Segregation of duties is critical to effective internal control because it reduces the risk of mistakes and inappropriate actions. It helps fight fraud by discouraging collusion.
In general, the following functions should be separated among employees:
- Approval
- Accounting/reconciling
- Asset custody
A detailed supervisory review of related activities is required as a compensating control activity if these functions cannot be separated in smaller departments.
Examples of segregation of duties:
- The person who requisitions the purchase of goods or services should not be the person who approves the purchase.
- The person who approves the purchase of goods or services should not be the person who reconciles the monthly financial reports.
- The person who approves the purchase of goods or services should not be able to obtain custody of checks.
- The person who maintains and reconciles the 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.
No one person should:
- Initiate a transaction
- Approve a transaction
- Record a transaction
- Reconcile balances
- Handle assets
- Review reports
Note: At least two sets of eyes are required for any transaction!
