CPA Exam — AUDAssessing Risk and Developing a Planned ResponseEasy
An auditor is evaluating a client's internal controls over cash disbursements. The auditor identifies that the same employee is responsible for authorizing purchases, approving invoices for payment, and signing checks. This situation represents a significant weakness in internal control primarily because it:
- APrevents proper segregation of duties, increasing the risk of fraud.
- BMakes it difficult to reconcile the cash account with bank statements.
- CReduces the efficiency of the cash disbursement process.
- DIncreases the likelihood of accidental errors in recording cash disbursements.
Show answer & explanationAnswer & explanation
Correct answer: A. Prevents proper segregation of duties, increasing the risk of fraud.
Combining the responsibilities of authorization, record-keeping, and custody (signing checks) in a single individual eliminates the checks and balances designed by segregation of duties. This creates an opportunity for that individual to commit and conceal fraud, such as making unauthorized payments to themselves or fictitious vendors.
Why the other options are wrong
- B. Bank reconciliations are a control, but this scenario specifically highlights a weakness in the initial transaction processing, not just reconciliation difficulty.
- C. While it might seem efficient, the lack of control outweighs any perceived efficiency gains and is not the primary reason for concern.
- D. While errors might occur, the primary concern with lack of segregation of duties is the heightened risk of intentional misstatement (fraud).
Segregation of Duties
Segregation of duties is a fundamental internal control principle that assigns different responsibilities (authorization, record-keeping, custody, reconciliation) to different individuals to reduce the risk of errors and fraud.
- Prevents a single person from controlling an entire transaction.
- Reduces opportunity for fraud and concealment.
- Applies to all key business processes.
Memory trick: SOD: Split the Duties, Stop the Deception.