Name three internal control activities that reduce risk of misappropriation of funds.

• A. Segregation of duties, proper authorization and approvals, and independent reconciliations with periodic reviews.
• B. Single-person authority over all cash receipts.
• C. No documentation of expenditures.
• D. Outsourcing internal controls to a third party.

Answer: (B)

Internal controls to prevent misappropriation of funds rely on creating checks and balances across the cash process. The key trio is separating duties so no single person handles all parts of a transaction, requiring proper authorization for transactions, and performing independent reconciliations with periodic reviews.

Segregation of duties means assigning different steps—such as cash handling, recording, and reconciling—to different people. This makes it much harder for someone to both commit theft and conceal it, because no one person has control over all stages of the process. Proper authorization ensures that every cash transaction has been approved according to policy, which reduces the chances of unauthorized or fraudulent disbursements. Independent reconciliations involve someone who is not involved in day-to-day processing comparing records (like the cash ledger) with external records (such as bank statements) and reviewing discrepancies on a regular basis. This independent check helps detect errors or theft quickly.

The other options weaken control: concentrating authority in one person increases the opportunity for misappropriation; having no documentation eliminates the evidence needed to detect and prevent improper spending; outsourcing controls without the accompanying independent oversight or internal checks can create gaps in monitoring.