Certified Internal Auditor (CIA) Practice Test

In ensuring proper segregation of duties, which of the following activities is incompatible?

1. Hiring employees and authorizing pay rate changes.

2. Preparing payroll and filing payroll tax forms.

3. Signing and distributing payroll checks.

4. Preparing attendance data and preparing the payroll.

The correct answer is: Preparing attendance data and preparing the payroll.

The correct choice highlights an essential aspect of internal controls—the segregation of duties. Segregation of duties is a fundamental principle intended to reduce the risk of errors and fraud by ensuring that no single individual is responsible for more than one aspect of a transaction. In the case of preparing attendance data and preparing the payroll, these two activities must be kept separate to prevent an individual from manipulating the attendance records to create fraudulent payroll entries. By having one person responsible for compiling attendance and another for processing the payroll, organizations can create a system of checks and balances that helps ensure the accuracy and integrity of payroll processing. This division of responsibilities makes it more difficult for an individual to commit fraud, as collusion would be needed to override the controls. In contrast, the other activities listed do not pose the same level of risk when managed by the same individual, as they do not have the same direct potential for manipulation. For instance, hiring employees and authorizing pay rate changes can be managed more effectively under the oversight of a hiring manager without the same vulnerability to payroll fraud. Similarly, signing and distributing payroll checks, while it poses risks, is commonly managed through a trusted process, and preparing payroll alongside filing tax forms ensures compliance without direct risk of data manipulation. Therefore,