Question

Segregation of duties is an important internal control. What functions must be separated? Be specific. If ideal segregation of duties is not economically feasible, what are some compensation controls that would help reduce the risk of fraud or error?

Answer 1

Answer:-

Seggregation of duties is an important internal control because it finds and corrects faults in the internal process IN an organization.It states that no single person should have complete control over the transaction.The duties should be seperated in such a way that work done by one person is checked by another.

Functions that must be seperated are:-

1.The person authorized to make payments to parties should not be the person approving it. Also,recording of payments made should also be seperated.In a nutshell duties in a payment cycle duties should be seperated in terms of person approving it,person making the payment voucher and the person recording the payments in books of accounts.

2.In a procurement cycle, the person authorized to make the purchases and the person approving the purchases should not be one and the same.Also, the person receiving goods purchased should be different from the persons involved in purchases and accounts payable activities.

3.Individuals preparing checks should be different from individuals signing the checks and reconciling the account.Also,Individuals receiving cash receipts should be seperated from individuals making cash payments.Accounting and Banking departments should not have the same individuals.

4.Individuals receiving orders and billing the orders should be different from the individuals recording and collecting the same.

If seggregation of duties is not economically feasible then the following can be done:-

1.Rotation of duties:-Employees involved in particular process should be assigned different responsibilities at regular intervals.Also, work done by these employees should be checked by the superiors on a regular basis.

2.Background checks during hiring an employee should be performed so that reliance can be placed on them.This would help in verifying the credentials and building a faith on employees.