One of the basic audit objectives when we review an organization framework is the proper segregation of duties. Though it is basic, it is by far the most potent as it ensure that errors or irregularities are prevented or detected on a timely basis by employees in the normal course of business.
Segregation of duties provides two benefits:
- A deliberate fraud is more difficult because it requires collusion of two or more persons; and
- It is much more likely that innocent errors will be found.
At the most basic level, segregation of duties means that no single individual should have control over two or more phases of a transaction or operation. Management should assign responsibilities to ensure a crosscheck of duties.
If a single person can carry out and conceal errors and/or irregularities in the course of performing their day-to-day activities, they have generally been assigned or allowed access to incompatible duties or responsibilities. Some examples of incompatible duties are:
|
An Employee who… |
Should not… |
|
Opens mail and endorses checks |
Handle cash receipts |
|
Prepares a document |
Approve that same document |
|
Handles cash receipts |
Endorse checks |
|
Prepares bank deposits |
Receive deposit slips or corrections from bank |
|
Distributes payroll checks |
Prepare payroll input |
Take note when we review duties or responsibilities, we can broadly classified it into the four categories which are:
- Authorization;
- Custody;
- Record-keeping; and
- Reconciliation.
In an ideal system, different employees would perform each of these four major functions. In other words, no one person should have control of two or more of these responsibilities. The more negotiable the asset, the greater the need for proper segregation of duties, especially when dealing with cash, negotiable checks and inventories.
Authorization
Authorization is the process of reviewing and approving transactions or operations.
Some examples are:
- Verifying cash collections and daily balancing reports;
- Approving purchase requisitions or purchase orders;
- Approving time sheets, payroll certifications, leave requests and cumulative leave records; and
- Approving change orders, computer system design or programming changes.
Custody
Custody is the process of having access to, or control over, any physical asset such as cash, checks, equipment, supplies or materials.
Some examples are:
- Access to any funds through the collection of funds or processing of payments;
- Access to safes, lock boxes, file cabinets or other places where money, checks or other assets are stored;
- Custodian of a petty cash or change fund;
- Receiving any goods or services;
- Maintaining inventories; and
- Handling or distributing paychecks/advices, limited purchase checks or other checks.
Record-Keeping
Record-keeping is the process of creating and maintaining records of revenues, expenditures, inventories and personnel transactions. These may be manual records or records maintained in automated computer systems.
Some examples are:
- Preparing cash receipt back-ups or billings, purchase requisitions, payroll certifications and leave records;
- Entering charges or posting payments to accounts receivable system; and
- Maintaining inventory records.
Reconciliation
Reconciliation is verifying the processing or recording of transactions to ensure that all transactions are valid, properly authorized and properly recorded on a timely basis. This includes following-up on any differences or discrepancies identified.
Some examples are:
- Comparing billing documents to billing summaries;
- Comparing funds collected to accounts receivable postings;
- Comparing collections to deposits;
- Performing surprise counts of funds;
- Comparing payroll certifications to payroll summaries;
- Performing physical inventory counts;
- Comparing inventory changes to amounts purchased and sold; and
- Reconciling departmental records of revenue, expenditures and payroll transactions to management reports