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CS Professional · Internal and Forensic Audit · Emerging Issues and Challenges

During an audit of Bharat Logistics Pvt Ltd, the internal auditor finds that the same employee raises vendor invoices, approves them and releases payments. Management says the employee is trusted and a change would add cost. What is the auditor's best course?

The auditor should report the segregation-of-duties weakness along with its fraud risk and recommend separating the functions or adding compensating controls. Trust in an individual is not a control. Performing approvals herself would compromise independence, and ignoring the issue until a loss arises defeats the purpose of preventive internal audit.

  1. ADrop the observation because management accepts the risk verbally
  2. BReport the segregation-of-duties weakness with its fraud risk and recommend separating the functions or adding compensating controlsCorrect
  3. CCorrect the process personally by approving the payments herself
  4. DWait until a loss occurs before reporting

Explanation

Combining initiation, approval and payment is a basic segregation-of-duties failure. The auditor must report it with risk rating and recommend separation or compensating controls such as independent review. Taking over approvals would impair independence, and verbal acceptance or waiting does not remove the risk.

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