Question
Chapter 5, Professional Auditing Standards and the Audit Opinion Formulation Process Segregation of duties is an important internal control. However, this control is often a
Chapter 5, Professional Auditing Standards and the Audit Opinion Formulation Process
- Segregation of duties is an important internal control. However, this control is often a challenge for smaller businesses because they do not have sufficient staff. Normally a segregation of duties deficiency results in either a significant deficiency or a material weakness in internal control. For each segregation of duties deficiency identified as 1-6., complete the following three tasks:
- Indicate the risk to financial reporting that is associated with the inadequacy of the segregation of duties.
- Identify other controls that might mitigate the segregation of duties risks
- Identify possible tests of controls for the mitigating controls selected in b.
Note: Segregation of Duties Deficiency 4 is presented as an example of the types of detailed commentary to include in the chart for the remaining Segregation of Duties Deficiencies 1-3, 5, 6.
Segregation of Duties Deficiency |
(a) Risk |
(b) Controls to Mitigate the Risk | (c) Evidence that Control is Operating Effectively (Test of Control) |
1. Same individual handles:
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2. Same person:
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3. Same individual
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4. Controller: Responsible for accounting estimates Adjusts journal entries No CFO | This is not an unusual situation for many smaller businesses. The risk is that the adjusting entries or accounting estimates may be made without economic substance, or may be in error. | Management review of all significant estimates and closing entries. | The auditor could test to determine if there is evidence that management performed such a review. However, management may not always be aware of the closing entries, nor review them in detail. This is a risk that would cause the auditor to do more direct substantive testing of the account balances affected by estimates and closing entries.
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5. Small company has only one accounting person.
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6. Computerized expert runs software, and has access to the software as well as to data records.
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