Which of the following arrangements of duties could most likely lead to embezzlement or theft within an organization?

• A. Requiring two signatures on all checks above \$5,000
• B. Separating the responsibilities of authorizing transactions and recording them
• C. Allowing the same employee to both authorize payments and reconcile bank statements
• D. Having independent internal audits conducted regularly

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of internal controls in financial accounting. Internal controls are processes and procedures implemented by an organization to safeguard assets, ensure accurate financial reporting, and prevent fraud or theft.
2. Step 2: Analyze the duties mentioned in the problem. Each arrangement of duties represents a different internal control mechanism or lack thereof. Evaluate how each arrangement impacts the risk of embezzlement or theft.
3. Step 3: Focus on the arrangement 'Allowing the same employee to both authorize payments and reconcile bank statements.' This creates a conflict of interest and bypasses the principle of segregation of duties, which is a key internal control to prevent fraud.
4. Step 4: Compare this arrangement to the others listed. For example, requiring two signatures on checks above \$5,000 adds a layer of approval, separating responsibilities for authorizing and recording transactions reduces risk, and independent internal audits provide oversight. These arrangements strengthen internal controls.
5. Step 5: Conclude that allowing the same employee to both authorize payments and reconcile bank statements is the arrangement most likely to lead to embezzlement or theft, as it lacks proper segregation of duties and oversight.