An internal auditor is responsible for assessing the effectiveness of internal controls, and a key control principle is segregation of duties (SoD). SoD helps prevent fraud and error by ensuring that no single individual has control over all aspects of a financial transaction. There are four key functions that must be separated: custodianship of assets, recording of transactions, authorization of transactions, and reconciliation of assets.

• Effective segregation means:

  • A person who authorizes a payment should not record it.

  • An employee who records a sale should not also reconcile inventory.

  • Someone with custody of cash should not also authorize disbursements or reconcile the bank account.

• Example: In a small retail business, if the same employee can approve vendor payments (authorization), write checks (custodianship), enter the payments into the accounting system (recording), and reconcile the bank statements (reconciliation), this creates a high risk of undetected fraud. An internal auditor would flag this lack of segregation and recommend assigning these duties to different staff members or implementing mitigating controls like independent reviews.

• Proper SoD reduces the risk of misappropriation and ensures that errors or fraud are detected promptly, protecting organizational assets and maintaining trust.