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Segregation of duties from an audit perspective

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The size of an entity can affect the components of internal control. Segregation of duties is a control activity that is important for adequate control. The following example presents a scenario where the auditor can provide assistance to the entity in establishing proper segregation of duties. TameBird Industries produces meals for airlines and nursing homes. For the prior two audit engagements, your firm has written a management letter recommending that TameBird establish better segregation of duties in the accounts receivable and accounts payable functions. Tom Tuffnut, controller for TameBird, has received authorization to hire an additional clerk to work in the accounting area. Tom now has three accounting clerks available, and he has asked you to provide advice on how to best assign the following functions:

1. Responsibility for petty cash fund.

2. Opening of mail and listing of cash receipts.

3. Depositing cash receipts in bank.

4. Maintaining accounts receivable subsidiary records.

5. Determining which accounts receivable are uncollectible.

6. Maintaining cash disbursements journal.

7. Preparing checks for signature.

8. Reconciling bank statements.

Required:

Prepare a recommendation to Tom Tuffnut on how best to distribute the various functions among the three accounting clerks. Please choose only one clerk for each function. Indicate your choices on the grid below.

Duty Clerk 1 Clerk 2 Clerk 3
1. Responsibility for petty cash fund
2. Opening of mail and listing cash receipts
3. Depositing cash receipts in bank
4. Maintaining accounts receivable subsidiary records
5. Determining which accounts receivable are uncollectible
6. Maintaining cash disbursements journal
7. Preparing checks for signature
8. Reconciling bank statement

See attached file for full problem description.

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Solution Summary

The solution is presented in narrative form with explanations rather than a completion of a grid. In addition to the explanation for segregation, possible negative consequences are listed without the proper controls.

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In thinking about this problem, I felt that by completing the grid, I would not be giving you any information for why I made the choices. Following are guidelines:

1. The person who handles the petty cash fund cannot also maintain the CD journal: too easy to cheat and then even easier to cover it.

2. The person who opens the checks in the mail cannot also deposit ...

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