Functions that must be separated
Segregation of duties is a crucial component in internal control yet challenging to achieve under small business operations. Segregation involves separating responsibilities and functions in the workplace for ease of management, reduction in work overload, and prevention of fraud and errors. The three primary functions that managers should segregate include custody of assets, record-keeping of assets, and assets authorization. In general, no employee should work in more than one of the above categories.
Asset handling involves access to a company's assets and having the power to control the movement of the assets. Assets in the company include cash at hand, cash at bank, equipment, etc. record-keeping involves handling and posting the firm's daily transactions in a ledger book which enhances control of assets in the firm. Comparison and review involve reviewing and comparing ledger entries and receipts to ensure firm's validity and efficient management of assets.
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Compensating controls
To reduce fraud and operational errors, compensation controls are applicable where segregation of duties is economically unfeasible. Compensation control can provide a similar level of assurance, go an extra mile than the previous control requirement, and meet the intended control requirement ( Gramling et al ., 2010). In designing compensating systems, firms should consider factors like documentation that the company can review. Another tip is ensuring approval that ensures the compensation system serves the intended purpose due to frequent functionality changes. Additionally, training is vital in ensuring employee’s understanding of the risk. Finally, reviewing the compensation system is essential to ascertain its effectiveness in executing the set objectives.
Some of the compensation controls that would help reduce fraud and error include; necessitating a secondary signature that authorizes important and sensitive transactions in the organization. Another control is using exception reports set on a timely basis to measure specific market changes or customer behaviors ( Gramling et al . 2010). A Report from this tool is signed by the supervisor and kept as evidence in the firm.
References
Gramling, A. A., Hermanson, D. R., Hermanson, H. M., & Ye, Z. S. (2010). Addressing problems with the segregation of duties in smaller companies.
