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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

While auditing Kavya Textiles Ltd, the auditor notes that the same employee who approves vendor invoices for payment also has access to create new vendors in the accounting software. Which control concept is primarily weakened by this arrangement?

The weakened control is segregation of duties. When one employee can both create vendors and approve their invoices, a fictitious vendor could be set up and paid without detection, because no independent person checks either function.

  1. ASegregation of dutiesCorrect
  2. BPhysical custody of inventory
  3. CAuthorisation of capital expenditure by the board
  4. DPeriodic bank reconciliation

Explanation

Allowing one person to both create vendors and approve their invoices combines incompatible functions. This makes it possible to set up a fictitious vendor and pay it without anyone else noticing. Bank reconciliation and physical custody relate to other areas and are not the weakness here.

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