Question

Segregation of duties

Fluffy Dogs Inc., is a small company with three people working in the revenue processes. One employee, Brenda, works as the Supervisor. Sally and Tyler report to Brenda. Together, this group must achieve the following tasks:

1. Accounts receivable maintenance
2. Credit approval of customers
3. Authorizing customer returns
4. Authorizing new customers
5. Cash receipts journal posting
6. Maintaining custody of cash
7. Inventory record keeping
8. Maintaining custody of inventory

Required:

For each of the three employees consider the duties you would assign to each employee. In assigning duties there should be a proper separation of duties to achieve appropriate internal control. List the three people, the duties you assigned to each employee, and a description of why those assignments achieve proper separation of duties. Provide two example pairings where proper internal control is not met and explain how fraud could be perpetrated by one person being responsible for duties that are not properly segregated. There will be three answers to this question.

Answer 1

Answer 1 :

I will bifurcate duties between three employee as follows,

• Supervisor Brenda

1. Accounts receivable maintenance
2. Credit approval of customers
3. Authorizing customer returns
4. Authorizing new customers

Brenda is supervisor, so she should be given authrority to take decision on most important tasks. In case of Brenda, due to nature of authority she may misuse her powers if we assign her task of custody of inventory. We can strengthen internal control system by assigning custody of inventory and cash to Sally & Tyler. We have assigned other important task to brenda(i.e authorization of new customer & account receivable management etc.) after considering importance of task in organization. We have ensured that important tasks should be assigned to higher authority, which is in our case is supervisor(Brenda).  

• Sally

1. Cash receipts journal posting
2. Maintaining custody of inventory

We have assigned two tasks to Sally, one of which is related to record keeping and other is related to maintainance of custody of inventory. We have ensured that the person, who is maintaining records for particular asset will not have custody of such asset. This will enforce good internal control system as per maker & checker rule.

• Tyler

1. Maintaining custody of cash
2. Maintaining custody of inventory

We have also assigned two tasks to Tyler, which is similar to Sally but asset involved in task is different from Sally. We have bifurcated duties between Sally & Tyler to ensure that record keeper will not have custody of asset for which person is maintaining record.

Answer 2 & 3

Following are two examples, which describes failure of internal control due to non segregation of duties.

1) In case of Bank USA Tom was assigned with two task as follows,

• Maintain custody of cash
• Record cash transaction in book

In the given case due to non segregation of duties Tom can defalcate cash amount, without recording it on books. In above case proper segregation of duties were not made, which resulted in weak internal control.

2) In case of Apple LLC Mat was entrusted with following duties,

• Make payment to suppliers
• Receive and recored credit note/debit note from suppliers.

In above case, Mat can defacate money of the company if he do not record any credit not received from supplier and makes full payment for invoice received from supplier. In this case Mat can defalcate money by issuing chque for his own account for sum equivalent to credit note received from supplier. In this case internal control became weak due to non segregation of duties.