AUDITING - INTERNAL CHECK, INTERNAL CONTROL &

INTERNAL AUDIT
INTERNAL CONTROL, INTERNAL CHECK AND INTERNAL
AUDIT
INTERNAL CONTROL
According to W.W.BIGG: Internal Control is best regarded as
indicating the whole system of controls, financial and otherwise,
established by the management in the conduct of a business,
including internal check, internal audit and other forms of control.
PURPOSE OF INTERNAL CONTROL
The objectives or purposes of Internal Control system is classified
in two types:
FROM CLIENTs POINT OF VIEW
FROM THE AUDITORs POINT OF VIEW
(A) FROM CLIENTs POINTOF VIEW:
Cost Benefit Analysis is applied by the management to assess and
select a particular method of control and its
applicability to the business conditions. The benefits which the
internal control system offers are:
a. Providing reliable data: Business decisions require accurate
information to run the business activities
efficiently. Examples of significant areas where management
requires reliable information are fixation of
selling prices, production directives depending on requirements
etc.
b. Safeguarding assets and records: The physical assets of a
company can be stolen, misused, or
accidently destroyed, if not properly protected by adequate
controls. The same is true of non-physical assets
such as accounts receivable, important documents (e.g.
confidential government contracts) and records (e.g.
the general ledger and journals). The safeguarding of certain
assets and records has become increasingly
important since, the advent of computer system. Large amounts of
information stored on computer media
such as magnetic tape can be destroyed permanently if care is not

taken to protect them.

c. To promote operational efficiency: The controls within an
organization are meant to prevent
unnecessary duplication of efforts, protect against waste in all
aspects of the business, and discourage other
types of inefficient use of resources.
d. To encourage adherence to prescribed policies: The system of
internal control is meant to provide
reasonable assurance that procedures and rules of the various
institutes are followed by company personnel.
(B) FROM AUDITORS POINT OF VIEW:
The study and evaluation of the clients system of internal control
is important to auditors. The auditors
must have a thorough understanding of the system. A birds eyeview of the controls fail to meet the standard
of due care. There is a difference between the system that is
supposed to be in operation and the one actually
being used. Simply by asking certain questions, reviewing of the
organization chart and studying a few
procedure manuals to obtain an understanding of the system is
not sufficient. No doubt, these are important
parts of reviewing the system, but to obtain an adequate
understanding the system must also be tested.
There are two ways in which the study and evaluation of the
client's of internal control is used.
To determine whether an audit is possible: if possible, then
To determine the scope of audit.
ELEMENTS/ CHARACTERISTICS/PRINCIPLES OF INTERNAL
CONTROL
An effective or a good system of internal control should have the
following characteristics which can be
abbreviated as CROSSASIA for memory.
COMPETENT AND TRUSTWORTHY PERSONNEL
RECORDS, FINANCIAL
ORGANISATIONAL PLANS
SEGREGATION OF DUTIES

SUPERVISION
AUTHORISATION
SOUND PRACTICES
INTERNAL AUDIT
ARTHIMETIC AND ACCOUNTING CONTROLS.
COMPETENT AND TRUSTWORTHY PERSONNEL
Personnel are the most important element of any system of
internal control. If employees are competent
and trustworthy, some of the other characteristics can be absent
and reliable financial statements can still
result. On the other hand, if the other characteristics of control are
strong, incompetent or dishonest people
can reduce the system to shambles.
RECORDS, FINANCIAL AND OTHER ORGANISATIONAL PLANS
Documents perform the function of transmitting information
throughout the clients organization and
between different organization. The documents must be adequate
to provide correctly recorded. For
example, if the receiving department fills out a receiving report
when material obtained, the accounts payable
department can verify the quantity and description on the
vendors invoice by comparing it with the
information on the receiving report.
SEGREGATION OF DUTIES
For the prevention of both intentional and unintentional error,
following types of segregation of duties
should be taken care of:
(i) Separation of Operational Responsibility from record-keeping
responsibilities: If each department or
division in an organization is responsible for preparing its own
records and reports, there would be a tendency
to bias the result to improve its reported performance. So in order
to ensure unbiased information, record
keeping is typically included in a separate department under the
controller ship function.

(ii) Separation of the Custody of Assets from Accounting: To protect

the firm against the frauds, it is
required that the custody of assets and their accounting should be
done by different persons. When one
person performs both functions, there is a risk of his disposing of
the assets for personal gain and adjusting the
records to relieve himself of responsibility for the assets.
In an electronic data processing system, any person with custody
of assets should be prevented from
performing the programming function and should be refused
access to punched cards, floppy or other input
records. As a general rule, it is desirable that any person
performing an accounting function, whether it will be
in an electronic data processing or in a manual system, should be
refused access to assets that can be
converted to personal gains.
SUPERVISION
Directors should review the companys financial operations and
position at regular and frequent intervals.
Comparison with results for previous periods indicates
discrepancies that call for further examination where
budgetary control is in use, attention will be drawn to material
variances and explanations required. From time
to time, special reviews of particular items such as stocks, or the
operation of the wages department, should be
undertaken.
AUTHORISATION
If control is to be satisfactory, every transaction must be properly
authorized. If any person in an
organization could acquire or expand assets at will, complete
chaos result.
Authorization can be of two types:
i) General
ii) Specific

Examples of general authorization are the issuance of fixed price

lists for the sale of product, credit limits
for customers and fixed automatic re-order points for making
purchases.
An example of specific authorization is a sale transaction by the
sale manager for a used car of the company.
The individual or group which can grant specific or general
authority for transaction should hold a position
commensurate with the nature and significance of the
transactions, and the policy for such authority should be
established by the management.
SOUND PRACTICES
Sound practices of administration require that established
procedures, polices and delegation of
responsibility should all be in black and white. This helps in
avoiding questions, attempts to shift responsibility
for unsatisfactory performance etc.
INTERNAL AUDIT
Internal audit is a part of the whole system of internal control. It
should operate independently of the
internal check and in no circumstances. It should divert any one of
responsibilities placed on him. It is the
examination of accounts of a business concern by its employees
specially appointed for the purpose. It is an
independent appraisal of activity within an organization for the
review of accounting, financial and other
business practices.
ARTHIMETIC AND ACCOUNTING CONTROLS.
Chart of accounts i.e. balance sheet and income statement is an
important control because it provides the
framework for determining the information presented to
management and other financial statement users.
Chart of accounts or Financial Statement should be prepared in
accordance with the generally accepted
accounting principles.

INTERNAL CHECK
It is an arrangement of duties of members of staff in such a
manner than the work performed by one
person is automatically and independently checked by the others.
According to F.R.M.De PAULA, Internal check means practically a
continuous internal audit carried on by the
staff it self, by means of which the work of each individual is
independently checked by other members of the
staff.
According to D.R. DAVAR, Internal check is a system or method
introduced with defined instructions given to
staff as to their sphere of work with a view to control and
verification of their work and also maintenance of
accurate records as the ultimate aim.
OBJECTIVES OF INTERNAL CHECK
1. To exercise moral pressure over staff.
2. To ensure that the accounting system produces reliable and
adequate information.
3. To provide protection to the resources of the business against
fraud, carelessness and inefficiency.
4. To distribute the work in such a business transaction is left
unrecorded.
5. To allocate duties and responsibilities of each clerk in such a
way that he may be held responsible for
particular fraud or error.
6. To minimize the chances of errors, frauds or irregularities in the
business based on the principle of division
of labour.
7. To detect errors and frauds easily if it is committed, because in
an efficient internal check system, there is
based on the principle of division of labour.
8. To detect errors and frauds easily if it is committed, because in
an efficient internal check system, there is a
provision for independent checking.
ESSENTIAL CHARTERISTICS/PRICIPLES OF A GOOD SYSTEM OF

INTERNAL CHECK
1. Responsibility: Responsibility of each individual must be
properly defined and fixed. The work of the
business should be allocated amongst various clerks in such a
manner that their duties and responsibilities
are clearly and judiciously divided.
2. Completion: The work should be divided in such a way that no
single person is allowed to complete the work
solely by himself from the beginning to the end. However, there
should be no duplication of work.
3. Rotation of employees: A good system of internal check should
not allow person having custody of assets to
have access to the books of account. A system of transfer or
rotation of employees from one seat of work to
anther must be followed by the business.
4. Automatic check: A good system of internal check must provide
for an automatic checking of the work of
one clerk by the other.
5. Reliance: No clerk of the business should be relied upon too
much.
6. Safeguards: Safeguards should be prescribed to keep un-used
cheque books, files and securities etc.
7. Supervision: A strict supervision should be exercised to ensure
that the prescribed internal checks and
procedures are fully operative.
8. Formal sanction: No deviation should be allowed from the
established procedures till it is formally
sanctioned by the top official.
9. Periodical review: the system of internal check be reviewed from
time to time to introduce improvements.
ADVANTAGES OF INTERNAL CHECK
Some of the widely accepted advantages of an efficient system of
internal check are as follows.
1. FOR THE BUSINESS
a. Proper division of work: Internal check entails a proper and
rational distribution of work among the
members of staff of the enterprises keeping in view their individual

qualifications, experience and area of

specialization.
b. Detection of errors and frauds: since no individual worker is
allowed to handle a job completely from the
beginning to the end, and the work of each clerk is automatically
checked by the other, this heaps in the
early detection and discovery of errors and frauds and the
possibilities of the commission of errors and
frauds can be minimized.
c. Increased efficiency coupled with economy: A good system of
internal check increase the efficiency of
work among the staff and leads to overall economy.
d. Moral check: knowledge of subsequent checking of each
employees work by others, acts as a great check
to commission of errors and frauds.
2. FOR THE AUDITOR
a. Quick preparation of final accounts: The Profit & Loss Account
and the Balance Sheet are
prepared without any loss of time.
b. Convenience to Auditor: Where an organization is operating
system internal check, the statutory
auditor may conveniently avoid detailed checking of the
transactions. He may apply a few tests
here and there and can relieve himself from detailed checking.
3. FOR THE OWNER
a. Accuracy of the accounts can be relied upon: if there is a system
of internal check the owner of
the concern may rely upon genuineness and accuracy of the
accounts.
b. Increase in profits: Overall efficiency and economy in operations
result in more profitsthus
ensuring larger dividends for the owners or shareholders.
DISADVANTAGES OF INTERNAL CHECK.
Depending on each other proves fatal in the quick disposal of the
work. if one person is absent, the day-to-day

work will be seriously disrupted. Following are some of the

disadvantages of a system of internal check.
1. Costly for small business: A system of Internal check system
quite expensive especially for small
business houses.
2. Quality is sacrificed for Promptness: In an internal check system
quality of work declines because the
clerks of the business attach greater importance to become quick
and do not care if in the process their
work gets substandardised.
3. Carelessness among high officials: The possibility of some of the
responsible and high officials being
complacent, increases as they believe, though not always rightly,
that under a sound system of internal
check nothing can go wrong.
4. Disorder in the working of a business. In the absence of a proper
organized system of internal check
there will be chaos and disorder in the working of business.
5. Risky for an auditor: If the auditor does not apply tests and
procedure his own and if he relies on the
output of the system his work cannot be free from irregularities if
the system itself proves to be
defective.
INTERNAL CHECK: WITH REGARD TO CASH.
The risk of misappropriation of cash needs no emphasis. The
chances of fraud are numerous in cash
transactions. For example, receipts may not be entered in the
cash-book: records of cash received may be
understated by preparing duplicate receipt for amounts less than
the original. Cash sales may be treated as
credit sales charging the amount to fictitious debtors, etc.
The following are the points that should be taken into
consideration while devising a good and proper system
of internal checks for cash transactions.
CASH SALES:

Cash Sales are of three types:

a. Sales at Counter / Counter Sales
b. Sales by travelling Salesmen.
c. Postal sales.
1> SALES AT COUNTER / COUNTER SALES: The following
procedure may be of great use in regard to cash sales:
i) A specific number, name or work may be allotted to every
salesman.
ii) Every salesman is supplied with a separate book containing
blank copies of cash memo.
iii) Cash memos should be printed in numerical sequence.
iv) Cash memos are printed in different colours for salesman at
different counters.
v) When the sales man sells goods to a customer he prepares four
copies of the Cash Memo. These copies
are checked by the senior clerk.
vi) Three copies of the cash memo are handed over to the
customer and the fourth is retained by the
salesman.
vii) The customer should hand over three copies of the cash
memos to the cashier, who alters collecting the
amounts and recording it in his cash register, returns two copies to
the customer duly stamp marked
cash paid.
viii) So the cashier collects the amount and records it in his cash
register.
ix) The customer should present two copies of the cash memos at
the counter where the goods purchased
by him are to be delivered.
x) Here the customer will get the goods purchased by him are to
be delivered to him.
xi) The Clerk, at the delivery counter, checks the sales and
delivers the goods to the customer and also keeps
one copy of the cash memos.
xii) In big business houses, the customers copy of the cash memo
may be checked by the security staff
before the customer is allowed to check out of the place.

xiii) At the end of the day, each counter salesman, cashier and the
delivery counter clerk should prepare
summaries of Cash Sales.
xiv) The cash sales summary prepared by the cashier should be
verified with the cash sales summary of each
salesman and the delivery counter clerk.
xv) The differences if any should be immediately enquired into.
xvi) If the summaries tally, accounts are certified as correct. Then
it is sent to the General Manager and
another copy is sent to accounts department.
xvii) Daily cash receipts should be deposited into the bank on the
same day.
xviii) Where cash recording machines are used, the total cash
received as shown by the machine should be
checked with the amount actually banked.
2> Sales by Travelling Salesmen: In big business houses, generally
Travelling salesmen are employed to push
sales and to collect debts. These Salesmen collect debts from old
customers and accept advances for new
ones.
Ordinarily debtors will be asked to send the remittances by post
and not to hand over the cash to any
representative of the enterprise. But in exceptional circumstances
travelling Salesmen may be permitted to
collect cash from the debtors. For example, where it is necessary
for enforcement of the terms of credit or
where refusal by travelling salesman to collect cash from a debtor
may be regarded as a bad policy.
Whatever the case may be, a good system of check over these
salesmen is vitally essential. So the following
precautions must be taken.
i. Travelling salesmen should be issued with pre-numbered, rough
receipt books.
ii. Final receipt against receipt of cash by travelling salesman
should be issued either from the branch or head
office to which the salesman is attached.
iii. Customers should be asked to contact the head office or branch
office if the final receipt is not mailed to

them within a stipulated period.

iv. Travelling salesmen should be instructed to remit the entire
cash collected by them to the head office or
branch office to which they are attached, without making any
deduction towards salary or commission
payable to them.
v. Head office or branch office should regularly send the statement
of accounts to keep them informed of the
latest position as to their liability.
vi. Special attention should be paid to customers accounts that
have become overdue.
vii. There should be surprise transfers of travelling Salesmen from
one area to another. This will increase
the efficiency of the agents and will also reduce the chances of
fraud.
3> Postal Sales or Value Payable Post(V.P.P) sales:
The following points should be noted in this regard.
i. There should be a separate register to record sales by post of
VALUE PAYABLE POST.
ii. When cash is received against V.P.P sales, it should be entered
in the V.P.P register and then it should be
posted to the cash book.
iii. Separate bank pay-in-slips should be used to deposit cash
received against post sales.
iv. An offer should be deputed to check carefully this register an
special attention should be given to those
goods that have been returned and those against which payments
has not been received .
v. Cash book and orders received should be checked and order
received should bed properly filed too.
INTERNAL CHECK WITH REGARD TO CASH PURCHASES
Requisition: The procedure for issuing purchase requisitions should
be specified. The head of the
department, who is in the need of goods, should fill in a requisition
slip duly signed and then should send it
to the purchases department. The details about the quantity, is

quality and the time by which the goods

must be supplied be clearly mentioned in the requisition slip.
Enquiry: Purchase department makes an enquiry about the terms
and conditions of purchases from
different suppliers. For this purpose tender are generally invited.
But, who shall open and accept the
tenders, should be clearly specified. At a rule, the lowest tender
should be accepted and accordingly a
decision be taken.
Purchase Order: The Purchase Department places orders which
should be recorded in the Purchase Order
book. Four copies of purchase order should be prepared. One copy
will be sent to the vendor, second to
the store department, third copy to the Accounts department and
fourth one will be retained by the
purchase department itself. A responsible officer should review the
purchase order, before signing by the
authorized person or director.
Receipt of Goods: On receipt of goods, the purchase department
should be properly inspect them, and there
after an entry in the goods inward (Receipt) book, the same should
be sent to the stores. Concerned
department should be informed about the receipt of the goods.
Making the Payments: The Purchase Department should
thoroughly check the invoices and send the same
to accounting department for payment. The accounting
department should compare the invoice with the
purchase order and Incoming Inspection Report and should also
verify the calculation.
The Accounts Department should enter the invoice in the Purchase
Book. Only responsible official
should draw cheque for the payment of invoice. At the time of
signing, a signing authority must verify that

correct payment is made. If some portion of the goods is returned

to the supplier, a proper entry must be
made in the Purchase Return Book. A Credit Note to that effect
must be obtained from the supplier and
accounts section must adjust the payment accordingly.
A good system of internal check with regard to purchase will
prevent the following types of
irregularities, errors and frauds.
i. Fictitious Payment: Fictitious Purchase may be recorded in the
purchase book and the payments
withdrawn may be misappropriated.
ii. Double Payment: Some invoices may be recorded twice and
double payment made may be
misappropriated.
iii. Artificial inflation in profits: Goods purchased may not be
entered in the period so as to inflate profits.
iv. Artificial reduction in profits: Goods not received in one period
may be entered as purchases so as to show
profits less than the actual.
INTERNAL CHECK WITH REGARD TO WAGES
The system of internal check for wages should be devised in a
careful and planned way, specially in
manufacturing concerns, employing large number of workers,
possibilities of frauds are always there. Thus
efforts should be made to prevent such frauds with the help of
some suitable arrangements of internal check
which should be revised from time to time in the light of
experience gained. System should be actively enforced
and supervised by some responsible official.
The Objectives
To avoid inclusions of dummy workers in the list of workers.
To avoid incorrect time or piece work records.

To avoid fraudulent manipulation of wage-sheet and

misappropriation of money etc.
To minimize such frauds, the following system of internal check for
wages is suggested.
MAINTENANCE OF WAGE RECORDS
1. TIME RECORDS: Workers are paid their wages normally on the
basis of time. Thus the time spent by each
worker should be correctly recorded in the time record book and
for this purpose the following methods
are in practice.
a. THE TIME RECORDING CLOCK: The time recording clock is
placed at the gate under the charge of a timekeeper.
As soon as worker enters the gate, the time keeper inserts his time
into the clock which records
the time. It is recorded when the worker leaves the factory.
b. BRASS TOKEN: The workers are given brass token bearing their
numbers. At the gate, a time board is
maintained on which each worker hangs his token as soon as he
enters in the factory. The time keeper is
thus able to record the time of workers entering the factory. He
should be vigilant enough to see that no
workers hang the token of others who are late or absent.
c. ATTENDANCE CARDS/PUNCHING MACHINE: Each worker is
provided with a time card with his name,
number, department and wages rate mentioned on it. He should
punch card at the time of his arrival and
departure. The punching or card must be supervised by the timekeeper. Foreman of each department
should also be asked to keep the time records of his workers. The
time keeper and foreman should
separately prepare the time records and the name of absentees at
the end of the day.
d. COMPUTERS: This method is the most popular method now

especially with the multinationals. An

identity card is issued to each worker and when the employee
enters the factory and leaves the factory, he
puts his identity card in the slot of the time recording machine.
This machine is controlled by the
computer. So the computer records the time the employee spends
in the office. Another advantage of this
method is that only with a proper identity card, the employee can
enter the office. That is only if the
identity card is the authorized one, then only the door will open for
the employee.
2. PIECE-WORK RECORDS: Where the workers are paid on the basis
of the wages system, proper hooks for
actual work done by workers should may be maintained. Each
worker should be provided ith a job card or
piece work return form bearing his name, hob number, nature of
worker should be recorded on this card
which should be countersigned by the foreman of the department.
Store-keeper to whom the goods
manufactured are handed over, should sign this card. It should be
finally checked by piece work reviewer
along with quality of goods.
3. OVERTIME RECORDS: Ordinarily overtime work should not be
encouraged. No worker should be allowed to
work overtime unless he is authorized to do so by the authorized
official of the organization. Strict check
must be kept on loiterers at the place of work. Overtime slips
should be sanctioned in advance. Such slips
should bear the name and number of worker, overtime put in the
job or the department in which he is
engaged. At the weekend such slips should be sent to the
department in and the job or the department in

which he is engaged. At the weekend such slips should be sent to

the time-keeper who will forward them
to the wage office.
4. PASS-OUT RECORDS: The workers should not be allowed to
leave the factory before the scheduled time.
But if sometimes, a worker wants to go out of the factory on his
personal work during working hours he
should not be allowed to go out of the factory premises without
obtaining permission from authorized
official who should issue pass-out slips. Such slips are handed over
to gatekeeper wage office should also
be given copy of such slips. In case a worker leaves the factory
before time on his own account, it should be
properly accounted.
5. PREPARATION OF WAGE SHEETS: The preparation of wage
sheets should be done by a separate
department. This work should be done by five clerks to minimize
the irregularities. Information regarding
attendance can be had from the attendance register, job cards,
piece work register, overtime slips, pass out
slips etc,. For time workers and piece rage workers, separate wage
sheet should be used. In big factories
loose wage sheet should be used so that the work may be
distributed amongst various clerks easily.
All the essential particulars should be entered in the wage slips
which should have columns for:
1) Name
2) Number/code number allotted to him and his address
3) Total time worked
4) Details of word
5) Rate

6) Total amount of wages

7) Bonus
8) Overtime, if any
9) Deductions
10) Net amount payable
The whole work is to be divided in various parts to be done by
separate clerks in the wage department.
i. Two clerks should examine the time and piece wage records,
over time records and other statements
received from the foreman.
ii. The third clerk is to prepare individual employee statement i.e.,
name of the worker, code number allotted
to him and his address, total time worked and rate of wages.
iii. The fourth clerk is to check the calculations and deduct the
permissible amount i.e. rent, provident fund,
income tax, installment of loans and other permissible deductions
under the PAYMENT OF WAGES ACT,
1936. From the gross wages to arrive at the net amount to be paid
to the workers.
iv. The fifth clerk is to check the whole work thoroughly.
v. All these clerks should initial the wage slips before these are
signed by some responsible officer, such as
director or works manager.
PAYMENT OF WAGES
1. The clerks associated with the preparation of wage sheets must
not be associated in the payment of
wages to avoid collusion between two or more persons.
2. The cashier should be entrusted with the job of disbursement as
he is not associated with the
preparation of the wage sheets.
3. Each worker, who is to receive the wages, should be present.
4. The foreman or concerned officer of each department should be

present at any sort of impersonation

for workers who are absent.
5. Where possible, the signature of the workers, should be
obtained when they receive the amount of
wages. But in case the number of workers is very large and it is
not feasible to obtain the signature of
each worker, the whole payment should be attested by those
present i.e., cashier, foremen and the
workers manager.
6. If casual workers are also employed in the organization a
separate list of such workers should be
prepared and the payment should be made to them in the
presence of a responsible officer. To avoid
fraud, the officer employing casual labour should not be connected
with the payment of wages.
Otherwise, the names of dummy workers can figure in the wages if
necessary precautions are not taken
by the works manager.
7. Proper arrangements should be made with regard to unclaimed
wages.
8. Advances to the workmen should be discouraged and if it
becomes unavoidable they should be given
and these should later be deducted from the wages of the
respective workers.
INTERNAL CHECK WITH REGARD TO STORES (STOCK)
The Stores Department has the charge of preserving and issuing
stores to different departments.
Proper control of stores is very much essential to prevent pilferage
(small theft) and misuse. Therefore, the
internal check system in relation to stores must be given careful
attention.
The following general rules may be followed to ensure effective
check on the stores.

i. LOCATION OF STORES: Store should be located at a convenient

place. It should have proper stores facilities
so that goods may not be misplaced, misused or wasted.
ii. RECEIPTS OF STORES: On receiving stores, the Stores
Department will prepare a Goods Received Note in
triplicate.
One copy will be sent to the Purchase Department.
Second copy will be sent to Accounts Department.
The third will be retained by the Stores Department itself.
All the details about stores should be noted on the note. Stores
should be properly checked after their receipt.
iii. PRESERVATION OF STORES:
Goods received should be stored at their allotted racks.
The system of Bin Cards should be used to show the receipts,
issues and balance of stores. Such Bin Cards
may be kept hanging on the places where stores are preserved.
Stores inventory software may be used on
computer for item stored.
iv. ISSUE OF STORES: No item from the stores should be issued to
any person without formal requisition or
demand note from some authority. Only authorized person should
be allowed to remove articles from the
stores according to the requisition. The Stores Officer should be
seated near the gate so that all issues
may be made under his supervision. For the materials or stores
returned from the job or the department.
Material return note should be written and properly accounted for.
Likewise, Material Transfer Notes
should be used for the materials transferred form one department
or job to another. The gate keeper

should be instructed not to allow any material out of the factory

without necessary permit from the StoreKeeper or Invoice of Sales Department.
v. RECORDING: After the issue of materials from the stores, the
Store Issue Requisition should be sent to the
Stores Accounts Section for proper records there. The Bin Cards
should be checked out compared from
time to time with stores records.

INTERNAL AUDIT

DEFINITIONS:
According to WATTER B. MEIGS, Internal auditing consists of
continuous critical review of financial and
operating activities by a staff of auditors functioning as full-time
salaried employees.
OBJECTIVES of INTERNAL AUDIT
To comment on the effectiveness of the internal control system in
force and to suggest ways and means
to improve upon the system.
To verify the correctness, accuracy and authenticity of the financial
accounting records presented to the
management.
To facilitate the early detection and prevention of frauds.
To ensure that the international accounting standards or the
standard accounting practices are followed
by the organization.
To take up an investigation at the special request of the
management.

To ensure that the assets of the organization are adequately

safeguarded and properly accounted for.
To ensure that the organization incurs liabilities in respect of its
valid legitimate activities.
To ensure that the acquisition and disposal of assets are under
proper authority.
To ensure as to whether or not each unit of the organization
follows the policies and procedures as laid
down by the top management.

INTERNAL CHECK Vs INTERNAL AUDIT

Similarities: Both Internal Check and Internal Audit are part of the
whole system of internal control, as
such both are complementary and go together.
Dissimilarities: There is a lot of difference b/w Internal Check and
Internal Audit. Both differ from each
other in the following respects.
a. Meaning: Internal Check is an arrangement of duties allocated
in such a way that the work of one person is
automatically checked by another. Internal Audit is an independent
appraisal of the operations and records
of the company.
b. Object: the purpose of Internal Audit is to detect the errors and
frauds which have already been
committed.
i. The purpose of Internal Check is to prevent or minimize he
possibilities of errors, frauds or
irregularities.
c. Need for separate staff: for carrying out Internal Audit, a
separate staff of employees is engaged for the
purpose.

For internal check, no new appointment is made. It, in fact

represents only the arrangement of duties of
the staff in a particular way.
d. Nature of work: the work involved in the Internal Audit is just
like that of a watch man. Internal auditor has
to report, from time to time, to the management about the various
in efficiencies and suggest
improvements. It is also his duty to see that the internal check
system does not become static.
Internal Check, on the other hand, represents a process under
which the work goes on uninterruptedly and the checking too is
more or less automatic.
e. Timing of work: Internal Audit starts when the accounting
process of different transactions is finished. Internal Check is an
operation during the course of transaction.
f. Internal audit: It is a device for checking the work, whereas
internal check is a device for doing the work.
g. In Internal Audit Errors and Frauds are detected after the
completion of work, whereas in Internal Check the Errors and
Frauds are discovered during the course of work.
h. Scope of work: The scope of Internal Check is very limited. The
scope of Internal Audit is comparativelyboard.
i. Involvement: A large number of employees are needed for the
implementation of Internal Check System.Whereas, a much
smaller number of persons are needed for implementing Internal Audit
implementation.