Segregation of Duties in Internal Control
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Questions and Answers

What is the main purpose of segregation of duties in internal control?

  • To reduce the risk of mistakes and inappropriate actions (correct)
  • To reduce the need for supervisory review
  • To increase the speed of transactions
  • To minimize the number of employees involved in a transaction

    • Who should not approve the purchase of goods or services?

  • The person who requisitions the purchase (correct)
  • The person who maintains the accounts receivable records
  • The person who opens the mail and prepares a listing of checks received
  • The person who reconciles the monthly financial reports

    • What is a necessary step if segregation of duties cannot be achieved in smaller departments?

  • Eliminating the need for accounting/reconciling
  • Reducing the number of transactions
  • Conducting a detailed supervisory review (correct)
  • Increasing the number of employees involved in a transaction

    • What is a common principle of segregation of duties?

    <p>At least two sets of eyes are required for any transaction</p> Signup and view all the answers

    What is a result of segregation of duties?

    <p>Reduced risk of mistakes and inappropriate actions</p> Signup and view all the answers

    What is a function that should be separated from others?

    <p>Accounting/reconciling and asset custody</p> Signup and view all the answers

    What is the primary reason for separating the functions of approval and accounting/reconciling?

    <p>To prevent fraud and collusion</p> Signup and view all the answers

    Which of the following is an example of segregation of duties?

    <p>The person who requisitions a purchase is not the same person who approves it</p> Signup and view all the answers

    What is the minimum number of people required to be involved in any transaction according to the principle of segregation of duties?

    <p>Two people</p> Signup and view all the answers

    What is the consequence of not separating the functions of initiating a transaction, approving a transaction, recording a transaction, reconciling balances, and handling assets?

    <p>Increased risk of fraud and collusion</p> Signup and view all the answers

    What is the purpose of a detailed supervisory review of related activities in smaller departments?

    <p>To compensate for the lack of segregation of duties</p> Signup and view all the answers

    What is the primary objective of segregating the functions of asset custody and accounting/reconciling?

    <p>To reduce the risk of theft and loss of assets</p> Signup and view all the answers

    Study Notes

    Segregation of Duties

    • Segregation of duties is essential to effective internal control as it reduces the risk of mistakes and inappropriate actions, and helps fight fraud by discouraging collusion.

    Functions to be Separated

    • Approval
    • Accounting/reconciling
    • Asset custody

    Compensating Control Activity

    • A detailed supervisory review of related activities is required if these functions cannot be separated in smaller departments.

    Examples of Segregation of Duties

    • The person who requisitions a purchase should not be the person who approves the purchase.
    • The person who approves a purchase should not be the person who reconciles the monthly financial reports.
    • The person who approves a purchase should not be able to obtain custody of checks.
    • The person who maintains and reconciles accounting records should not be able to obtain custody of checks.
    • The person who opens the mail and prepares a listing of checks received should not be the person who makes the deposit.
    • The person who opens the mail and prepares a listing of checks received should not be the person who maintains the accounts receivable records.

    Key Principle

    • No one person should initiate, approve, record, reconcile, handle, and review transactions; at least two sets of eyes are required for any transaction.

    Segregation of Duties

    • Segregation of duties is essential to effective internal control as it reduces the risk of mistakes and inappropriate actions, and helps fight fraud by discouraging collusion.

    Functions to be Separated

    • Approval
    • Accounting/reconciling
    • Asset custody

    Compensating Control Activity

    • A detailed supervisory review of related activities is required if these functions cannot be separated in smaller departments.

    Examples of Segregation of Duties

    • The person who requisitions a purchase should not be the person who approves the purchase.
    • The person who approves a purchase should not be the person who reconciles the monthly financial reports.
    • The person who approves a purchase should not be able to obtain custody of checks.
    • The person who maintains and reconciles accounting records should not be able to obtain custody of checks.
    • The person who opens the mail and prepares a listing of checks received should not be the person who makes the deposit.
    • The person who opens the mail and prepares a listing of checks received should not be the person who maintains the accounts receivable records.

    Key Principle

    • No one person should initiate, approve, record, reconcile, handle, and review transactions; at least two sets of eyes are required for any transaction.

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    Description

    Segregation of duties is crucial for effective internal control, reducing the risk of mistakes and fraudulent activities by separating key functions among employees. It helps prevent collusion and requires supervisory review as a compensating control.

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