What are the three tasks that should be segregated?
Select one: a. Authorization, recording and custody b. Delivery, recording and custody c. Authorization, maintaining and custody d. Reconciliation, recording and custody Clear my choice
The correct answer and explanation is:
Correct Answer: a. Authorization, recording and custody
Explanation:
In any effective internal control system, segregation of duties is a key principle used to reduce the risk of errors and fraud. The three critical tasks that should be segregated are authorization, recording, and custody.
Authorization involves the approval of transactions. This ensures that only valid and permitted activities take place within the organization. For example, a manager might authorize the purchase of goods or services. If the person who authorizes a transaction also performs other functions such as recording or custody, there is a risk that unauthorized or fraudulent activities might go undetected.
Recording refers to documenting the transaction in the organization’s books or accounting system. This includes entering data in journals, ledgers, or databases. If someone responsible for recording is also involved in authorizing or handling assets, they could manipulate records to hide misappropriations.
Custody involves the physical possession or control over assets such as cash, inventory, or equipment. If someone with custody also records transactions or authorizes them, they could easily steal assets and cover it up with false documentation.
Segregating these three responsibilities among different individuals ensures that no single person has control over all aspects of any financial transaction. This separation creates a system of checks and balances. For instance, the person who approves a payment does not handle the cash and does not record the transaction, making it harder for one person to commit and conceal fraud.
Without segregation of these duties, the risk of undetected errors or fraudulent activities increases. Therefore, proper internal control requires separating authorization, recording, and custody functions to promote transparency, accuracy, and accountability.