Segregation of duties refers to the delegation of tasks among different individuals, so that no one individual is responsible for:

Initiation of a transaction;

Authorization of a transaction;

Recording of a transaction; and

Custody of the resulting asset.

Ultimately, segregation of duties ensures that one individual cannot commit a fraud and cover it up

EXAMPLE:  Cashier enters sales into the register. John takes cash and deposits. Mary records the transactions and ensures that sales = cash.

1 – Segregation of duties is key to many preventative controls

2 – Delegation of tasks among different individuals for no one is responsible for:

-Initiation of a transaction

-Authorization of a transaction

-Recording of a transaction

-Custody of the resulting assets

3 – Ultimately ensures that one person cannot commit a fraud and then cover it up

Example:

The cashier initiates the transaction.

John retains the asset (cash)

Mary records the transactions.

Let’s think about two other scenarios:

Qs: If the cashier entered the transaction and was responsible for the deposit, would there still be segregation?

– No – she could simply not record a transaction and pocket the cash

Qs: What about if Mary was responsible for the deposit and the accounting side?

– No – she could remove cash and then make an adjusting entry on the Sales Journal. Even when the owner reviews, the cash and sales will match.

When thinking about segregation of duties, always go back to our key risk question:

What could go wrong?

Consider two other scenarios:

If the cashier entered the transaction and was responsible for the deposit, would there still be segregation?

If Mary was responsible for the deposit and the accounting side?

Even though you are not responsible for designing controls, ALWAYS be on the look out for potential issues, especially when processes or roles change.

You are your company’s first line of defense.

Let’s think about two other scenarios:

Qs: If the cashier entered the transaction and was responsible for the deposit, would there still be segregation?

– No – she could simply not record a transaction and pocket the cash

Qs: What about if Mary was responsible for the deposit and the accounting side?

-No – she could remove cash and then make an adjusting entry on the Sales Journal. Even when the owner reviews, the cash and sales will match.