Internal check on wage payments, purchases and sales

1. Why wages need a special system

Wages are paid to a large number of workers, often in cash, and the records are prepared by a few clerks. The usual frauds are: dummy (ghost) workers on the wage sheet; inflated hours or piece-work; continuing to pay workers who have left; wrong rates; arithmetical errors in the wage sheet; and misappropriation of unclaimed wages. The labour laws now consolidated in the Code on Wages 2019 and the Code on Social Security 2020 (in force from 21 November 2025) also require correct registers and statutory deductions such as provident fund and ESI contributions, so errors carry legal consequences.

2. Internal check on wages, step by step

1. Engagement and personnel records. Workers are engaged only by the personnel department on written authority. Each worker has a personal file with his appointment letter, rate of pay, photograph and specimen signature, and an employee number. Changes in rates and discharges are made only on written orders sent directly to the wages office.
2. Time-keeping. Attendance is recorded by a mechanical or biometric time recorder at the gate, under the eye of a gatekeeper who is not connected with the wages office, so that one worker cannot mark attendance for another.
3. Time booking. The time spent on each job is recorded on job cards by the foreman; the total time on job cards is reconciled with gate attendance. Overtime is paid only on the written approval of the works manager.
4. Piece-work. The output of each worker is certified by the inspection department, not by the worker or the foreman alone.
5. Preparation of the wage sheet by the wages office, with duties divided: one clerk enters hours from the time records, another enters the rates from the personnel file, a third calculates gross wages, deductions and net pay. Each clerk initials his part.
6. Checking. The wage sheet is checked by a separate clerk, totalled and cross-cast, compared with the previous period (large changes are explained) and signed by a responsible official.
7. Drawing the cash. A cheque for the exact net amount of the wage sheet is drawn, signed by authorised signatories.
8. Payment. Wherever possible wages are credited directly to the workers’ bank accounts. Where cash is paid, it is put into pay packets by persons other than those who prepared the wage sheet; payment is made by the cashier in the presence of the foreman, who identifies each worker; the worker signs or puts his thumb impression.
9. Unclaimed wages are entered in an unclaimed wages register, handed back to the cashier at once and banked; later payment is made only on identification and approval. The packets are never left with the paying clerk.
10. Statutory deductions (provident fund, ESI, income tax) are deposited by the due dates, and the amounts reconciled with the wage sheet.
11. Rotation and surprise checks. The wage clerks are rotated; an officer makes occasional surprise checks by paying wages himself or checking headcount against the sheet.

3. Internal check on purchases

1. Requisition: the storekeeper or department head sends a purchase requisition when stock falls to the re-order level.
2. Ordering: only the purchase department places orders, after obtaining quotations; the purchase order is pre-numbered and copies go to the stores and the accounts department.
3. Receipt of goods: the receiving section counts and inspects the goods and prepares a goods received note; defective goods are returned with a debit note.
4. Invoice checking: the accounts department compares the supplier’s invoice with the purchase order (quantity, price, terms) and the goods received note (quantity actually received), checks the arithmetic, and passes it for entry.
5. Recording and payment: the invoice is entered in the purchase book and supplier’s account by a clerk who did not order or receive the goods; payment is made on the due date by cheque or bank transfer after approval; the invoice is stamped “paid”.
6. Reconciliation: suppliers’ statements are compared with the ledger every month.

This guards against payment for goods not ordered or not received, duplicate payment of the same invoice, fictitious suppliers and collusion between the buyer and a supplier.

4. Internal check on credit sales

1. Orders are received by the sales department and recorded in an order book.
2. The credit control section approves the customer’s credit before the order is accepted.
3. The dispatch section sends goods only on an approved order and prepares a pre-numbered delivery note; the gatekeeper checks goods leaving against it.
4. The invoice is prepared by the billing section from the delivery note, priced from the approved price list, and checked by a second clerk.
5. The sales ledger is posted by a clerk independent of cash receipts; statements are sent to customers monthly; overdue balances are reviewed; bad debts are written off only with the sanction of a senior officer.
6. Returns inwards are accepted only through the receiving section on a credit note approved by an official.

5. A simple illustration

A factory has 200 workers. The wage clerk adds three names of persons who do not exist, each at Rs. 600 a day for 26 days, and collects their pay packets. The fraud is Rs. 600 × 26 × 3 = Rs. 46,800 a month. It is stopped at three points in the system above: the names are not in the personnel department’s records, so the rates clerk cannot enter them; no gate attendance exists for them; and at payment the foreman cannot identify them, so the packets go to the unclaimed wages register and come to notice.

How this is examined

“Explain the internal check with regard to wage payments” (April 2023 for 10 marks, January 2026 for 16 marks): open with the frauds the system guards against, then the eleven steps of section 2. “Explain internal check; discuss internal check system for purchase and sales” (April 2022): define internal check briefly (see the previous note), then sections 3 and 4. “Internal check on purchase” was a short note in April 2021.