Question

Segregation of duties is an important internal control.

a) What duties need to be segregated and why?

b) Give examples to illustrate the issues and how to resolve them.

c) Give real case examples where segregation of duties has been breached and the consequences of such a breach.

Answer 1

a.

Duties relating to accounting and general business must be segregated in order to prevent fraud and/or minimizing errors. Segregation of duty actually gives proper checking of work done by others for ensuring correctness.

b.

Example: In accounting practice, an accountant is entrusted to prepare payment vouchers and making payments of those vouchers. Issue: His duty is not segregated and it may create serious financial damage (like stealing of money) to the organization. Since there is only one person dealing all the payments, he may prepare a vague voucher and clear such payment to his personal account; this is a fraud and it can’t be detected without the segregation of duty.

Resolve: If the duty is segregated, one person should prepare payment vouchers, one person should check vouchers along with the supporting bills, and one person in the senior category should sign it for final approval. In this way the fraud could be prevented, since there would be no room of preparing vague vouchers.

c.

Real example: This is a motor company, AMA. There was no segregation of duty, causing a fraud of around 8 million dollars done by the vice president of the company.