Question

Segregation of duties is an important internal control.

1. What functions must be separated?

2. If ideal segregation of duties is not economically feasible, what are some compensating controls that would help reduce the risk of fraud or error?

Answer 1

No doubt, segregation of duties is an important internal control.

Primarily segregation of duties serves following purposes

a) It ensures there is oversight and review to catch errors

b) It helps to prevent fraud or theft because it requires two or more people to collude in order to hide a transaction

1. Function that may be separated under segregation of duties

i. Record keeping of assets

ii. Being able to authorize the use of assets

iii. Having custody over assets

2. This segregation of duties is cumbersome to achieve in small and medium businesses, but should be implemented as much as possible. In some cases, it may result in an employee from another department being responsible for one of the functions. In order to overcome this, some compensating controls can be established

An example of this could be as follows

A. increased periodic oversight by you or the board of directors

B. . All checks are hand signed by an officer of the organization, rather than using a signature plate that is in the control of the person that prepared the checks.

C. A single employee has the duties of accepting cash payments, recording the deposit, and reconciling the monthly financial reports. To prevent errors and/or fraud, additional oversight is required. This means we need a compensating control, such as the leader performing a review of the reconciliation or another unit performing the reconciliation. In some cases, two small units have “swapped” reconciliation duties to provide the needed

D. separation of duties that are not possible within the unit..

E. The bank reconciliation may be reviewed by the preparer’s manager.

F. A periodic report of all checks that are cleared at the bank could be prepared by the bank and forwarded to an officer of the organization for review