When duties cannot be segregated, the most important internal control procedure is

Separation of duties is the means by which no one person has sole control over the lifespan of a transaction.  Ideally, no one person should:

• Initiate the transaction
• Approve the transaction
• Record the transaction
• Reconcile the transaction
• Handle the related asset
• Review reports

There should be at least two sets of eyes on each transaction.

Why is it Important?

Separation of duties is critical to effective internal control because it reduces the risk of both erroneous and inappropriate actions.

All units should attempt to separate functional responsibilities to ensure that errors, intentional or unintentional, cannot be made without being discovered by another person.  In addition, separation of duties is a deterrent to fraud because it requires collusion – working with another person – to perpetrate a fraudulent act.

What About Small Departments?

When separation of duties is not possible due to a small department size, compensating controls must be put in place.  Detailed Tier 2 and/or Tier 3 review of activities is required to compensate for the lack of separation of duties.

ABCs of Separation of Duties

In general, no one employee should have job functions in more than one of the following three categories of duties:

1. Asset handling and disposition: Having physical access to University assets or being in a position to control where an asset is directed
   • Assets include cash, tickets and passes, PCards, supplies, equipment, books, vendor and payroll checks, and purchase orders
   • Directing an asset includes initiating a vendor or payroll payment in myUFL, setting up a new employee in the Human Resources Management System (HRMS), making an adjustment to a student account transaction, placing an order for supplies, distributing payroll checks, and specifying where supply orders are to be delivered
2. Booking or recording transactions to the myUFL general ledger or subledger: Recording or posting a financial transaction to the myUFL general ledger
   • The recording of financial transactions in myUFL occurs when a vendor invoice, direct payment, or journal is approved
3. Comparison or review of transactions or balances: Reconciling and reviewing transactions appearing in the myUFL general ledger for validity and reasonableness
   • Monthly reconciliation is required as a key internal control to ensure the accuracy of data in myUFL – the official accounting record of the university of Florida

 How Does it Look?

Consider the following in assigning duties to people involved in handling a financial transaction process:

1. The preferred number of people that should be involved in handing a financial process is three of more – at this staffing level, satisfactory separation of duties can be attained fairly easily
2. The minimum number of people who can successfully operate a financial process is two – at this staffing level, satisfactory separation of duties can be attained, but not without careful planning
   • For some processes, certain duties might have to be performed jointly by both staff members
3. A person involved in more than one financial process should be assigned duties within the same duty category, such as asset handling, across the different processes. For example, people with asset handling duties in the cash handling process should be assigned only asset handling duties in other financial processes.

Note: An employee serving in a “back-up” role must be competent and have the same authority as the person normally performing the duty.

Example – Cash Handling

*Closing of cash drawer is performed jointly with both coworkers witnessing the count and certifying the deposit amount appearing on the department records/logs.  Employee 2 retains and secures the copy of the record/log for ledger review purposes.

**Ideally, someone other than employee 1 or 2 should review and certify the monthly reconciliation

Example – Purchase

**Ideally, someone other than employee 1 or 2 should review and certify the monthly reconciliation

Example – Billing and Receivables

Last Reviewed

09/30/2022: reviewed content

Training

PRO303 – Internal Controls at UF

PST130 – Reconciliation for Tier 1

Internal Controls & Quality Assurance: (352) 392-1321

The segregation of duties is the assignment of various steps in a process to different people. The intent behind doing so is to eliminate instances in which someone could engage in theft or other fraudulent activities by having an excessive amount of control over a process. In essence, the physical custody of an asset, the record keeping for it, and the authorization to acquire or dispose of the asset should be split among different people.

The segregation of duties is an essential element of a control system. Auditors will look for duty segregation as part of their analysis of an entity's system of internal controls, and will downgrade their judgment of the system if there are any segregation failures. When there are segregation failures, the auditors will assume that there is an expanded risk of fraud, and adjust their procedures accordingly. This change in procedures usually involves in increase in the amount of audit work, which is passed through to the client in the form of higher audit fees.

The segregation of duties is more difficult to accomplish in a smaller organization, where there are too few people to effectively shift tasks to different people. Another issue with segregation is that shifting tasks among too many people makes the process flow less efficient. When a higher level of efficiency is desired, the usual trade-off is weaker control because the segregation of duties has been reduced.

Examples of Segregation of Duties

As an example of the segregation of duties, the person who receives goods from suppliers in the warehouse cannot sign checks to pay the suppliers for those goods. As another example, the person who maintains inventory records does not have physical possession of the inventory. And as a third example, the person who sells a fixed asset to a third party cannot record the sale or take custody of the payment from the third party.

Terms Similar to Segregation of Duties

The segregation of duties is also known as the separation of duties.

1. Internal accounting controls (e.g., processes, checks, balances, segregation of duties) safeguard assets. Implement them early on.
2. Two types of internal controls:
   • Preventative: E.g., requiring dual signatures on cheques
   • Detective: E.g., reconciling the bank or inventory counts
3. Segregation of duties provides critical oversight and deters fraud and theft. Separate:
   • Custody of assets
   • Ability to authorize the use of assets
   • Recordkeeping

Internal controls are the processes, checks and balances that need to be put in place as a business grows. Internal controls can relate to any aspect of your business, from human resources to IT. Internal controls in accounting are critical and are used for safeguarding assets. Having a system of internal controls, including a segregation of duties, matters because as much as you trust your team, simply having a team means there is no longer one person with complete oversight and knowledge of the operations.

When implementing an internal control procedure, ensure it includes a means to generate evidence that a process has been followed or completed. This may be as simple as requiring that a document be initialled—but if there is nothing to show that something happened, it didn’t!

Benefits of internal controls

As your business grows and becomes more complex, it is more likely that errors, duplication or omissions can occur. For example, without internal controls to dictate who is responsible for certain purchases, more than one person may make the same purchases, resulting in duplication and waste. Or products may be received by mistake from a supplier and, without internal controls, the fact that the items were not ordered may be missed. There are many other reasons to implement internal controls—and the longer you wait to introduce these procedures, the more difficult it will be to change your company’s processes and to get buy-in from your employees (see below).

The importance of internal controls in accounting

Why establish internal controls in accounting? If you are required to have a review or an audit but do not have sufficient internal controls in place, an accountant will not be able to satisfactorily conduct their tests. And if you are claiming a tax credit such as through the SR&ED Program, you may not be able to support your claim if you do not have adequate timesheets and other records, and this could result in a significant loss of funding.

Securing the buy-in from your employees

Employees may have a negative reaction to the implementation of internal controls. They may feel that these are time consuming, labour intensive or show a lack of trust in them. It is important to communicate to your co-workers and colleagues that these processes are required as the business grows, not only for oversight purposes (although this is certainly part of it) but also for planning, tracking and review purposes.

Types of internal controls: Preventative and detective

Internal controls generally fall into one of two categories: preventative or detective.

Preventative controls are those such as requiring dual signatures on cheques or having password-protected files. This type of control protects and limits access to business assets.

Detective controls include reconciling the bank or inventory counts. Typically these internal controls are performed periodically to see if any need to be corrected. They will often turn up internal errors or problems, as well as any external errors (such as bank errors).

Segregation of duties: Safeguarding assets

One of the key concepts in placing internal controls over a company’s assets is segregation of duties. Segregation of duties serves two key purposes:

1. It ensures that there is oversight and review to catch errors
2. It helps to prevent fraud or theft because it requires two people to collude in order to hide a transaction

Segregation of duties involves separating three main functions and having them conducted by different employees:

1. Having custody of assets
2. Being able to authorize the use of assets
3. Recordkeeping of assets

This segregation of duties is often difficult to achieve in small businesses, but should be implemented as much as possible. In some cases, it may result in an employee from another department being responsible for one of the functions.

When having adequate internal controls is not possible

Where it is not possible to have adequate preventative internal controls including segregation of duties, it is important to implement a compensating control. An example of this could be increased periodic oversight by you or the board of directors.

Summary: Internal accounting controls (e.g., processes, checks, balances, segregation of duties) safeguard assets and need to be implemented early on.

Read next: Internal controls in accounting: Oversight of financial transactions