Case: Internal Controls

Wagner Industries produces and sells parts that are used as components for large industrial machinery and equipment. The business has over a thousand workers for three shifts, and employees usually work overtime when necessary. Wagner has had major growth in its production and has acquired a mainframe computer to handle order processing, inventory management, production planning, distribution operations, and accounting applications. Glynnson Bermudez, president of Wagner, has suspicions that there may be internal control weaknesses due to the rushed implementation of the computer system. Glynnson recently hired Tsarina Otoman, CPA as the internal control accountant.

Glynnson asked Tsarina to review the payroll processing system first. Tsarina has reviewed the payroll process, interviewed the personnel involved, and compiled the flowchart. The following additional information concerns payroll processing:

• The human resources (HR) department determines the wage rate of all employees at Wagner. HR starts the process by sending an authorization form for adding an employee to the payroll to Ivee Pastor, the payroll officer. After Ivee inputs this information into the system, the computer automatically determines the overtime and shift differential rates for the individual, updating the payroll master files.
• Wagner uses an external service to provide monthly payroll tax updates. The company receives a copy of the record every month, which the data processing department installs to update the payroll master file for tax calculations.
• Employees at Wagner use a bundy clock to record the hours worked, while waiting for the new biometrics system to be installed. Every Monday morning, Ivee collects the previous weeks time cards and begins the computerized processing of payroll information to produce paychecks the following Friday. Ivee reviews the time cards to ensure that the hours worked are properly totaled; the system will determine whether overtime has been worked or a shift differential is required.
• All the other processes displayed on the flowchart are performed by Ivee. The system automatically assigns a sequential number to each payroll check produced. The checks are stored in a locked drawer next to the computer printer to provide immediate access. After the checks are printed, Ivee uses an automatic check-signing machine to sign the checks with an authorized signature plate that Ivee keeps locked in a vault.
• After the check processing is completed, Ivee distributes the checks to the employees, leaving the checks for the second- and third-shift employees with the appropriate shift manager/supervisor. Ivee then notifies the data processing department that she is finished with her weekly processing, and data processing makes a backup of the payroll master file for storage in the computer room.

Required: By referring to the information and the flowchart above, identify and describe:

1. Five different areas in Wagner's payroll processing system where the system controls are inadequate.
2. Two different areas in Wagner's payroll processing system where the system controls are satisfactory.