Premium Essay

Segregation of Duties

In: Business and Management

Submitted By nicole1204
Words 2548
Pages 11
Segregation of Duties
One element of IT audit is to audit the IT function. While there are many important aspects of the IT function that need to be addressed in an audit or risk assessment, the fundamental element of internal control is the segregation of certain key duties, especially as it relates to risk. The basic idea underlying segregation of duties (SOD) is that no single employee should be in a position both to perpetrate and to conceal errors or fraud in the normal course of their duties. Similar to traditional SOD in accounting functions, SOD in IT plays a major role in reducing certain risk, and does so in a similar fashion as well.
Duties that should be segregated include:
1. Custody of the assets
2. Authorization
3. Recording transactions
If adequate segregation of duties does not exist, the following could occur:
1. Misappropriation of assets
2. Misstated financial statements
3. Inaccurate financial documentation (i.e. errors or irregularities)
4. Improper use of funds or modification of data could go undetected
5. Unauthorized or erroneous changes or modification of data and programs may not be detected As the figure 1 shows, there are some of the key roles and functions that need to be segregated.
1. IT Duties vs. User Departments
The most basic segregation is the segregation of the duties of the IT function from user departments. Generally speaking, this means the user department does not perform its own IT duties. While a department provides its own IT support, like the help desk, it should not do its own security, programming and other critical IT duties. Mixing critical IT duties with user departments would increase risk associated with errors, fraud and sabotage.
User departments should be expected to provide input into systems and application development (i.e., information requirements) and provide a quality assurance...

Similar Documents

Premium Essay

Segregation of Duties

...Customer Payments Received Does the employee responsible for opening customer payments/remittances also perform any of the following duties: • Record payments • Record or authorize write-offs or adjustments to customer accounts in the accounts receivable ledger • Reconcile the bank account(s) The employee who is responsible for the receipt of cash should not have access to record or authorize transactions in the accounts receivable ledger and customer accounts. In addition, the person receiving the cash or preparing the deposit should not be responsible for recording cash transactions or preparing the bank reconciliation. To enhance controls over the cash receipt process, the following compensating controls can be utilized: • A lockbox system should be implemented to receive customer payments. • Two employees should receive and open customer payments, create a listing of customer payments and prepare the deposit. Customer Payments Received Does the employee responsible for preparing the deposit also perform any of the following duties: • Record payments • Record or authorize write-offs or adjustments to customer accounts in the accounts receivable ledger • Reconcile the bank account(s) The employee preparing the deposit should not be responsible for recording cash transactions in the accounts receivable ledger and customer accounts....

Words: 321 - Pages: 2

Premium Essay

Importance of Segregation of Duties

...One of the major components of internal controls is a concept known as Segregations of Duties (SOD). Segregation of Duties is a regulatory requirement that was put into place to aid in the prevention of fraudulent financial behavior and reporting. Its main purpose is to hinder fraudulent behavior of key employees by requiring crucial functions of the business process to be performed by various people. Throughout this text there will be an exploration of the types of business risks...

Words: 2844 - Pages: 12

Free Essay

Checklist for Evaluating Internal Controls

...Segregation of Duties 2. Procedural Controls Cash 1. Segregation of Duties 2. Procedural Controls Revenues and Receivables 1. Segregation of Duties 2. Procedural Controls 3. Billing and Remittance Verification Capital Assets 1. Segregation of Duties 2. Procedural Controls Procurement and Payables 1. Segregation of Duties 2. Procedural Controls Payroll 1. Segregation of Duties 2. Procedural Controls Electronic Data Processing 1. Segregation of Duties 2. Procedural Controls Financial Reporting 1. Segregation of Duties 2. Procedural Controls Checklist for Evaluating Internal Controls Overview Organizations, whether for profit or non-profit, assess the effectiveness of internal controls. The most efficient way to gather information and evidence about the internal controls of an entity is to conduct an interview with the managers using a checklist form of internal control questionnaire (Louwers, 2007). The preparer of the checklist should include questions about each significant assertion in order to obtain evidence about the control environment. Answers to the internal control questionnaire are in the form of yes or no; no usually indicates some weakness or control deficiency. Policies and Procedures A. Segregation of Duties Yes/No Comments 1. Does your organization have an organizational chart that defines lines of authority and responsibility? ________ ____________ 2....

Words: 454 - Pages: 2

Premium Essay

Seg of Duties

...However, it is important for an IS auditor to obtain information to assess the relationship among various job functions, responsibilities and authorities in assessing adequate segregation of duties. The segregation of duties avoids the possibility that a single person could be responsible for diverse and critical functions in such a way that errors or misappropriations could occur and not be detected in a timely...

Words: 1893 - Pages: 8

Free Essay

A Delima

...There is clearly stated that they do not have segregation of rights and duties between shareholder and management. Besides that, there is no segregation of duties when the employees itself prepared their timesheet when they arrived at work and recorded the time they leave the office, manually. The possibility of employees will cheat their time in and time out would increase because the record is not checked by another colleague. It...

Words: 668 - Pages: 3

Premium Essay

Acc 504 Case Study 2 Internal Controls

...The six principles of control activities are; establishment of responsibility, segregation of duties, documentation procedures, physical controls, independent internal verification and human resource control (Kimmel, pg. 338, Straus 2008). The adequacy and effectiveness of any organization’s internal control is examined by the internal audit office. Its success is strengthened by reviews and recommendations from the internal auditing. The internal control requirements for the LJB Company to adhere before it goes publics will be addressed and it must be in accordance with Sarbanes-Oxley Act of 2002 (SOX.) All publicly traded corporations are required to preserve a satisfactory internal control system. Corporate presidents and administrators must ensure these controls are dependable and efficient. LJB Company needs to establish adequate internal control principles, whether it goes public or not (Kimmel, pg. 337, Straus 2008). The interest of LJB to go public will only become successful when, proper internal checks are administered. The overall image of the company can be build when the company complies with clear ethical practices. The LJB Company is a new local distributor and the Sarbanes-Oxley Act of 2002 provides a mandatory set of standard rules and regulations to be followed by all U.S corporations to adequately maintain an internal...

Words: 1361 - Pages: 6

Free Essay

Case Study 6 - Accounting

...The Securities Exchange Commission guidelines for internal control activity validation include one or more of the principles: * Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. For instance, the same person who is responsible for an asset's recordkeeping should not be responsible for physical control of that asset. * Proper authorization of transactions and activities helps ensure that all company activities adhere to established guide lines unless responsible managers authorize another course of action. Proper authorization also extends to multiple approvers for large capital expenditures and hiring personnel. * Adequate documentation and records provide evidence that financial statements are accurate. Controls designed to ensure adequate recordkeeping include the creation of invoices and other documents that are easy to use and sufficiently informative; the use of pre-numbered, consecutive documents; and the timely preparation of documents. * Physical control over assets and records helps protect the company's assets. These control activities may include electronic or mechanical controls (such as a safe, employee...

Words: 823 - Pages: 4

Premium Essay

Fraud and Defalcations

...The small city should have segregated these duties of treasurer and management of retirement plans. They should not have had one person in charge of both these duties. In addition, the city should have monitoring in place to double check everything is being done properly. As an auditor, they should have been aware of these opportunities for fraud that exist based on the way the hierarchy was set up. Defalcation 2: a. The auditor should have reviewed operational procedures and controls to identify the defalcation. b. The auditor should have noticed the risk involved with having one person with the authority to create reports, send them to receiving, prepare vendor invoices, and send purchase orders to accounts payable. When you allow one agent to do all these operations, it allows for an easy opportunity for an employee to manipulate statements since he does not have any direct supervision or monitoring on the “sales” he makes. The auditor should look at changes from prior years with regards to purchases from vendors. An auditor should have recognized this potential for fraud. c. There should have been segregation of duties as well as monitoring and supervision in place to verify purchases from vendors. The $125,000 is a significant amount of the company’s sales which you...

Words: 1123 - Pages: 5

Premium Essay

Delima Case Study

...Segregation of duties in an accounting department serves as the primary defense against internal fraud. Having employees to check each other’s work may reduce errors, but simple mistakes do not reduce profit to the same degree. If there are no segregation of duties, it will creating gaps...

Words: 672 - Pages: 3

Free Essay

Acct 504 Case Study 2

...Segregation of duties is also missing. Segregation of duties is one of the steps that decrease the likelihood of theft. Segregation of duties prevents a breakdown in a key element of controls, such as improper segregation of duties and/or improper access to assets. Or it might result from a weak control environment. In the absence of the segregation of duties, the clerk has opportunity to steal. Problems: Can record inaccurate information since nobody is there to double check Theft Solution: Put a supervisor in place to for oversight until the cashier is adequate. Implement check and balances by preventing one person from processing transactions. Situation b. Missing Internal Controls: Adequate records, bookkeeping, and Authorization: Nicole is a part of a successful growing business, but does not book keep and provide any reports for the sales team. Problem: Not being able to accurately account for what is being spent Unable to report to the government any expenses Records cannot be seen since the sales persons are using their own credit cards Solutions: Implement proper record and bookkeeping activities by making sales associates provide receipts for all expenses or provide company credit cards. In either case a reimbursement policy or credit card, policy with guidelines to account...

Words: 406 - Pages: 2

Free Essay

Case Study 6: Ljb Company Audit Report Regarding Internal Control Activity Requirement Evaluation for Initial Public Offering and Indelible Ink Printer Procurement Recommendation

...The Securities Exchange Commission guidelines for internal control activity validation include one or more of the principles: • Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. For instance, the same person who is responsible for an asset's recordkeeping should not be responsible for physical control of that asset. • Proper authorization of transactions and activities helps ensure that all company activities adhere to established guide lines unless responsible managers authorize another course of action. Proper authorization also extends to multiple approvers for large capital expenditures and hiring personnel. • Adequate documentation and records provide evidence that financial statements are accurate. Controls designed to ensure adequate recordkeeping include the creation of invoices and other documents that are easy to use and sufficiently informative; the use of pre-numbered, consecutive documents;...

Words: 851 - Pages: 4

Premium Essay

Evaluation of System of Internal Control-Lbj Company

...The most important control activities involve segregation of duties, proper authorization of transactions and activities, adequate documents and records, physical control over assets and records, and independent checks on performance. A short description of each of these control activities appears below. • Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. For example, the same person who is responsible for an asset's recordkeeping should not be responsible for physical control of that asset. Having different individuals perform these functions creates a system of checks and balances. • Proper authorization of transactions and activities helps ensure that all company activities adhere to established guidelines unless responsible managers authorize another course of action. • Adequate documents and...

Words: 1020 - Pages: 5

Premium Essay

Case Study

...No supervisor reviews the purchasing agent’s work. 1, Segregation of duties 2, Employees who purchases diamonds should not be allowed to approve invoices and sign checks. Segregation of duties is needed in order to prevent obvious opportunities for quality control and fraud. 3, Solution: Train a supervisor to approve the purchasing order and another manager or supervisor to approve and sign the checks, this will ensure that proper quality control as well as check & balances are taken into consideration. Situation B: The missing internal controls :  Rachel Williams owns an architectural firm. Williams’ staff consists of 19 professional architects, and Williams manages the office. Often, Williams’ work requires her to travel to meet with clients. During the past six months, Williams has observed that when she returns from a business trip, the architecture jobs in the office have not progressed satisfactorily. Williams learns that when she is away, two of her senior architects take over office management and neglect their normal duties. One employee could manage the office. 1, Supervision control 2, The problem arises in the lack of an appointed interim supervisor when Rachel is out....

Words: 531 - Pages: 3

Premium Essay

Fi504 - Internal Controls

...* Establishment of responsibility * Segregation of duties * Documentation procedures * Physical controls * Independent internal verification * Human resource controls Key attributes/”best practices” of LJB company: * Faith and trust in long term employees. (Establishment of responsibility) * Usage of pre- numbered invoices to maintain controls around printed documents. (Documentation procedures) * Retaining items overnight in safe (Physical controls) Item: | Recommendation: | Reason: | Indelible Ink Machine | Yes | Further enhancement of documentation procedures. Reduces chances of manipulation of invoices and procurement of fraudulent documents. | Areas of concern: The accountant playing the role of both Treasurer and Controller is not acceptable. Controller and Treasurer are meant to play opposite roles in order to maintain balance. The accountant incorporates too many roles/duties and too much power/responsibility thus increasing chances to commit fraud. This is a clear violation of establishment of responsibility and segregation of related activites in internal control principles. The cash drawer setup is also an area of concern. Giving employees simple/single access to petty cash leaves the company exposed to fraud and manipulation of funds. This is a violation of establishment of responsibility and segregation of duties, specifically...

Words: 557 - Pages: 3

Free Essay

Acct 504 Case Study 2

...Those principals are establishment of responsibility, segregation of duties, physical controls, independent internal verification, documentation procedures and human resource controls. Establishment of responsibility is making sure that only designated personnel has the authority to handle certain financial responsibilities. Segregation of duties is ensuring that different individuals have different responsibilities. A physical control is having the proper items that need to be secure in a place that has limited access. Independent internal verification is having individuals confirm the information that is received by various departments to make sure there is accuracy in the documents and reports that are being reported. Documentation procedures is using proper documentation to keep records accurate and having supporting evidence for the transactions that had taken place to make sure that fraud has not occurred. Human resource is handling personnel issues such vacations, conducting background checks and issuing bond personnel for the individuals who handle cash. All of these internal control principals are important to protect the company’s assets, increase the effectiveness of the operations and ensure compliance with laws and regulations. These controls also heighten the accuracy and reliability of accounting records. The company is doing some things well. On payday, the accountant picks up checks and leaves them in his office for pick-up....

Words: 1591 - Pages: 7