Internal check: meaning, principles, objectives and cash transactions

1. Meaning

The Institute of Chartered Accountants of England and Wales described internal check as “the checks on day-to-day transactions which operate continuously as part of the routine system whereby the work of one person is proved independently or is complementary to the work of another, the object being the prevention or early detection of errors or fraud.” Spicer and Pegler call it an arrangement of the staff and their duties such that no single person can carry through a transaction and record it without the intervention of another.

Internal check is a part of the wider system of internal control. It is built into the routine: it is not a separate examination after the event (that is internal audit).

2. Fundamental principles

1. Division of work: no one person should have complete control of a transaction; recording, custody and authorisation are with different people.
2. Separation of custody from recording: the cashier should not write the ledgers; the storekeeper should not keep the stock ledger.
3. Automatic check: the work of one clerk is checked in the normal course by another (the cashier’s receipts against the sales ledger clerk’s postings).
4. Rotation of duties: clerks are changed from one seat to another at intervals, so that a fraud kept up by one person comes to light.
5. Compulsory leave: every employee takes leave at least once a year, during which another person does his work.
6. Fixed responsibility: each employee’s duties are defined in writing, so that the person at fault can be identified.
7. Physical control: cash, securities and stock are kept under lock, with limited access.
8. Mechanical devices: cash registers, self-balancing ledgers, computer access controls and audit trails.
9. Authorisation: purchases, payments and write-offs are approved by a responsible officer within set limits.

3. Objectives

• to prevent errors and frauds, and to detect quickly those that happen;
• to allocate duties so that responsibility can be fixed;
• to protect the cash, stock and other assets of the business;
• to keep the accounts up to date and accurate, so that final accounts can be prepared quickly;
• to increase the efficiency of the staff through division of labour;
• to exercise a moral check on employees.

Limitations. It can be defeated by collusion among two or more employees; it adds to cost in a small business, where there are too few staff to divide duties; and staff may become careless, relying on the next person to catch mistakes.

4. Auditor’s duty regarding internal check

The auditor is not responsible for designing the internal check, but he must study and evaluate it, usually by an internal control questionnaire, because the extent of his own checking depends on it. Where the system is sound he can rely on test checks; where it is weak he must extend his detailed checking. He should report serious weaknesses to management (SA 265). He cannot rely on the system entirely: he remains responsible for his opinion.

5. Internal check on cash receipts

Cash sales (counter sales)

1. The salesman prepares a cash memo in duplicate (pre-numbered, from a bound book or the billing system) and gives it to the customer.
2. The customer pays at the cash counter, not to the salesman. The cashier receives the money, stamps the memo “paid” and records it in the cash register or point-of-sale terminal.
3. The goods are delivered by a separate packer only on production of the stamped memo.
4. At the close of each business day the total of the cash memos is compared with the cash register and with the cash actually handed over by the cashier.
5. The day’s collections are banked intact the same day or the next morning.
6. A responsible official checks the serial order of memos; cancelled memos are kept with all copies.

Receipts from debtors

1. Mail is opened by a responsible person, not the cashier, in the presence of a second person, and a list of remittances (cheques, drafts) is made.
2. Cheques are crossed “Account payee only” at once.
3. Receipts are issued from pre-numbered printed receipt books kept under control; counterfoils are checked.
4. The sales ledger clerk posts from the list, not from the cashier’s book; the two are agreed periodically.
5. Salesmen and collectors are not permitted to grant discounts or receive cash beyond limits; collections are deposited daily.
6. Statements of account are sent to debtors regularly by a person other than the cashier; disputes are reported to an official independent of the cashier. This exposes teeming and lading.
7. Digital receipts (UPI, NEFT) are credited directly to the bank and reconciled with the bank statement.

6. Internal check on cash payments

1. All payments, except small expenses, are made by cheque or bank transfer.
2. Payments are made only against a voucher approved by an authorised officer; the voucher is stamped “paid” and cancelled so that it cannot be used again.
3. Cheques are signed by two officers (joint signatories) and are not signed blank.
4. Cheque books are kept under lock by a responsible person; unused cheques are counted.
5. Petty cash is kept on the imprest system: the petty cashier gets a fixed sum and is reimbursed the exact amount he has spent, on production of vouchers.
6. The bank account is reconciled every month by a person who is not the cashier.
7. The cashier is not allowed to post the ledgers, and his cash in hand is checked by surprise counts.

How this is examined

As a 10-mark question: “Define internal check; explain internal check with regard to cash transactions” (November 2021, June 2025). Write the definition, list the principles briefly, then give sections 5 and 6 under headings. Short notes: objectives of internal check (2021, August 2024), fundamental principles of internal check (2019), internal check for cash sales (April 2021, October 2023). The contrast with internal audit is in the next notes.