Question

11-19 (OBJECTIVE 11-2) The following are partial descriptions of internal controls for com- panies engaged in the manufacturing business: 1. Every day, hundreds of employees clock in using their employee identification cards at Generous Motors Corporation. The data on these time records is used in the prepa- ration of the labor cost distribution records, the payroll journal, and the electronic payments and payroll checks. The treasurer, Angela Lee, compares the payroll journal with the payroll records, signs the checks, and returns the payroll notifications and checks to Charles Strode, the supervisor of the computer department. The payroll checks and payment notices are distributed to the employees by Strode. 2. When Jill Clark orders materials, an electronic copy of the purchase order is sent to the receiving department. During the delivery of materials, David Smith, the receiv- ing clerk, records the receipt of shipment on this purchase order and then sends the Purchase order to the accounting department, where it is used to record materials purchased and accounts payable. The materials are transported to the storage area by orklifts. The additional purchased quantities are recorded on storage records, Chapter 11 / ASSESSING CONTROL RISK AND REPORTING ON INTERNAL CONTE

Answer 1

1. a. The payroll checks must be returned to the employees by the computer operator as he can edit and change the figures the checks. The data used to prepare the payroll checks is not verified by a person independent to whose is preparing the checks.

b. It may lead to incorrect employee costs being recorded and also misstatement in employee data relating to no of hours worked, rates among others.

c. The checks must he handed over by a person independent to the person who has controls to editing the checks. Also, before signing off the checks the data must be validated by an employee independent to signing the checks.

2. a. The PO is sent to the receiving department who can record as per wishes the materials received and not the actual receipt of goods.

b. Inaccurate recording of inventory figures and amounts. Also, the physical inventory count may differ from the figures in the books. There can also employee theft of the materials.

c. The PO must not be sent to the receiving department. There has to be perpetual inventory system in place along with periodic physical inventory counting.

3. a. The checks and reconciliation of the bank statement are done by the same person which results in conflict of duties.

b. The reconciliation and the cash accounts can have incorrect figures and the branch manager can record figures as her own personal account.

c. There must be segregation of duties and critical activities such as cash must be handled by different people and must not have conflicting roles.