Which of the following is an example of separation of duties in a good system of internal control?

• A. Management reviews financial statements at the end of each month.
• B. All cash receipts are handled by the same employee who prepares the bank reconciliation.
• C. The employee who authorizes payments is different from the employee who records transactions.
• D. Employees are required to take annual vacations.

Answer: (C)

Verified step by step guidance

1. Understand the concept of separation of duties: Separation of duties is a key principle in internal control systems. It ensures that no single individual has control over all aspects of a financial transaction, reducing the risk of errors or fraud.
2. Analyze the options provided: Review each option to determine whether it aligns with the principle of separation of duties. Look for scenarios where responsibilities are divided among different employees.
3. Option 1: Management reviews financial statements at the end of each month. This is an example of oversight, not separation of duties, as it does not involve dividing responsibilities among employees.
4. Option 2: All cash receipts are handled by the same employee who prepares the bank reconciliation. This violates the principle of separation of duties because the same person is responsible for both receiving cash and reconciling the bank account, increasing the risk of fraud or errors.
5. Option 3: The employee who authorizes payments is different from the employee who records transactions. This is an example of separation of duties because it divides responsibilities between two employees, reducing the risk of fraud or errors. Option 4: Employees are required to take annual vacations. While this is a good practice for detecting fraud, it is not directly related to separation of duties.