ACCA Audit and Assurance (F8) Practice Exam

What is a potential issue with separating duties within internal controls?

1. It is costly to implement

2. It can lead to collusion

3. It makes controls less effective

4. It adds unnecessary complexity

The correct answer is: It can lead to collusion

Separating duties within internal controls is fundamental to ensuring that no single individual has control over all aspects of any financial transaction. This separation helps to prevent fraud and reduce errors, as it typically requires multiple people to be involved in related operations, thereby enhancing checks and balances. However, one potential issue that can arise despite this separation is the risk of collusion. When individuals are aware of the controls in place and the responsibilities that have been assigned, they may choose to work together to bypass these controls. Collusion between employees can undermine the very purpose of separation of duties by allowing two or more employees to coordinate their actions so that they can commit fraud or misappropriation without detection. This cooperation can make it challenging for an organization to identify wrongdoing since the controls are designed to catch errors or irregularities when there’s an absence of collusion. In contrast, while the others may contribute to the challenges of implementing internal controls—such as cost, complexity, or the potential for reduced effectiveness—the specific risk that collusion poses highlights a significant weakness in a well-intended system of checks and balances. Thus, while separation of duties is crucial, it is not entirely foolproof, and management must remain vigilant to the possibility of collusion among employees.