Flowcharting Problem: Payroll Process

A CPA's audit working papers contain a narrative description of a segment of the Croyden
Factory, Inc., payroll system and an accompanying flowchart as follows:
NARRATIVE
The internal control system with respect to the personnel department is well-functioning and is
not included in the accompanying flowchart.
At the beginning of each work week, payroll clerk no. 1 reviews the payroll department files to
determine the employment status of factory employees and then prepares time cards and
distributes them as each individual arrives at work. This payroll clerk, who is also responsible for
custody of the signature stamp machine, verifies the identity of each payee before delivering
signed checks to the foreman.
At the end of each work week, the foreman distributes payroll checks for the preceding work
week. Concurrent with this activity, the foreman reviews the current week's employee time
cards, notes the regular and overtime hours worked on a summary form, and initials the
aforementioned time cards. The foreman then delivers all time cards and unclaimed payroll
checks to payroll clerk no. 2.

REQUIRED
(A) Based on the narrative and Fig. 7.16, what are the weaknesses in the system of internal
accounting control?
Note: Do not discuss the internal control system of the personnel department.
(CPA)

Answer to Case:

CPA Examination, Unofficial Answer

Weaknesses in the system of internal control are the following:

1. Lack of approval of the foreman's timecard by an appropriate supervisor is an unsound
practice. Employees should not be permitted to maintain their own time records and submit them
without approval.
2. The computation of overtime and regular hours prepared by payroll clerk no. 2 that is used in
the preparation of the payroll register is not compared with the summary of the regular and
overtime hours prepared by the foreman.
3. Arithmetic computations and rates of pay used in the preparation of the payroll register are not
checked by a person who is independent of their preparation and payroll register columns are not
verified (re-added) by a person other than the preparer of the payroll register.
4. Payroll checks are not reconciled to the payroll register in order to prevent improper
disbursements.
5. A signature stamp machine should not be in the custody of any payroll clerk who has access to
unsigned checks.
6. Since the paymaster should be independent of the payroll process, signed payroll checks
should not be distributed by the foreman.
7. Unclaimed payroll checks should be in the custody of an employee who is independent of the
payroll process.
8. The comparison of regular and overtime hours indicated on payroll checks with regular and
overtime hours indicated on time cards should not be performed by the clerk who is responsible
for the original computation of regular and overtime hours indicated on the time cards.
9. The comparison of gross and net payroll indicated on payroll checks with gross and net payroll
indicated in the payroll register should not be performed by the clerk who is responsible for
preparing the payroll register.
One should also inquire whether:
1. Payroll clerk no. 2 checks time cards for the foreman's written approval.
2. Approved overtime is indicated on time cards.
3. Employment, wage, and related data in payroll files are periodically crosschecked with
personnel files for agreement.
4. The punching of time cards is observed by a time keeper.
5. Other mitigating internal control measures (for example, bonding, required vacations,
etc.) are in existence.