What may result from an auditor's finding of inadequate segregation of duties?

The finding of inadequate segregation of duties can lead to increased fraud risk because when responsibilities are not properly divided among different individuals, it creates opportunities for individuals to engage in fraudulent activities without detection. Segregation of duties is essential for establishing checks and balances within an organization, ensuring that no single person has control over all aspects of any significant financial transaction.

For example, if the same employee is responsible for both recording financial transactions and reconciling bank statements, that individual could manipulate the records to conceal errors or theft. Inadequate segregation can enable fraud by making it easier for employees to carry out unauthorized activities without oversight, thereby compromising the integrity of financial reporting.

While improved compliance, enhanced operational efficiency, and reduced audit scope are all important considerations in auditing, they are not direct results of finding inadequate segregation of duties. Instead, the primary concern is that such a finding directly correlates with heightened vulnerability to fraudulent actions.