Certified Government Financial Manager (CGFM) Practice Exam 2025 – Your All-in-One Guide to Exam Success!

The separation of duties is a fundamental internal control activity that significantly contributes to the mitigation of risk within an organization. By dividing responsibilities among different individuals, it reduces the likelihood of errors and fraud. When one individual is responsible for all aspects of a financial transaction—from initiation to approval and recording—it creates an environment where manipulation is easier and more likely to occur.

Implementing separation of duties ensures that no single person has control over all phases of a transaction. This creates a system of checks and balances that enhances accountability and transparency, making it difficult for malicious activities to go unnoticed. For example, one employee may handle the receipt of cash, while another processes the related entries in the accounting system. This layering serves as an obstacle for anyone trying to commit fraud since collusion would be required to override the protective measures.

On the other hand, while contingency planning, management review of performance, and documentation of transactions are all important in managing risk and ensuring proper operational functioning, they do not inherently prevent the misappropriation of assets or errors in handling transactions as effectively as the separation of duties does. Contingency planning prepares for unforeseen events but does not actively mitigate daily operational risks. Management reviews help in oversight and performance evaluation but rely on the existing controls to function effectively