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Questions and Answers
What is the main purpose of segregation of duties in internal control?
Who should not approve the purchase of goods or services?
What is a necessary step if segregation of duties cannot be achieved in smaller departments?
What is a common principle of segregation of duties?
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What is a result of segregation of duties?
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What is a function that should be separated from others?
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What is the primary reason for separating the functions of approval and accounting/reconciling?
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Which of the following is an example of segregation of duties?
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What is the minimum number of people required to be involved in any transaction according to the principle of segregation of duties?
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What is the consequence of not separating the functions of initiating a transaction, approving a transaction, recording a transaction, reconciling balances, and handling assets?
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What is the purpose of a detailed supervisory review of related activities in smaller departments?
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What is the primary objective of segregating the functions of asset custody and accounting/reconciling?
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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.
