Understanding the Difference between Internal Check and Internal Control
When it comes to managing a business, it is crucial to have proper checks and controls in place to ensure smooth functioning and prevent fraud or errors. Though the terms internal check and internal control are often used interchangeably, they are two different concepts that have distinct roles in ensuring the financial health of a company. In this article, we will delve into the differences between internal check and internal control to help you understand their importance.
What is Internal Check?
Internal check refers to the procedures that a company puts in place to ensure that financial transactions are accurately recorded and reported. It is a system of review and verification that takes place during different stages of a transaction. This process ensures that there is a proper division of work and that one individual cannot solely control or manipulate any one part of the transaction. The objective of internal check is to detect and prevent errors, irregularities, or fraud in the financial statements of the company.
For instance, a company may have a system in place where no single person is responsible for the entire financial transaction. Rather, different individuals may be responsible for different things such as ordering the inventory, receiving and verifying the inventory, preparing the invoice, and posting it to the ledger. These checks ensure that employees are not manipulating any part of the system for personal gain, and that the financial statements reported are accurate.
What is Internal Control?
Internal control is a broader concept that encompasses all the policies, procedures, and actions taken by a company to safeguard its assets, ensure accuracy in financial reporting, and comply with applicable laws and regulations. It is a framework with several components such as control environment, risk assessment, control activities, information and communication, and monitoring.
Internal control focuses on the entire system of financial transactions, including the physical custody of assets, authentication of transactions, authorization of transactions, recording, and reporting. The objectives of internal control include preventing fraud, safeguarding assets, ensuring the accuracy of financial statements, and ensuring compliance with applicable laws and regulations.
The Main Differences
Although internal check and internal control may have similar objectives, there are key differences between them.
– Internal check focuses on the division of work while internal control focuses on the entire system of financial transactions.
– Internal check is a procedural step, while internal control is a comprehensive framework with several components.
– Internal check is mostly concerned with detecting and preventing fraud, errors, and irregularities, while internal control focuses on safeguarding assets, ensuring the accuracy of financial statements, and ensuring compliance with applicable laws and regulations.
Conclusion
Both internal check and internal control are crucial for ensuring the financial health of a company. While internal check is a procedural step that ensures accuracy in financial transactions, internal control is a comprehensive framework that encompasses all the policies and procedures to safeguard assets, ensure accurate financial statements, and comply with regulations.
Understanding the difference between the two can help companies develop more robust financial systems and avoid errors, irregularities, and fraud.
Table difference between internal check and internal control
| Internal Check | Internal Control |
|---|---|
| It is a process where different departments cross-check the work done by each other to detect errors. | It is a system implemented by the management to ensure that operations are carried out efficiently to achieve company objectives. |
| Internal check is a part of the internal control system. | Internal control includes several processes such as internal audit, risk management, monitoring of financial transactions, and so on. |
| It is used to detect errors and prevent fraud. | It is used to prevent fraud, errors, and misuse of company resources. |
| Internal check is a continuous process carried out by different departments within an organization. | Internal control is a proactive process implemented by the management to ensure operations are carried out efficiently throughout the company. |
| Internal check is carried out by both employees and external auditors. | Internal control is primarily carried out by employees under the supervision of the management. |