General Considerations in Framing a System of Internal Check

(1) No single person should have an independent control over any important aspect of the business. All dealings and acts of every employee should, in the ordinary course, come under the review of another.
(2) The duties of members of the staff should be changed from time to time without any previous notice so that the same officer or subordinate does not, without a break, perform the same function for a considerable length of time.
(3) Every member of the staff should be encouraged to go on leave at least once in a year. Experience has shown that frauds successfully concealed by employees are often unearthed when they are on leave.
(4) Persons having physical custody of assets must not be permitted to have access to the books of account.
(5) There should exist an accounting control in respect of each important class of assets; in addition, these should be periodically inspected so as to establish their physical condition.
(6) To prevent loss or misappropriation of cash, mechanical devices, such as the automatic cash register, should be employed.
(7) A majority of business concerns now-a-days work according to some kind of budgetary control. It enables them to review from time to time the progress of their trading activities. Such business houses should have a separate staff for the collection of statistical figures which later on should be checked with the corresponding figures from the financial books. If wide discrepancies are observed, these should be reconciled.
(8) For stock-taking, at the close of the year, trading activities should, if possible, be suspended. The task of stock-taking, and evaluation should be done by staff belonging to several sections of the organisation. It may prove dangerous to depend exclusively on the stock section staff for these tasks, since they may be tempted to under or over-state the stock.
(9) The financial and administrative powers should be distributed very judiciously among different officers and the manner in which these are actually exercised should be reviewed periodically.
(10) Procedures should be laid down for periodical verification and testing of different sections of accounting records to ensure that they are accurate.
(11) Accounting procedures should be reviewed periodically, for, even well-designed and carefully installed procedures, in course of time, cease to be effective.

Tutorial Note: Since verification of the internal check is an important function of an audit, it is recommended that students should study the nature and details of the audit forms of internal check and their application, on examining their operation in various business organisations, the accounts of which they have an opportunity to audit. Examiners often require students to define internal check and also to suggest the internal checks which would be applicable for one or more operations of a business or to explain the consequences which would result if the internal checks in respect of one or more operations did not exist. Before attempting such a question, it is advisable that the student should visualise the various processes through which each transaction would pass before it is recorded, comprehend the
exact nature of documents on the basis of which the transaction would be recorded and the sequences in which the entries would be made in the books of account. Once this is done, it would be possible for him to suggest the appropriate internal checks that should be introduced or the consequences if they are not introduced provided the student has knowledge of the fundamentals of the subject, the channels through which the money and goods normally flow and the various stages at which a record of their movements is kept.

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