One thing must be clear: The Schengen Agreement is separate to the European Union. Visa-free travel between nations that are signatories to the Schengen Agreement applies only to citizens of the respective signatory countries. Click on the map to be taken to the official web site.
i.e. If you’re not a citizen of a country signed up to Schengen, you will need a visa to cross any of its borders, external and internal.
If you’re an Aussie, then a visa is generally understood and valid for 90 days within any 180 day period. But it is perfectly legitimate for you to be stopped at an internal border to present your passport/visa. It is also perfectly understandable for a citizen of a signatory nation to Schengen, to be stopped and asked for identification. Schengen only absolves them of the need to obtain a visa.
If you’re a former Somali pirate without passport or visa, claiming asylum at an internal border might get you turned around to where you came from. Or locked up.
Schengen does not mean “no borders”. It means free travel for citizens of signatory nations across the borders of signatories.
The European Union tries to make the Schengen Agreement to all of its members; as soon as possible. However, sovereign states cannot be made to surrender control over their own borders. Borders are the clearly delineated boundaries of national sovereignty; where the laws of one nation stop and the laws of another start.