City Loan Company has 100 branch loan offices. Each office has a manager and four or five employees who are hired by the manager. Branch managers prepare the weekly payroll, including their own salaries, and pay employees from cash on hand. The employees sign the payroll sheet signifying receipt of their salary. Hours worked by hourly personnel are inserted in the payroll sheet from time reports prepared by the employees and approved by the manager.

The weekly payroll sheets are sent to the home office, along with other accounting statements and reports. The home office compiles employee earnings records and prepares all federal and state payroll tax returns from the weekly payroll sheets.

Salaries are established by home office job-evaluation schedules. Salary adjustments, promotions, and transfers of full-time employees are approved by a home office salary committee based upon the recommendations of branch managers and area supervisors. Branch managers advise the salary committee of new full-time employees and terminations. Part-time and temporary employees are hired without referral to the salary committee.

Required:

a. How might funds for payroll be diverted in the above system?

b. Prepare a payroll internal audit program to be used in the home office to audit the branch office payrolls of City Loan Company.