A

As a part of the Audit, you are assessing internal control in the audit of the human resources and payroll cycle for the Sunshine Company, which is specialized in assembling computer systems from purchased parts. As an auditor you know that HR and Payroll Sections must work cohesively for effective administration of payroll. The Company has approximately 200 hourly and 30 salaried employees in three locations. Each location has one foreman who is responsible for overseeing operations. The owner of the company lives in Kelowna, B.C., and is not actively involved in the business. The two key executives are the vice president of sales and the controller, both of whom have been employed by the company for more than 15 years. Whenever there is a job opening at a location, the factory foreman interviews applicants and based on the interview, either hires or rejects them. When applicants are hired, they prepare a TD1 (employees withholding exemption certificate) and give it to the foreman. The foreman writes the hourly rate of pay for the new employee in the corner of the TD1 form and then gives the form to the locations office manager as notice that the worker has been employed. The foreman verbally advises the office manager when there are wage-rate adjustments.

Since each hourly employee works independently, Sunshine has a highly flexible work schedule policy, as long as employees start after 7:00 a.m. and are finished by 6:00 p.m. Employees are issued magnetic stripe cards with a PIN (personal identification number) that they use to scan in and out. Every Friday at 6:00 p.m., the office manager retrieves the time records and prints the time records with hours worked. The foreman reviews the list and signs and dates it indicating his approval. Once the time records are approved, the office manager transmits the time records to head office in Ajax, Ontario. Employees without a time record do not receive pay.

In Ajax, the accounting supervisor retrieves the file for transfer into the payroll system, which is used to calculate the pay amounts and create a payroll journal. The payroll journal for the three locations is printed and reviewed by the controller. The payroll package then generates a direct deposit file, which is sent to the bank by the accounting supervisor every Monday afternoon.

Except for the foremen and office managers, all salaried employees work at the Ajax location. The vice president of sales or the controller hires all salaried employees, depending on their responsibilities, and determines their salaries and salary adjustments. The owner determines the salary of the vice president of sales and the controller. The accounting supervisor processes the payroll transactions for salaried employees using the same payroll software that is used for hourly employees. The monthly payroll journal is approved by the controller before the office manager transmits the salaried payroll direct deposit file to the bank. The payroll software package has access controls that are set up by the controller. She is the only person who has access to the salary and wage rate module of the software. She updates the software for new wage rates and salaries and makes changes to existing ones. The accounting supervisor has access to all other payroll modules. The controllers assistant has been taught to reconcile bank accounts and does the monthly pay-roll bank reconciliation.

Requirements:

a. List the risks of error or fraud that are present at Sunshine Company. For each risk, state the type of misstatement that could occur. Mark: 3

Ans:

b. State whether the fraud risk could lead to misappropriation of assets or fraudulent financial reporting. Explain how these frauds could take place.

c. For each risk of error or fraud, in your opinion what would be controls to prevent or detect the fraud?