Which segregation of duties would best reduce the risk of payroll fraud?

Question breakdown

Tests

Evaluate segregation of duties in the payroll cycle

Difficulty

Medium

Key idea: Payroll fraud risk is lowest when no single function can both create an employee and control where that employee's pay goes.

How to reach the answer

1. Identify the main payroll fraud schemes: ghost employees and diverted pay.
2. For a ghost employee scheme, a person must be able to add an employee and also direct the payment to an account they control.
3. In A, HR adds employees while payroll controls bank details, so neither function can complete the scheme alone, and direct deposit removes the risk of check handling.
4. In D, HR both adds employees and enters bank details, so one function can create a ghost employee and route the pay to itself.

Each option

• ACorrect. Employee setup is kept apart from bank account maintenance, and direct deposit removes the risk of physical check interception, which blocks a single-person ghost employee scheme.
• BIncorrect. HR both adds employees and hands out paychecks, so HR could create a fictitious employee and keep the check.
• CIncorrect. HR adds employees, submits hours, and delivers checks, which concentrates almost the whole payroll cycle in one function.
• DIncorrect. HR adds employees and also sets the bank account where pay is deposited, so it can create a ghost employee paid into its own account.

Common trap: A and D look almost the same because both use direct deposit, but in D the function that creates employees also controls where the money goes.

In practice: Auditors reviewing payroll check HRIS and payroll system access rights to confirm that the people who create employee records cannot also change bank account details.

Remember: In payroll, keep the authority to create an employee separate from control over that employee's payment destination.

Drafted with AI assistance and checked against the answer key.