Segregation of Duties

Segregation of Duties

Segregation of duties is a key internal control intended to minimize the occurrence of errors or fraud by ensuring that no employee has the ability to both perpetrate and conceal errors or fraud in the normal course of their duties. Generally, the primary incompatible duties that need to be segregated are:

• Authorization or approval
• Custody of assets
• Recording transactions
• Reconciliation/Control Activity

Some examples of incompatible duties are:

• Authorizing a transaction, receiving and maintaining custody of the asset that resulted from the transaction
• Receiving funds (checks or cash) and approving write-off of receivables
• Reconciling bank statements/accounts and booking entries to general ledger
• Depositing cash and reconciling bank statements
• Approving time cards and having custody of pay checks

If internal control is to be effective, there needs to be an adequate division of responsibilities among those who perform accounting procedures or control activities and those who handle assets. Ideally, separate employees will perform each of the four major duties. In general, the flow of transaction processing and related activities should be designed so that the work of one individual is either independent of, or serves to check on, the work of another. Such arrangements reduce the risk of undetected error and limit opportunities to misappropriate assets or conceal intentional misstatements in the financial statements.

When duties cannot be sufficiently segregated due to the small size of a unit, it is important that mitigating controls, such as a detailed supervisory review of the activities, be put in place to reduce risks.