Question

To ensure proper employee supervision and proper separation of duties, companies must develop and monitor an organizational chart. One corporation that did this found that out of 17,000 employees, there were 400 people who did not report to anyone, and 35 people who reported to each other.

Why would unsupervised employees or employees who report to each other represent potential internal control threats?

Answer 1

Answer:

An unsupervised employee can pose risk to the safety of Company assets.

Employees reporting each other can collude in order to defraud the company.

Above situations can act as a loophole in the Internal controls of the company.

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Explanation:

When an employee is unsupervised, it is difficult to ensure that whether the person is actually an employee of the company or is pretending to be an employee (i.e. a fictitious employee). Such type of employees can pose risk to the safety of Company assets.

When employees report each other, there is every possibility that they will collude in order to defraud the company. Segregation of duties will not work in this case.

Both of the above situations can act as a loophole in the Internal controls of the company thereby posing a threat.