Question

As the internal auditor for Right Manufacturing, you have been asked by your supervisor to document the company’s current payroll processing system. Based on you documentation, Right plans to revise the current information system to eliminate unnecessary delays in paycheck processing. Your best explanation of the system came from an interview with the payroll supervisor:

The payroll processing system at Right Manufacturing is fairly simple. Time data are recorded in each department using time cards and time clocks. It is annoying, however, when people forget to punch out at night and we have to record their time information by hand. At the end of the period, our payroll clerks enter the time card data into a payroll file for processing. Our clerks are pretty good – though I’ve had to make my share of corrections when they mess up the data entry.

Before the payroll file is processed for the current period, human resources send us data on personnel changes, such as increases in pay rates and new employees. Our clerks enter this information into the payroll file so it is available for processing. Usually, when mistakes get back to us, it’s because human resources is recording the wrong pay rate or an employee has left and the department forgets to remove the record.

The data are then processed and individual employee paychecks are generated. Several important reports are also generated for management – though I don’t know exactly what they do with them. In addition, the government requires regular federal and state withholding reports for tax purposes. Currently, the system generates these reports automatically, which is nice.

Required

1. Prepare a document flowchart to document the payroll processing system at Right Manufacturing.
2. Based upon your flowchart and the narrative identify any weaknesses in internal controls in the payroll processing system at Right Manufacturing.

Answer 1

b. The following weaknesses observed in the internal control of Right Manufacturing:

- The time clocks sometimes are not punched by the employees and hence there might be lack of control in identifying the time of leaving work. The payroll clerk has to end up mentioning the timing as at the end of the day.

- Messing up of entries in payroll

- Manual data input by Human Resource, wherein sometimes the data record gives wrong information. hence there should be an automated data reminder or else the company can opt for an outsourcing of its payroll which would reduce further errors caused.