15.3 You have been hired to evaluate the payroll systems for the skip rope manufacturing Company. The company processes its payroll in-house. Use table 15-1 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” answer should indicate potential internal control weaknesses. Include a listing the potential problem that could arise if that particular control were not in place. (CPA Examination, Adapted)
15.4 Although most medium and large company have implemented sophisticated payroll and HRM system like the one describe in this chapter, many smaller companies still maintains separate payroll and HRM system that employ many manual procedure. Typical of such small companies is the Kowal Manufacturing Company, which employs about 50 production workers and has the following payroll procedures:
– The factory supervisor interviews and hires all job applicants. The new employee prepares a W-4 form (Employee’s Withholding Exemption Certificate) and gives it to the supervisor. The supervisor writes the hourly rate of pay for the new employee in the corner of the w-4 form and then gives the form to the payroll clerk as notice that a new worker has been hired. The supervisor verbally advises payroll department of any subsequent pay rises.
– A supply of blank time cards is kept in a box near the entrance to the factory. All workers take time card on Monday morning and fill in their names. During the week they records the time they arrive and leave work by punching their time cards in their time clock located near the main entrance to the factory. At the end of the week the workers drop the time cards in a box near the exit. A payroll clerk retrieves the complete time cards from the box on Monday morning. Employees are automatically removed from the payroll master file when they fail to turn in a time card.
– The payroll checks are manually signed by the chief accountant and then given to the factory supervisor, who distributes them to the employees. The factory supervisor arranges for delivery of the pay checks to any employee who is absent on pay day.
-The payroll bank account is reconciled by the chief accountant, who also prepares the various quarterly and annual tax reports.
a) Identify weaknesses in current procedures, and explain the threats that they may allow to occur.
b) Suggest ways to improve the Kowal manufacturing Company’s internal controls over hiring and payroll processing.
(CPA Examinations, adapted)