Difference Between Internal Check and Internal Control

Internal check and internal control are two frequently used terms in risk management which are often used interchangeably. However, subtle differences exist between the two since internal control is a broader concept compared to internal check.  The key difference between internal check and internal control is that internal check refers to the way of allocating responsibility, segregation of work where work of the subordinates is checked by the immediate supervisors to verify that the work is carried out according to the company policies and guidelines whereas internal control is the system implemented by a company to warrant the integrity of financial and accounting information and ensure that the company is progressing towards fulfilling its profitability and operational objectives in a successful manner.

CONTENTS
1. Overview and Key Difference
2. What is Internal Check
3. What is Internal Control
4. Side by Side Comparison – Internal Check vs Internal Control
5. Summary

What is Internal Check?

Internal check refers to the way of allocating responsibility, segregation of work, where work of the subordinates is checked by the immediate supervisors to verify that the work is carried out according to the company policies and guidelines. Internal checks are carried out on a day to day basis, and a number of internal checks are implemented with regard to many aspects such as cash, sales, and purchases. Some of them are,

• All the receipts of the day should be deposited in the bank at the end of the day.
• All cash transactions should be recorded in a cash register.
• Bank reconciliation statements should be made periodically to ensure that cash at hand is equal to the cash at the bank.
• Petty cash has to be maintained under the imprest system (A fixed amount is granted for each month where the spent amount during the month will be reimbursed at the end of the month).
• Wage sheets or payrolls should be checked for accuracy.
• Orders received should be recorded in writing, and corresponding invoices should be stored.
• Entries should be made in the sales book on the basis of invoices.
• Goods returned by the customers should be entered in the returns inwards ledger.
• Entries for goods purchased should be entered by an independent person in the store’s
• Goods received should be checked by the storekeeper for accuracy in correspondence with the ‘Goods Received Note’ (GRN).
• Payment for invoices should be authorized by a responsible manager.

What is Internal Control?

Internal control is the system implemented by a company to ensure the integrity of financial and accounting information and to make sure that the company is progressing towards fulfilling its profitability and operational objectives in a successful manner. The main reason that internal control procedures are in place is to ensure that the management is ideally positioned to identify and mitigate the risks the company is faced with in order to safeguard company assets.

Even when an efficient internal control system is in place, there is no guarantee that the risks will be completely eliminated. However, they can be controlled from causing notable destruction for the organization. Internal control measures can take the following forms.

Organizational Controls

Establishing clear lines of authority, accountability and responsibility based on organizational structure are very important to ensure effective decision making. Job descriptions for all employees must be extensive and should describe their duties. Segregation of duties to divide responsibility for recording, inspecting and auditing transactions should be in place to prevent a single employee committing a fraudulent act.

Operational Controls

Planning and budgeting activities to decide on production and sales is the main concern of operational controls. In addition to that, accounting reconciliations to ensure that account balances match up with balances maintained by other entities including suppliers, customers, and financial institutions is also a part of ensuring operational control.

Personnel Controls

There should be clear and transparent procedures to select and recruit employees subjected to verification processes. Once recruited, adequate training should be conducted before allowing them to perform their designated duties. Independent checks on employee performance such as supervision should also be conducted.

The above controls are designed and implemented based on the risks the company is exposed to. Thus, it is essential to regularly review the effectiveness of internal controls and whether they are operating as intended. The same is done through internal and external audit. Internal and external audit functions provide independent and objective assurance that an organization’s internal control and risk management systems are functioning effectively.

What is the difference between Internal Check and Internal Control?

Summary – Internal Check vs Internal Control

The key difference between internal check and internal control mainly depends on the way each is used to mitigate risks faced by the organization. Internal checks are conducted in line with internal controls; thus, there is a close relationship between the two and internal check and internal control complement each other. Inadequate checks and controls reduce the organizational and operating effectiveness and can result in significant costs. Thus, organizations should take necessary steps to control such circumstances.

Reference:
1. “Internal controls.” Internal controls | ACCA Qualification | Students | ACCA Global. N.p., n.d. Web. 29 May 2017. <http://www.accaglobal.com/lk/en/student/exam-support-resources/fundamentals-exams-study-resources/f1/technical-articles/internal-controls.html>.
2. “Income Tax & Auditing.” International Recognition. N.p., n.d. Web. 29 May 2017. <https://sol.du.ac.in/mod/book/view.php?id=1688&chapterid=1679>.
3. “Internal Check.” Merriam-Webster. Merriam-Webster, n.d. Web. 29 May 2017. <https://www.merriam-webster.com/dictionary/internal%20check>.

Image Courtesy:
1. “Figure 2: Achieving Objectives through Internal Control” by U.S. Government Accountability Office (U.S. Government Works) via Flickr