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CHAPTER 3: INTERNAL CHECK

Introduction
Internal check is a system 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 transaction itself.
Internal check means practically a continuous internal audit carried on by the staff itself,
using which other members of the staff independently check the work of each individual.
Definition and Meaning of Internal Check:

Internal Check has been defined by different authorities.

L.R. Dicksee defines Internal check as “such an arrangement of book-keeping routine that
errors and frauds are automatically prevented or discovered by the very operation of the
book-keeping itself”.
Objectives/ Objects or Aims of Internal check:
An Ideal system of internal check aims to achieve the following objectives:
1. Proper division of work:
An ideal system of internal check aims to achieve proper division of work among the
members of the staff based on each individual’s, qualifications, training, experience, ability,
etc.

Proper division of work among the staff is aimed at for the following purposes:
a) To allocate the duties and responsibilities among the staff in such a way that each
staff member could be held responsible for a particular error or fraud.
b) To ensure pro-per staff development through appropriate and timely change of
work.
c) To increase the efficiency of the staff members.
d) To bring about economy in the work.

2. Minimization of errors and frauds:

A proper system of internal check aims at minimization or reduction of errors, frauds and
irregularities.
Errors and frauds are sought to be minimized:
a) By ensuring that no one person does any single task from the beginning to the end.
b) By ensuring that the work done by each staff member is independently and
automatically checked by another staff member in the ordinary course of business.
c) By making each staff member liable for any error or irregularity in the task assigned

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to him.
d) By exercising moral pressure over the staff members.

3. Early detection of errors and frauds

Another objective of an effective system of internal check is to detect errors and frauds, if
they have been committed, easily and at an early stage.
The early and easy detection of errors and frauds is made possible by ensuring that no one
person does any single task from the beginning to the end, the work performed by one
person is independently checked by another person and each person is responsible for each
details of the work done by him.
4. Ensuring the reliability of accounts:

Another important objective of an internal check system is to ensure the reliability of

accounts by seeing that no business transactions are left unrecorded, all the transactions
are recorded accurately and the accounts are kept up-to-date.
5. Early preparation of final accounts:

Another objective of an efficient system of internal check is to facilitate the early

preparation of final accounts by ensuring that the accounting system provides complete,
regular, and reliable accounts.
6. Simplification of external auditor’s work:
An efficient system of internal check aims at simplification of the work of an external
auditor. When there is an efficient system of internal check in operation in an enterprise,
the external auditor need not undertake a detailed examination of each and every
transaction.
Merits or Advantages of Internal check:
A: A good system of internal check bestows the following benefits on the concern:

1. Proper division of work:

Under the internal check system, the work is distributed among the staff on the basis of
their qualifications, experience and area of specialization.
2. Fixation of responsibility:
Under the internal check system, the respective duties of each member of the staff of a
business are clearly defined by fixing up responsibility.
3. Greater efficiency of staff:
Division of work among the staff on the basis of specialization, envisaged in the internal
check system, increases the efficiency of the staff, and thereby, contributes to economy in
operations.
4. Increased earnings or profits:
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Internal Check contributes to overall efficiency in work and economy in operations and this
in turn leads to increased earnings or profits for the business.

5. Early detection of errors and frauds:

Under the internal check system, the work of each employee is checked by another in the
ordinary course. As a result, errors and frauds detected at an early stage, no sooner than
they are committed.
6. Prevention of errors and frauds:
The fact that the work of each employee is checked by another in the ordinary course
creates a moral check on the staff which helps in preventing or minimising errors or
frauds.
7. Early and easy preparation of final accounts:

The efficient work and the correct and complete records of all transactions, resulting from
an effective system of internal check, facilitate the preparation of final accounts easily
wit6hout mush loss of time.
8. Truth and accuracy of the accounts:
An efficient system of internal check ensures the truth and accuracy of the books of
accounts. The books of accounts of a concern operating a good system of internal check can
be very well relied upon.
9. Moral Influence of Employees:

The system of internal check puts a morale check on members of staff and enables them
to learn honesty, hard work, and straightforwardness.

10. Auditing made easy:

The system of internal check facilitates the work of auditors to a great extent by enabling
him to relay on test checking.
11. Correct and Complete record of all transactions:

The system of an internal check may also result in correct and complete records of all
the transactions on each balancing of the books of accounts.

12. Test Checking possible:

Suppose the auditor finds the system of internal cheek satisfactory. Then by taking into
mind, it defects or weak points he can take the help of test checking.

B. Advantages of Internal check to the owners of the Business:

a) When there is a good system of internal check, the owners of the business can rely upon
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the genuineness and accuracy of the accounts.

b) An efficient internal check results in overall efficiency and economy in operations. This
results in increase in profits, which in turn ensures more earnings od dividends for the
owners.
C. Advantage of Internal Check to the Auditor:
When there is an efficient system of internal check in operation in a concern, the auditor
need not have a detailed checking of every transaction and can rely on test checking.
Disadvantages or limitations of Internal Check:
Internal Check is not without limitations or disadvantages. It suffers from the following
limitations:
1. Suitable only for big concerns:

Introduction of an internal check system is quite expensive, as it involves additional costs.

That means, only big concerns can afford to have internal check.
2. Sacrifice of quality for quickness:
Under internal check system the staff of the concern attach greater importance to being
quick, but are not very serious about the quality of the work. As a result, the work becomes
slip shod.
3.Complacency among high officials:
Under the internal check system, responsible or high officials, who are responsible for
supervision of work, tend to be complacent in their work. This is because they tend to
believe that the work under a sound system of internal check will go on efficiently, and
nothing can go wrong.
4.Chaos and disorder in the working of the concern:

If the internal check system is not properly organised, it may create chaos and disorder in
the working of the business.
5. Useful only when there is no collusion between the employees:
Under the system of internal check, the checking of errors and frauds is ensured only when
there is no collusion between the employees of the concern. If the employees collude, the
internal check system will fail to ensure the checking of errors and frauds.
6.Risky for the Auditor:
When there is an internal check system, the auditor may not carry-on a thorough and
detailed checking of every transaction, He depends mainly on test checks, as he relies on the
books of accounts. If he does not judge the soundness of the internal check system and
relies wholly on the books of accounts, and if the books of accounts turn out to be incorrect
and inaccurate, he may be held liable for negligence.

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Conclusion:
No doubt, internal check system is subject to certain limitations or drawbacks. But the
limitations can be overcome, if the management is very careful in the application of the
internal check system. If the internal check system is applied by the management cautiously
and carefully, it will certainly prove to be very helpful for the efficient running of the
business.
Fundamental Principles of Internal Check or Essentials of a Good System of Internal check:

A system of internal check can be efficient and successful only when it adheres to well-
established principles. The important principles of a good system of Internal Check are:
1. The system of internal check should be simple, easily workable and effective.
2. The internal check system should not be too expensive and it should be economical
for the concern.
3. The internal check system must be carefully devised and properly regulated.
4. The employees should be carefully selected and properly trained for the job to be
done by them.
5. The authority(rights), duties and responsibilities of the staff should be clearly
defined.
6. There should be proper division of responsibility or work among the members of the
staff.
7. The division of work among the staff members should be based on their
qualifications, area of specialisation, experience and capabilities.
8. Clear-cut instructions about each job should be given to employees in writing so that
everybody understands his job clearly.
9. Work of similar nature should be entrusted to one person to ensure specialisation
and efficiency.
10. There should be no over-lapping or duplication of work at any level.
11. The division of work among the staff should be so designed that no single individual
is allowed to perform any work solely from the beginning till the end.
12. The work should be distributed in such a manner that the work of every employee
should automatically come under the review of another in the ordinary course.
13. No employee should be allowed to remain on a particular job for long. There should
be frequent rotation of employees from one job to another, as it would help to
detect fraud, if any, committed by employees to broaden their work experience.
14. Persons dealing with cash, cheques, goods, securities, etc should be required to go
on leave at periodic intervals so that errors and frauds, if any, committed by them
could be detected by their substitutes.
15. Safeguards should be prescribed for the safe custody of unused cheque books,
securities, confidential files, etc.
16. Labour- saving devices or mechanical devices, such as cash register, calculating
machines, time-recording clocks, etc. should be made use of to prevent errors and
frauds, and to improve efficiency in the work.

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17. To make the internal check system efficient and successful, there should be self-
balancing ledger system, providing for control of subsidiary ledgers through control
accounts or total accounts in the general ledger.
18. Proper reporting to the management is a necessary adjunct of a good internal check
system.
19. There should be proper system of filing vouchers, correspondence, etc, of the
business.
20. The work of correspondence with the debtors and the creditors should be under the
charge of a responsible person.
21. The debtors and creditors of the business should be requested to send statements of
accounts at certain intervals to a responsible person.
22. All incoming letters should be opened by a responsible official, who should enter all
the letters, money orders, postal orders, cheques, etc received in a proper register
and then passed on to the clerks concerned.
23. No clerk should have access to books containing entries which act as a check on the
entries made by him.
24. The receipts and payments of cash should be entrusted to different persons. The
work of receipt of cash should be entrusted to the receiving cashier and the work of
payment of cash should be entrusted to the paying cashier.
25. The cashiers should have no access to the ledgers.
26. Those in charge of subsidiary books should have no access to the ledgers.
27. All remittances received should be deposited into the bank immediately.
28. The cash and bank balances should be verified frequently by a responsible official.
29. There should be effective control over all purchases, receipts and issue of goods.
30. There should be a system of perpetual inventory control providing for continuous
stock taking and up-to-date accounting of stocks.

Internal Check regarding Cash Sales:

In a big business concerns where there are a large number of daily cash sales, there are
many chances of fraud and defalcation of cash sale proceeds. So, there should be an
effective system of internal check to reduce the scope for fraud and defalcation of cash
sale proceeds.
Cash sales may take the form of a) Sales at the counter b) Sales by the travelling
salesman and c) Postal Sales. So there should be an effective system of internal check
for all these 3 forms of cash sales.
A) Internal Check for Cash Sales at the Counter:

There should be an efficient system of internal check for counter sales. An efficient system
of internal check for counter sales should be taken into account certain guidelines or points.
They are:
1. For each section or counter, there must be a seaprate salesman, who should be
independent charge of his section or counter.
2. The salesmen auhtorised to sell goods at the counters should be specifically named.
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3. Every counter salesman must be identified by a number or by his initials.

4. The salesmen should neither be allowed to receive cash from the customers for the
goods sold nor deliver the goods sold to the consumers.
5. Every counter salesman must be provided with sales memo book or cash memo
book. The sales memo book or cash memo book should be printed and serially
numbered.
6. The Cash memo book provided to the different counter salesmen must be of
different colours for easy recognition
7. When a cash sale takes place at the counter the counter salesman should fill in the
sales memo book or cash memo book, giving the details as to the quantity and
quality of goods sold, rate and the value of sales.
8. The sales memo book prepared by the counter salesman should be checked by
some responsible clerk sitting nearby as regards the prices charged , before they are
handed over to the counter.
9. The customer should be required to carry the 3 copies or the 2 copies to the cashier
for making payment.
10. When the customer carries and hands over the 3 copies or two copies of the sales
memo to the cashier and makes the payment, the cashier checks the entries made
therein and collects the amount. He retains one copy of the sales memo in is hand
and returns the 2 copies or one copy to the customer after marking the same with
the stamp “Cash received”.
11. In the mean time, the goods sold will be sent to the delivery counter by the
salesman.
12. After receiving back the two copies or one copy of the sales memo from the cashier,
the customer should present the same at the delivery counter to receive the goods.
13. After receiving the sales memo from the customer, the man at the delivery counter
will deliver the goods and one copy of the sales memo to the customer, and will
retain the other copy of the sales memo, if 2 copies are given to him.
14. At the end of every day, each counter salesman should prepare a summary of sales
made by him during the day in a sheet known as sales sheet from the copies of the
sales memo retained by him in his hands.
15. Similarly, at the end of every day, the man at the delivery counter should prepare a
summary of the value of goods delivered by him.
16. The sales sheet prepared by each salesman everyday, should be verified with the
cash sale summary prepared by the cashier every day.
17. The cash sale summaries prepared by the salesman, the cashier, and the delivery
man must be signed by the general manager or by an official in charge.
18. After the verification of the cash sale summaries prepared by everyone concerned
ascertaining the total amount of cash sales, the total cash sales should be recorded
in the General Cash Book.
19. Daily cash receipts must be deposited into the bank either on the same day or on
the next day.
20. If cash recording machine is used in the business, the total of cash received,
asshown by the machine, should be checked with the amount actually
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banked.
B)Internal Check for Sales by Travelling Salesmen:
It depends upon whether the Travelling salesmen are allowed to collect cash for the sales
made by them to the customers. The customers are advised to send the remittances by post
to the enterprise. Where the travelling salesmen are allowed to collect cash from the
customers, there should be a proper internal check as regards the cash collected by the
travelling salesman or the sales made by the travelling salesmen. The system of internal
check for sales by travelling salesmen should take into account the following guidelines or
points:
1. Travelling salesmen should be provided with pre-numbered rough receipt books or
temporary receipts books. They should be required to issue only the temporary
receipts to the customers for the cash collected by them for the sales made by them.
2. The final receipts for the cash collected by the travelling salesmen should be issued
from the head Office or from the branch office to which the travelling salesmen are
attached.
3. The customers should be asked to contact the head office or the branch office, if
final receipt is not issued to them within a stipulated period.
4. Where the travelling salesmen are allowed to collect cash from the customers, they
should be given clear instructions either to remit the collections in tact to the head
office or deposit them to the credit of the head office account in the local bank.
5. The travelling salesmen should not be allowed to make any deductions from the cash
collected by them for the expenses incurred by them or for their salaries or
commission.
6.The travelling salesmen should be asked to submit periodical statements of sales to
the head office or to the branch to which they are attached.
7.Periodical statements of accounts must be sent to customers informing them of the
balances due from them.
8.Special attention should be paid to the customers' accounts which have become
overdue. Reminders should be sent to them.
9.Correspondence should be made with those old customers from whom no orders have
been received for long.
10.The travelling salesmen should not be allowed to remain in the same area for long.

C) Internal check by Postal Sales or Under Mail Order Business:

1. There should be a separate wing in the sales department to deal with postal sales
2. There should be a separate register to record the sales by post or V.P.P. and all the details
of the postal sales, such as particulars of the customer. Quality of goods cold prices dates of
dispatches & amounts received must be recorded in this register.

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3. The goods returned by the customers should also be entered in the V.P.P. Register.
4. Any advance received from the customers should also be entered in the V.P.P.Register.
5. As soon as cash received against a V.P.P. sales, it should record in the V.P.P. Register.

6. The total amount received everyday against postal sales should be recorded in the cash
book.
7. The cash received against the postal sales should be deposited into the bank. Separate
bank pay-in-slips should be prepared for the deposit of cash received against postal sales.
8.At frequent intervals, a responsible official should check the VPP Register for goods which
have not been returned, and also for those for which payment has not been received.

Internal check as regards Cash Purchases:

1. There should be a proper system of control in regard to cash purchase so that only
the required purchases are made for cash.
2. Cash purchases should be supervised & controlled by the purchase department, &
the purchase department should be headed by a responsible official.
3. The purchase department must maintain a list of approved supplier's from whom
goods can be purchased for cash.
4. The procedure relating to placing the orders, approval of orders,
receipts, inspection and acceptance of goods should be clearly laid
down.
5. The goods received should be properly checked to ensure that they are exactly as
ordered.
6. The goods purchased for cash should be recorded in the Goods Received or
Inward Register.
7. The payment for cash purchase should be made by crossed account payee
cheques as far as possible.
8. Before issuing cheques for cash purchases, it should be ensured that the goods
have been received.
9. The person in charge of making payment for cash purchase should have nothingto
do with the receipt of cash.
10. If any payment for cash purchases involves a big sum, it is desirable that the
cheque for such cash purchase is signed by more than one responsible official.
11. As soon as the cheque has been issued, the relevant invoice should be stamped
'paid' so that it is not, by mistake or otherwise, again passed for payment.

Internal Check as Regards wages

In every manufacturing concern, where a large number of workers are employed and huge
amount are spent on wages, there are greater chances of errors and frauds regarding wages.
Examples of errors and frauds regarding wages
 Time record may be incorrect, and as a result the worker get wages for the time for
which they have not worked.
 The piece work card may be incorrect
 The rate of wage may be overstated
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 The hours of work may be overstated

 There may be inclusion of dummy or fictitious workers in the wage sheets.

Guidelines for Devising System of Internal Check Regarding Wages

1. General Guidelines:
2. Guidelines for the maintenance of wage records

3. Guidelines for the preparation of wages sheets:

4. Guidelines for payment of wages

1. General Guidelines
a) All appointments and dismissals of workers, and fixation and alteration of wage
rates should be in writing, and should be authorized by a competent person of the
personnel department, who is duly empowered to do so. This information should be
communicated to the wages office, which is entrusted with the task of preparation
of wage sheets.

b) Separate personal records should be maintained for each worker, showing his
name, number, address, marital status, date of appointment, scale of pay, etc
c) The wages office, which is a section of the accounting department, should be bet
up and placed under the control of a responsible officer other than the cashier

d) Copies of orders relating to increase in pay, promotions, punishment involving

deductions from wages, etc, should be communicated to the wages office concerned
with the preparation of wages sheets
2. Guidelines for the maintenance of wage records
The guidelines to be kept in mind by the people concerned for the maintenance of wage
records are as follows.
1. Time records- When wages are paid to the workers based on time spent by them
recording the time taken by them in doing their task is very significant. Following manual
and mechanical devices are used in the organization.
a. Time recording clocks
Under this method, every worker is given a time card. When the worker enters the
gate of the factory, he has to put his time card into the slot of the clock. The date and
time of arrival and departure are recorded on this card. Thus the time card of the
worker gives the correct and clear picture of the time devoted by the worker in the
factory.
b. Use of tokens
Every worker is given a metal disk or token bearing his number under this method. At
the factory gate a time board is kept. Each worker who enters the gate hangs his
token on the time board and the time keeper records his attendance.in this method
timekeeper should see that no worker hangs the token of other workers who are late
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or absent.
c. Attendance Cards
In some manufacturing units attendance cards may be issued to the workers to record
the attendance. Attendance card contains the details of the workers. The worker puts
his card into a box kept at the gate of factory as he enters the gate. Gatekeeper
records the time of arrival and departure of each worker in the attendance register.
d. Time cards
Under this method worker is given a time card by the foreman of each workshop.
Time card contains the name and number of the worker. Time card contains the name
and number of the worker. Each worker writes the time of his arrival into the
workshop and departure from the workshop, the time spent by him on the job and
the department to which he belongs in the presence of the foreman. At the end of the
week the time cards are sent to the wage office by the foreman to the department
concerned.
e. Bio –matric attendance system
Under this system there is an electric device that identifies an individual. A few
examples of the attendance system are fingerprint system, face recognition system,
voice recognition etc. The time of arrival and departure of every worker is recorded by
the device which is kept at the entrance of the factory.

2. Piece work records

When wages are paid to the workers on the basis of piece work( units produced) each worker is
given a card known as job card or piece work card containing his name , job number, quantity of
work and rate per unit produced by the worker. It is signed by the worker and counter signed by
the store officer to whom the goods produced are delivered.

3. Overtime Records
Sometimes to meet urgent orders from the customers, the organization may go for production of
units after normal hours of work. However, no worker should be allowed to work overtime unless
permitted by some responsible officer.

4. Pass out record

No worker is permitted to leave the factory before the scheduled time. In case a worker
wants to go out of the factory before the scheduled departure time for some urgent
personal work, he is supposed to take written permission from the foreman. When he is
permitted to go out 2 copies of pass out slip issued , stating the reason.one copy of pass
out slip Is to be given to the gatekeeper and the second is to be given to the foreman
who will send it to the wage officer for records.
3. Guidelines for the preparation of wages sheets:

a) There should be a separate office or section in the accounts department for

the preparation of wages sheets.
b) The wages office, which is a second of the accounting department, should be placed
under the control of a responsible officer, which has no hand in the maintenance of wage
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records and in the actual payment of wages.

c) In the case of large concerns, it is advisable to use loose wages sheets so that the work of
preparation of wage sheets can be distributed among a number of clerks in the wages
office.
d) The wage sheets should be prepared at the end of the week or month with the help of
information regarding the attendance time and the quantity of work done by the workers
from the time cards, piece work cards, over-time slips, and pas-sout slips.
e) Separate wages sheets should be prepared for time wages and piece wages.

f) The wages sheets should be prepared on individual pay rolls.

g) The work of preparation of wage sheets should be distributed among a number of clerks I
the wage office, who have no hand either in the preparation of wage records or in the
payment of wages.
4. Guidelines for payment of wages:
a) The work payment of wages should be entrusted to the cashier, who has not been
associated with the preparation of wages sheets
b) It should be seen that clerks who were associated with the preparation of wage sheets
are not allowed to take part in the payment of wages to avoid any collusion.
c) After getting the wages sheets from the wage office, the cashier should withdraw the
necessary sum as shown by the wages sheets under the net wages column.
d) All workers who are to receive wages should be asked to be present personally at the
timeof payment of wages to receive their wages
e) The foreman of each department should also be asked to be present at the time of
payment of wages to identify the workers and to prevent impersonation for workers who
are absent.
f) The payment of wages should be made in the presence of the works manager.
g) It is desirable that a director or a senior official of the concern attends the wage payment
at irregular intervals. This would act as a moral check.
h) At the time of payment of wages to the workers, the signature of each worker should be
obtained on the wages sheet.
i)After the disbursement of wages is completed, a list of unclaimed wages should be
prepared and signed by the cashier, Forman and the works manager.
j) Any wages unclaimed after a reasonable period should be re-banked.
k) Payment of unclaimed wages on a subsequent date should be made only against
authorization by a responsible official.

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INTERNAL CHECK AS REGARDS STORES

Need for Effective Internal Check for Stores: Stores are vulnerable to pilferage, theft,
waste, misuse, etc. particularly in large industrial concerns, which has large stores. So, there
must be a proper system of internal check for stores.
Guidelines for Internal Check for Stores:
The system of internal check for stores must be so devised as to prevent any kind of
pilferage, theft, waste, misuse, etc. While devising an effective system of internal check for
stores, the following guidelines or points should be taken into account:
1. General guidelines: The general guidelines are as follows:

a. The store should be located at a convenient place.

b. The store should have proper storage facilities so that goods may not be misplaced,
wasted, pilfered or stolen.
c) This is because the chances of frauds and misappropriations will be more, where both the
functions are performed by the same persons.
d) This is because the chances of frauds and misappropriations will be more, if the persons
engaged in the maintenance of stores ledger are connected with stores.
e) A system of code numbers should be established for stores. The use of code numbers will
help to prevent unauthorized purchases, purchases by unauthorized persons, etc.
f) There should be an independent checking of stores by a responsible person, who is not
connected in any way, with purchases, issues or preservation of stores.
g) It is advisable to have the perpetual inventory system of checking of stores under which
the stores are checked regularly throughout the year by specialized staff.
h) Entry (ie, admission) into stores should be regulated by permits. This would ensure that
persons going outside do not remove any goods without proper authority.
2. Guidelines for receipt of stores:
a. On the arrival of the stores, the stores should be properly checked and accepted by the
stores department (i.e., the store keeper).
b. The material requisition slip should be signed by a responsible official of the department
which requisitions the materials. It is preferable that the material requisition slips used by
different departments are of different colours.
c. After the issue of the materials against the formal material requisition slips, the stores
issued should be recorded in the bin card by the stores department
d. Stores returned from some job or department should be recorded in the bin card and also
in the stores ledger on the basis of the 'Material Returned Note sent by the department
which has returned the stores.

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e. The transfer of materials from one department to another department, no entry need be
made in the bin card kept in the stores department.
f. The gate-keeper must be instructed not to allow any item of stores go out of the store
without the necessary permit from the store-keeper. (A gate book may be maintained in
which the gate keeper should record all the goods received in or taken out of the factory.
3. Guidelines for preservation of stores:
The following guidelines or points may be takeninto account as regards the preservation
of stores:
a. There should be a separate place earmarked for each type of stores, and the stores
should be properly kept in their respective places, bins or racks.
b. There should be proven system of numbering the bins or racks for easy location or
identification of bins
c. The stores should be frequently checked and counted by a responsible official, who
should compare the physical quantity of stores in the bins with the accounting quantity as
recorded in the bin card and the store ledger
d. It is also advisable that the stocks in the store are inspected by some responsible official,
who should check at random the quantity of materials in the bin with the quantity of
materials as shown in the bin card and the stores ledger.
e. Where necessary, certificated should be obtained. Again, there must be regular
inspection of such stocks,
4. Guidelines for the recording of stores (i.e., for maintenance of stores records):

a. The bin cards should be written up by the stores department (ie, the store keeper or his
subordinate). Each bin card should record the stores received into the store room, stores
issued from the store room and the balance in hand in terms of quantity.
b. Both the bin cards and the stores lodger should be maintained on the basis of relevant
documents, such as goods received note, material returned note and material requisition
slip.
c. It is desirable to have stores ledger cards or different sizes and colours for different types
of stores for easy identification.
d. Stores records should also be compared with those of corresponding periods of the
previous years so as to discover the possibilities of materials omissions and inclusions.
e. It is necessary to ensure that the store-keeper, who is in charge of stores and
maintenance of bin cards, has no access to the stores ledger in the accounts department.

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Difference between Internal and Independent Audit (External Audit):

Internal Audit Independent Audit (External Audit)
1. An internal auditor is a regular employee of 1. He is a professional auditor appointed by the
the company. company who is not an employee.

2. His duties, rights and responsibilities are 2. The scope of audit work liabilities, duties etc
determined by management. are explained by concerned statutes.
3. He is appointed by the management. 3. He is appointed either by shareholders or by
govt.
4. It’s not compulsory 4. It is compulsory for all companies.

5. Internal auditor acts as an advisor to the 5. He is independent of the management

management.
6. To become an internal auditor professional 6. An independent auditor must have
qualification is not necessary. professional qualification as per the act.
7. Internal Auditor ensures that the system of 7. the internal auditor comment on the true
accounting is efficient. and fair view of the business.
8. An internal auditor reports to the 8. The Internal Auditor reports to the
management. 9. Internal audit is a continuous shareholders.
process. 9. It’s a periodic process
9. Internal audit is a continuous process. 9. It’s a periodic process.

Difference between Internal check and Internal audit:

Internal Check Internal Audit

1. It is an arrangement of duties allocated in 1. It is independent appraisal of operation and
such a way that the work of one person is records of the company.
automatically checked by another.
2. The purpose of IC is to prevent minimize 2. The purpose is to detect errors and frauds
possibilities of errors and frauds. 3. IC doesn’t that are already committed.
require separate staff. It represents only the
arrangement of duties. 3. It requires separate
staff employed o
3. IC doesn’t require separate staff. It 3. It requires separate staff employed only for
represents only the arrangement of duties. this purpose.
4. IC is a continuous process. 4. The Internal auditor has to report
periodically about various inefficiencies and
suggest improvements.
5. IC begins along with the recording of 5. It begins when the accounting process ends.
transactions.
6. It is devices of doing the work. 6. It is a device for monitoring the work.
7. Scope of Internal Check is limited especially 7. The scope of internal audit goes on beyond
to the accounting department. the accounting department

Auditing Chapter3 Internal Check