Question

According to COSO, the proper segregation of functions is an effective internal control procedure. Comment on the exposure (if any) caused by combining the tasks of paycheck preparation and distribution to employees. 

Answer 1

If a payroll employee were to prepare a paycheck for a nonexistent employee  (perhaps under an alias, or in the name of a relative), and this employee also has the task of distributing the checks, then no one would be the wiser. On the other hand, if the checks go directly to another person, who then distributes the paychecks, then the extra check should be discovered.

A payroll employee distributing a fake paycheck avoids detection if handling both preparation and distribution, unlike when checks go through another person.