The internal auditor of a small manufacturer noted that the accounting department has insufficient staff to achieve proper segregation of duties. What type of controls would the auditor likely…

Question

Options

• AEntity-level.
• BPreventive.
• CDirective.
• DCompensating.

• A
  8% (2)
• B
  71% (17)
• C
  4% (1)
• D
  17% (4)

Explanation

There appears to be an error in the provided answer key - D (Compensating) is the correct answer, not B.

Why D is correct: When a small organization lacks sufficient staff to achieve proper segregation of duties, an auditor recommends compensating controls - alternative controls designed to offset or make up for an existing control weakness that cannot be eliminated. Classic examples include enhanced management review, supervisory approval of transactions, and independent reconciliations performed by an owner or manager outside the accounting function.

Why the other choices are wrong:

• A (Entity-level): These are broad, organization-wide controls (e.g., tone at the top, audit committee oversight) - they address the overall control environment, not a specific segregation-of-duties gap.
• B (Preventive): These stop errors before they occur. Segregation of duties is itself a preventive control - recommending more preventive controls doesn't solve the problem when you lack the staff to implement them.
• C (Directive): These guide behavior through policies and training. They establish what should happen, but don't substitute for missing structural controls.

Memory tip: Think of "compensating" as making up for something missing - just like compensating someone for a loss. When a small company can't have segregation of duties, compensating controls are the auditor's way of making up for that gap.

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