ASSIGNMENT
Each of the following internal controls has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in the payroll and personnel cycle.
1. Human resource policies require an investigation of an employment application from new employees. Investigation includes checking the employee’s background, former employers, and references.
2. Approval of department head or foreman on time records is required before preparing payroll.
3. All pre-numbered time records are accounted for before beginning data entry for preparation of payroll.
4. The payroll accounting software calculates gross and net pay based on hours inputted and information in employee master files, and payroll accounting personnel double-check the mathematical accuracy on a test basis.
5. The payroll accounting software application will not accept data input for an em-
ployee number not contained in the employee master file.
6. Persons preparing the payroll do not perform other payroll duties (e.g., human resources or approval of time records) nor do they have access to payroll data master files or cash.
7. Written termination notices, with properly documented reasons for termination, and approval by an appropriate official are required.
8. All checks and notices of electronic payments not distributed to employees are returned to the treasurer for safekeeping and follow-up.
9. Online ability to add employees or change pay rates to the payroll master file is restricted via passwords to authorized human resource personnel.
a. For each internal control, identify the type(s) of specific control activity (or activities) to which it applies (such as adequate documents and records or physical control over assets and records).
b. For each internal control, identify the transaction-related audit objective(s) to which it applies.
c. For each internal control, identify a specific misstatement that is likely to be prevented if the control exists and is effective.
d. For each control, list a specific misstatement that could result from the absence of the control.
e. For each control, identify one audit test that the auditor could use to uncover mis- statements resulting from the absence of the control.
The following are partial descriptions of internal controls for companies 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 preparation 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 receiving 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 forklifts. The additional purchased quantities are recorded on storage records.
3. The smallest branch of Connor Cosmetics employs Mary Cooper, the branch manager, and her sales assistant, Janet Hendrix. The branch uses a bank account to pay expenses.
The account is kept in the name of “Connor Cosmetics—Special Account.” To pay expenses, checks must be signed by Cooper or by the treasurer, John Winters. Cooper receives the cancelled checks and bank statements. She reconciles the branch account herself and files cancelled checks and bank statements in her records. She also periodically prepares reports of cash disbursements and sends them to the home office.
a. List the deficiencies in internal control for each of these situations. To identify the deficiencies, use the methodology that was discussed in this chapter.
b. For each deficiency, state the type(s) of misstatement(s) that is (are) likely to result. Be as specific as possible.
c. How would you improve internal controls for each of the three companies?
