Question

In: Accounting

What is the concept of separation of duties, and how does it come into play in...

What is the concept of separation of duties, and how does it come into play in the systems of internal control, as they relate to cash/ cash equivalents? Please answer in your own words. Do not use outside resources.

Solutions

Expert Solution

Solution:

Separation of Duties: Under this method, more than one person is involved in completing the task. In other words, this method prevents the concentration of control by one person. This method applied to a variety of jobs to prevent errors and fraud.

In the present time, This Method becomes an important tool for internal control in the business. examples are as following

1. Cash and Cash equivalents

2. Accounts Receivable

3. Inventory

4. Payroll

As required by the question, application of separation of duty is cash and cash equivalent is as follows

A. Cash: One person assigns the task for collecting cash or cheque, but the other person should be assigned to record above in accounting. This way company is able to reduce the chance of fraud and error like recording less cash or manipulating the account of company. There will be always a check and balance mechanism in place to make people involved more responsible towards their duty.

B. Online Transactions: In present-day where online transaction is the demand of the business. There should be a separation of duty for the online payment system. This can be done in the following ways

1. Maker and Approver: There should be a minimum of 2 layers of approval for online payment. That is one employee is authorized to online make payment but the senior officer is authorized to approve the payment. Passwords for each maker and Approver should be confidential. This way the company can use separation of duty and maintain checks and balances.

2. Limit on transaction value:   This can be done to minimize the chance of fraud as a maximum limit for each user is fixed. Say payment for up to $1000 can be made by associate accountant after this payment must involve approval of the chief accountant.     

Note:

1. Problem or Disadvantage of separation of duty is that it is time-consuming and less efficient.

2. This method is also known as the Segregation of duty.


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