Question

Annual Audit Case Study -- for an annual audit of a Payroll Cycle Case Study Facts: able Your audit team flowcharts the payroll cycle of your manufacturing company client. The audit team notes the following through preparation of the flowcharts and discussion with client personnel: Payroll personnel have applicants properly complete employment applications. Compensation for new employees is properly determined by reference to union contracts and authorizations prepared by department heads. Hourly employees complete time cards but supervisors often do not review and sign the time cards to document their approvals. The clerks in the payroll department gather all information for input to the computer to prepare the payroll register. The payroll supervisor reviews and signs these documents to indicate his/ her approval only if he/she has time. Payroll checks are prepared and reviewed by payroll department employees. The payroll checks are distributed to employees by one of the payroll department clerks. Payroll department personnel prepare and review payroll adjusting journal entries to record payroll for the period in the general ledger. Due to a shortage of accounting department personnel, the Controller's Department is several months behind in reconciling payroll expense per the general ledger to payroll expense per the payroll department records. Question: Describe two weaknesses in internal control in this revenue cycle. • Payrool for the period in counting departmense per the gen

Answer 1

The Weaknesses in the internal control system are :-

1. The supervisors do not approve the numbers of hours worked by an employee by reviewing and signing the time cards. This may lead to employee charging extra hours than the actual hours the employee has worked for. Also , the supervisors should regularly review the payroll register and not only as and when they get time as lack of supervision may lead to excess payment or payments being made to past employees who no longer work in the organisation or wrong payment calculations etc.
2. Reconciliation of records is a very important step of payroll cycle. The department should have a record of the number of active employees, the number of employees recruited in the current year , no. of employees left during the year, hours worked , overtime if any, leaves taken, rate per employee and other information as is necessary and it should be ensured that proper record is being maintained also, that the ex- employees are not still being paid and the hours worked by an employee are being charged against the correct name. The reconciliation is must to ensure that no excess payment is being made and no fraud is taking place. Here the company is several months behind in reconciliation of its records.
3. There should be segregation of duties within the payroll department so that no employee can misuse and pocket the amount. The duties of preparation , analyzing , approving, authorizing , making payments should be done separately to avoid fraud or collusion among employees.