Answer to Question #320039 in Economics of Enterprise for Jen

Question

Explain the association of the following diagram (hints: the association has directions; from sales order to customers, and from customers to sales orders)?

What is segregation of duties and why internal controls need segregation of duties?

Answer 1

Segregation of tasks is a crucial internal control that aims to reduce the likelihood of mistakes or fraud by ensuring that no employee has the potential to both commit and hide errors or fraud in the course of their work.

Internal control must have a good division of duties between those who execute accounting procedures or control activities and those who handle assets if it is to be effective. Each of the four key responsibilities should ideally be handled by a different person. In general, the flow of transaction processing and associated activities should be organized such that one person's work is either independent of another's or acts as a check on the work of another. Such methods lower the danger of undiscovered errors and restrict the potential for asset misappropriation or purposeful financial statement misrepresentation.

When tasks cannot be adequately separated owing to a unit's small size, mitigating measures, such as a rigorous supervisory evaluation of the operations, must be implemented to mitigate risks.