal Check System
Specific criteria are required to make an internal check system more effective and efficient. These attributes are known as internal check system features, and they are as follows:
1. Workplace Organization
No one should be given the authority to complete the work from beginning to conclusion.
For example, a sale transaction may need to be divided into the display of an item by staff, the preparation of an invoice by another, the receipt of cash against the invoice by a third clerk, the delivery of an item against the proof of receipted invoice by another clerk, the checking of outward movement of an article against the delivery order by another clerk, and so on.
Such specialized activities speed up labour and incorporate internal checks automatically in large corporations.
2. Checks are Provided
A company should set up procedures so that other employees can double-check work. By transferring to the staff and back, an officer can check the work of one staff.
3. Devices in Use
In today's modem world, various gadgets can be employed to do various tasks, such as time record machines, wage determination machines, and so on. Machines that an organization should use aid in internal auditing.
4. Self-Balancing Mechanism
An organization can use Self-balancing ledger accounts to make internal auditing easier. Its efficiency is determined by how well it is managed.
5. Rotation of Jobs
No single clerk should be allowed to occupy a particular area of operation for an extended period. A person's familiarity with and exclusivity in a position gives them more leeway to manipulate the system.
6. Specialization
Every employee may not have the particular expertise required to keep accounts effectively. As a result, a company should provide training to improve their abilities to improve the effectiveness of internal controls.
7. Control
There is direct contact between consumers or the general public; there is a higher risk of fraud. As a result, a manager can keep an eye on those projects to improve the effectiveness of the internal check system.
8. Level of Authority
Precise authority levels must be established by the sanctions imposed on specific transactions. Responsibility must be extracted in proportion to the authority granted. The existence of authority levels causes an evaluation of subordinates' operations.