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Segregation of duties is a basic internal control that attempts to ensure no single individual has the authority to execute two or more conflicting sensitive transactions with the potential to impact fnancial statements, so that Segregation of duties is a very effective tool to minimize fraud risk.
Segregation of duties of SoD is one of the most effective tool to prevent fraud and error.
The core concept of segregation of duties is to establish a system where no single person could be able to perform a whole function independently. A function or task can be break down into four sections: 1-record keeping 2-custody 3-authorization and 4-reconciliation and no single person shall perform more than one tasks so the risk of fraud reduces significantly.
Companies also use two signature policy and 4 eye principle where two person authorize a business decision. In banks two keys normally open the vaults or ATMs which are assigned to two separate persons. The staff can also be frequently rotated so one’s work can be checked by the other on a regular or surprise basis.
It is also possible to physically separate the functional units by locating them in different places to counter the social bonds likely form between the person working at a work place.
SoD is widely a legal requirement as well. Many laws like SOX, 2002 in United States or Law 262, 2005 of Italy require companies to perform SoDs as part of their internal control.
Examination of purchases and sales and returns associated thorough examination and particularly the processes that took place last fiscal year.
- Make sure there is no confusion between or resource expenses and capital expenditure.
- Ensure the adequacy of provisions.
- Make sure the calculation of depreciation on assets and a review of depreciation rates and the extent of compliance with the Certified for previous years.
- Review the methods of stock valuation.
- Access to the foundations that have been followed for the evaluation of investment real estate to get into the real estate fair value.
segregation of duties by divided among two or more people so no one individual can act alone should contributing factor in almost all occurrences of fraud
