Question

The owner of the company you audit explains that in order to establish clear lines of responsibility for various aspects of the business, you have held an employee responsible for the purchase, receipt and storage of merchandise. A second employee has full responsibility for maintaining customer receivables and collections records. A third employee is responsible for personnel records, payroll preparation, and distribution of payroll checks. Analyze the company's division of responsibilities. Is the division of responsibilities appropriate to promote adequate segregation of duties? What division of responsibilities do you recommend? Please note that it is recommended that the processes of a transaction be divided between different employees so that a single employee cannot complete the transaction from start to finish. This reduces the risk of an employee committing fraud and covering it up or making a mistake and not detecting it. Your response should include between 150 - 250 words.

Answer 1

Internal Control -

Audit is an independent examination of financial information of an entity to express opinion on them, internal control is the crucial part of the organization that it controls the employees from committing fraud. Effective internal control help organization to reduce risk of losses of financial assets, Help to get accurate and timely information.

Internal control contains many measures in that Segregation of function plays important and crucial role to control employees to committing fraud.

For Example - In case of accounting of fixed assets - Segregation of duties be like Purchase of Fixed assets are delegated to one person, Record Keeping delegated to other, Payment/Receipt in case of sale of fixed assets delegated to different person.

Through above example if the company segregated the duties and different function to different employee the chances of errors will go down, Misappropriation of assets and wrong disposals will not happen in the company.

It’s like internal auditing one function by other due to different function performed by different person. It keeps periodic checks on internal department and ultimately helps to reduce errors and frauds.

Current analysis -

In the current audit example company has delegated the entire function to one employee like "an employee responsible for the purchase, receipt and storage of merchandise"

"A second employee has full responsibility for maintaining customer receivables and collections records"

"A third employee is responsible for personnel records, payroll preparation, and distribution of payroll checks"

In all three cases there is huge chances of that single employee handling a particular function to commit fraud. Like in a 1st example employee can show huge purchase and without that material receipt make the payment which he may use,

In 2nd example he can raise fraud bills and collect into their own account.

In3rd case he can transfer manipulated amount to his own account.

Likewise function of the company should always be segregated to different employees