You have been hired to evaluate the payroll system for the Skip-Rope Manufacturing Company. The company processes its payroll in-house. Use Table as a reference to prepare a list of questions to evaluate Skip-Rope’s internal control structure as it pertains to payroll processing for its factory employees. Each question should be phrased so that it can be answered with either a yes or a no; all “no” answers should indicate potential internal control weaknesses. Include a third column listing the potential problem that could arise if that particular control were not in place. (CPA Examination, adapted)
TABLE Threats and Controls in the Payroll/HRM Cycle
Activity | Threat | Controls (first number refers to the corresponding threat) |
General issues throughout entire HRM/payroll cycle | 1. Inaccurate or invalid master data 2. Unauthorized disclosure of sensitive information 3. Loss or destruction of data 4. Hiring unqualified or larcenous employees 5. Violations of employment laws | 1.1 Data processing integrity controls 1.2 Restriction of access to master data 1.3 Review of all changes to master data 2.1 Access controls 2.2 Encryption 3.1 Backup and disaster recovery procedures 4.1 Sound hiring procedures, including verification of job applicants' credentials, skills, references, and employment history 4.2 Criminal background investigation checks of all applicants for financerelated positions 5.1 Thorough documentation of hiring, performance evaluation, and dismissal procedures 5.2 Continuing education on changes in employment laws |
Update payroll master data | 6. Unauthorized changes to payroll master data 7. Inaccurate updating of payroll master data | 6.1 Segregation of duties: HRM department updates master data, but only payroll department issues paychecks 6.2 Access controls 7.1 Data processing integrity controls 7.2 Regular review of all changes to master payroll data |
Validate time and attendance data | 8. Inaccurate time and attendance data | 8.1 Source data automation for data capture 8.2 Biometric authentication 8.3 Segregation of duties (reconciliation of job-time tickets to time cards) 8.4 Supervisory review |
Prepare payroll | 9. Errors in processing payroll | 9.1 Data processing integrity controls: batch totals, cross-footing of the payroll register, use of a payroll clearing account and a zero-balance check 9.2 Supervisory review of payroll register and other reports 9.3 Issuing earnings statements to employees 9.4 Review of IRS guidelines to ensure proper classification of workers as either employees or independent contractors |
Disburse payroll | 10. Theft or fraudulent distribution of paychecks | 10.1 Restriction of physical access to blank payroll checks and the check signature machine 10.2 Restriction of access to the EFT system 10.3 Prenumbering and periodically accounting for all payroll checks and review of all EFT direct deposit transactions 10.4 Require proper supporting documentation for all paychecks 10.5 Use of a separate checking account for payroll, maintained as an imprest fund 10.6 Segregation of duties (cashier versus accounts payable; check distribution from hiring/firing; independent reconciliation of the payroll checking account) 10.7 Restriction of access to payroll master database 10.8 Verification of identity of all employees receiving paychecks 10.9 Redepositing unclaimed paychecks and investigating cause |
Disburse payroll taxes and miscellaneous deductions | 11. Failure to make required payments 12. Untimely payments 13. Inaccurate payments | 11.1 Configuration of system to make required payments using current instructions from IRS (Publication Circular E) 12.1 Same as 11.1 13.1 Processing integrity controls 13.2 Supervisory review of reports 13.3 Employee review of earnings statement |
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