Vikash ShrivastavaVikash Shrivastava asked 1 year ago
1 Answers
RaviRavi Staff answered 1 year ago

Below are 3 questions on Internal Check and their answers. Q2 & Q3 both focus on same thing how to implement or improve internal check, but icai has given different answer. you can remember them as 2 separate questions or combine 4 points of Q3 with points Q2 and remember one combined answer.
 
Q1 What do you mean by internal check system? What are the main objectives of internal check system?
 
Internal Check System – Internal check system implies organization of the overall system of book-keeping and arrangement of Staff duties in such a w ay that no one person can carry through a transaction and record every aspect thereof. It is a part of overall control system and operates basically as a built-in-device as far as organization and job-allocation aspects of the controls are concerned. The system provides existence of checks on the day to day transactions which operate continuously as part of the routine system w hereby the work of each person is either proved independently or is made complimentary to the work of another. The following are the objectives of the internal check system :

(i) To detect error and frauds with ease.
(ii) To avoid and minimize the possibility of commission of errors and fraud by any staff.
(iii) To increase the efficiency of the staff working within the organization.
(iv) To locate the responsibility area or the stages where actual fraud and error occurs.
(v) To protect the integrity of the business by ensuring that accounts are always subject to proper scrutiny and check.
(vi) To prevent and avoid the misappropriation or embezzlement of cash and
falsification of accounts.
 
Q2 What are the general conditions pertaining to the internal check system?
Q2 The Auditor of S Limited has just commenced the statutory audit. What should be considerations for the effectiveness of a system of internal check?

 
The general condition pertaining to the internal check system may be summarized as under –

(i) no single person should have complete control over any important aspect of the business operation. Every employee’s action should come under the review of another person.
(ii) Staff duties should be rotated from time to time so that m embers do not
perform the same function for a considerable length of time.
(iii) Every member of the staff should be encouraged to go on leave at least once
a year.
(iv) Persons having physical custody of assets must not be permitted to have access to the books of accounts.
(v) There should exist an accounting control in respect of each class of assets, in
addition, there should be periodical inspection so as to establish their physical condition.
(vi) Mechanical devices should be used, w here ever practicable to prevent loss or
misappropriation of cash.
(vii) Budgetary control should be exercised and wide deviations observed should
be reconciled.
(viii) For stock taking, at the close of the year, trading activities should, if possible
be suspended, and it should be done by staff belonging to several sections of
the organization.
(ix) The financial and administrative powers should be distributed very judiciously
among different officers and the manner in which those are actually exercised
should be reviewed periodically.
(x) Procedures should be laid down for periodical verification and testing of
different sections of accounting records to ensure that they are accurate.
 
Q3 State the considerations on which effectiveness of an efficient system of internal check depends
 
Considerations for the effectiveness of a System of Internal Check: The effectiveness of an efficient system of internal checks depends on the following considerations:
(i) Clarity of responsibility – The responsibility of different persons engaged in various operations of business transactions should be properly identified. A well integrated organizational chart depicting the names of responsible persons associated with specific functions may help to fix up responsibility.
(ii) Division of work – The segregation of work should be made in such a manner that the free flow of work is not interrupted and also helps to determine that the work of one person is complementary to the other. Then, it is suggested that rotation of different employees through various components of job should be effectively implemented.
(iii) Standardization – The entire process of accounting should be standardized by creating suitable policies commensurate with the nature of business, so as to strengthen the system of internal checks.
(iv) Appraisal – Periodic review should be made of the chain of operations and flow.
Such process may be carried out by preparing an audit flow chart.

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