Segregation of Functions

Maintaining a system of effective internal control does require appropriate separation of responsibilities. 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. 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. Segregation of duties and functions serve as a deterrent to fraud and concealment of error because of the need to recruit another individual's cooperation, via collusion, to conceal it.

a. The treasurer has the authority to sign checks but gives the signature block to the assistant treasurer to run the check-signing machine.

In this kind of situation inappropriate transactions are permitted to occur since one individual controls a major portion of the revenue, expenditure, or payroll function. Thus increases the risk of fraud, falsification of not only checks but also other documents that can lead to theft and fund misappropriation. To reduce risks additional control procedures must be provided, say, the treasurer counter checks all the transactions by the assistant treasurer to ensure the validity of transactions.

b. The warehouse clerk, who has custodial responsibility over inventory in the warehouse, may authorize disposal of damaged goods.

The fact warehouse clerk having access to or control over any physical asset such as equipment, supplies, or materials increases the inherent risks like theft in the situation. And for a warehouse clerk to also have authority over disposal of damaged goods aggravates the inherent risks. Authority over disposal of damaged goods must not be delegated to a warehouse clerk

c. The sales manager, who works on commission based on grossed sales, approves credit and has the authority to write off uncollectible accounts.

Delegation of the authority to write of uncollectible accounts to the sales manager enables him to falsify sales to get additional commission.

d. The shop foreman submits time cards and distributes paychecks to employees.

Submission of time cards and distribution of paychecks to employees cannot be found on the job description of a shop foreman. And there is a good reason behind it. First it is not in the expertise of the shop foreman to monitor time cards and distribute paychecks. Second, this might result to abuse of power since appropriate controls are not provided. Bribes, kickbacks and fraud can be inevitable to this situation. The shop foreman can falsify time cards, one example, say an employee in on AWOL, the shop foreman can time in the AWOL employee and get the paycheck on the distribution date.

e. The accounting clerk posts to individual account receivable subsidiary accounts and performs the reconciliation of the subsidiary ledger and the general ledger control account.

Reconciliation or verifying the processing or recording of transactions to ensure that all transactions are valid, properly authorized, and properly recorded on a timely basis is part of internal control, however ineffective segregation or delegation of duties and functions like in the situation only aggravates the risks, thus, ineffective and inefficient control system would result. Reconciliation must not be delegated to an accounting clerk, because it will be a loophole in the internal control system. Falsification and fraud of ledgers may result. However, if the situation cannot be avoided, additional control measures should be provided.