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What is separation of duties?

Short Answer

Expert verified

To divide duties according to the activities.

Step by step solution

01

Definition of duties

Duties mean assigning a job to a specified person. The person is only responsible for his duty.

02

Separation of duties

Separation of duties means assigning different duties to different people. Different activities related to a job are assigned to different people based on their jobs.

Different types of separation are the basis of their functions:

  • Separation of duties of cash:

In the separation of the duties of cash, all the duties related to cash payments and cash receipts are assigned to a person. This person has all the responsibilities related the cash transactions. If there is a mistake in the cash transactions, this person is responsible for the mistake.

  • Separation of duties of inventory:

According to this separation, the duties related to inventory are assigned to a person. This person must manage and control the inventory. This person is responsible for inventory-related activities.

  • Separation of duties of accounts receivables:

In this separation of duties, all the duties related to the accounts receivables are assigned to a person. This person manages all the accounts receivable records. He also collects all the accounts receivables.

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Most popular questions from this chapter

Understanding internal control, components, procedures, and laws

Match the following terms with their definitions.

1. Internal control

2. Control procedures

3. Firewalls

4. Encryption

5. Environment

6. Information system

7. Separation of duties

8. Collusion

9. Documents

10. Audits

11. Operational efficiency

12. Risk assessment

13. Sarbanes-Oxley Act

a. Two or more people working together to overcome internal controls.

b. Part of internal control that ensures resources are not wasted.

c. Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

d. Should be prenumbered to prevent theft and inefficiency.

e. Limits access to a local network.

f. Example: The person who opens the bank statement should not also be the person who is reconciling cash.

g. Identification of uncertainties that may arise due to a companyโ€™s products, services, or operations.

h. Examination of a companyโ€™s financial statements and accounting system by a trained accounting professional.

i. Without a sufficient one of these, information cannot properly be gathered and summarized.

j. The organizational plan and all the related measures that safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting data.

k. Component of internal control that helps ensure business goals are achieved.

l. Rearranges data by a mathematical process.

m. To establish an effective one, a companyโ€™s CEO and top managers must behave honorably to set a good example for employees.

What are the five components of internal control? Briefly explain each component.

Levon Helm was a kind of one-person mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for โ€œcash on the barrelhead.โ€ Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started โ€œborrowingโ€ from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldnโ€™t stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time, and Helm lost everything

Requirements

  1. What was the key control weakness in this case?
  2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

Correcting internal control weaknesses

Each of the following situations has an internal control weakness.

a. Upside-Down Applications develops custom programs to customersโ€™ specifications.

Recently, development of a new program stopped while the programmers

redesigned Upside-Downโ€™s accounting system. Upside-Downโ€™s accountants could

have performed this task.

b. Norma Rottler has been your trusted employee for 24 years. She performs all cashhandling

and accounting duties. Norma just purchased a new luxury car and a new

home in an expensive suburb. As owner of the company, you wonder how she

can afford these luxuries because you pay her only $30,000 a year and she has no

source of outside income.

c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order

to get an important loan. The loan went through, but Izzie later went bankrupt and

could not repay the bank.

d. The office supply company where Pet Grooming Goods purchases sales receipts

recently notified Pet Grooming Goods that its documents were not prenumbered.

Howard Mustro, the owner, replied that he never uses receipt numbers.

e. Discount stores such as Cusco make most of their sales in cash, with the remainder

in credit card sales. To reduce expenses, one store manager ceases purchasing

fidelity bonds on the cashiers.

f. Corneliusโ€™s Corndogs keeps all cash receipts in an empty box for a week because

the owner likes to go to the bank on Tuesdays when Joann is working.

Requirements

1. Identify the missing internal control characteristics in each situation.

2. Identify the possible problem caused by each control weakness.

3. Propose a solution to each internal control problem.

What are some common controls used with a bank account?

See all solutions

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