Segregation Of Duties

Identify situations in this scenario which indicate inadequate segregation of duties. Explain why these situations are an issue for the business. Discuss how the problem may be solved.

Romney & Steinbart (2006) states that, Ð''Good internal control requires that no single employee should be given too much responsibility over business transactions or processes. An employee should not be in a position to commit and conceal fraud.'

Segregation of Accounting Duties

In accordance to Romney & Steinbart (2006), effective segregation of accounting duties is achieved when the following functions are separated:

Ð'* Authorisation Ð'- approving transactions and decisions

Ð'* Recording Ð'- preparing sourcing documents; entering data into online systems; maintaining journals, ledgers, files or databases; preparing reconciliations; and preparing performance reports

Ð'* Custody Ð'- handling cash, tools, inventory or fixed assets; receiving incoming customer checks; writing checks on the organisation's bank account

The first situation identified of inadequate segregation duties occur in accounting duties. The Pets Plus Assistant Accountant is responsible for the banking as well as updating the ledger accounts. This becomes an issue for the business as it is possible for him to steal a certain amount of cash and falsify the journal entries to correspond with the amount to bank. This can also be applied to the Accounts Clerk who also handles the cash and cheques and is also able to update the ledger accounts if the Assistant Accountant is busy. Furthermore, cash and cheques do not always get banked at a certain day or time within a week. The inadequate segregation of duties, in regards to handling both the banking and maintaining the ledger accounts becomes an issue when incorrect posting to general ledger accounts and incorrect or non-existent customer accounts occur. In order to overcome the inadequacy presented, an ideal situation is to assign the duties of cash and cheques to the Accounts Clerk whilst the Assistant Accountant will maintain and update the general ledger accounts and customer accounts at specified times during the week. In reference to Romney & Steinbart (2003) above, this would mean that the Accounts Clerk would be performing the custodial functions and the Assistant Accountant would be performing the recording functions for effective segregation of accounting duties.

The second situation identified of inadequate segregation of accounting duties also occur with the Assistant Accountant. As stated above, he is responsible for the banking as well as updating the ledger accounts. However, he is also responsible for preparing and posting journals to write-off bad debts, when necessary. This presents a problem to Pets Plus as he handles the banking as well as writing-off bad debts. For example, when a customer pays $200 cash on an owing account, the Assistant Accountant can possibly pocket the $200 amount and simply write the amount off to bad debts. To Pets Plus, this would mean that the customer has not paid the amount owing and it is foreseeable that it is not likely to be received. Furthermore, all customers of Pets Plus are eligible for credit terms, providing that they satisfy the requirements of additional information such as a contact person, address, phone and fax when they place their first order. Therefore, it is also possible for the Assistant Accountant to create non-existent customers and write-off the fraudulent amount to the non-existent customer. As stated above, in order to overcome the issue of cash handling and posting of journal entries, the division of work between the Accounts Clerk and the Assistant Accountant becomes increasingly necessary to avoid theft and the falsification of records.

The third situation identified in regards to inadequate segregation of accounting duties is the lack of authorisation of the Accountant. The Accountant is trusting and does not always check all receipts. He also often reviews the postings made to the general journal for any unusual items and signs off his review, due to time limitation and tight deadlines. This becomes a situation to the business when incorrect journal entries and incorrect ledger postings have been made. As the accounting employees also have the same access as the Accountant, the employees in the Accounting department are therefore having the opportunity to create fraudulent