In internal controls over a revenue cycle, which practice is a fundamental control?

In internal controls over a revenue cycle, which practice is a fundamental control?

• A. Centralizing approvals
• B. Segregation of duties
• C. Removing access controls
• D. Forcing all reconciliations to be done by sales team

Answer: (B)

Segregation of duties in the revenue cycle creates checks and balances by ensuring no single person handles multiple steps from authorization to recording to custody of assets. By separating responsibilities such as credit approval, sales order entry, shipping, invoicing, and cash receipts from the accounting for receivables, there’s an independent verification at each stage, which helps detect errors and deter fraudulent actions. If one person could both authorize a sale and handle cash or record the transaction, opportunities to misstate numbers or misappropriate assets increase. Centralizing approvals would still concentrate power and can undermine this independent oversight; removing access controls or forcing reconciliations to be done by the sales team would remove essential safeguards and bias results. So, separating duties is the most effective fundamental control.

Segregation of duties in the revenue cycle creates checks and balances by ensuring no single person handles multiple steps from authorization to recording to custody of assets. By separating responsibilities such as credit approval, sales order entry, shipping, invoicing, and cash receipts from the accounting for receivables, there’s an independent verification at each stage, which helps detect errors and deter fraudulent actions. If one person could both authorize a sale and handle cash or record the transaction, opportunities to misstate numbers or misappropriate assets increase. Centralizing approvals would still concentrate power and can undermine this independent oversight; removing access controls or forcing reconciliations to be done by the sales team would remove essential safeguards and bias results. So, separating duties is the most effective fundamental control.