Holly Company is a small family-run manufacturer of wooden garden furniture, sheds, and storage containers. The company is located outside Pittsburgh, Pennsylvania, and currently employs 185 workers. Much of the manufacturing work involves casual labor in the lumberyard and sawmill. The work is hard, and employees often move on after a few months. Although the company does not issue audited financial statements, its owner has retained your firm to conduct a review of its internal controls. The focus of your review at this time is the payroll process.

Payroll Processing System

Holly employees use a time clock in an unsupervised area to record their time on the job. The timekeeping clerk tries to monitor the process but is often distracted by other duties. Every Friday, the shop foremen collect the time cards for their subordinates, review and approve them, and deliver them to the payroll clerk.

The payroll clerk uses a stand-alone PC to record the employee earnings in the employee records and print a hard-copy payroll register. The payroll clerk sends one copy of the payroll register to the accounting department. The clerk then files the time cards and a copy of the payroll register in the payroll department.

The accounting department clerk receives the payroll register, reviews it for accuracy, and uses the department computer to record the transaction by posting to subsidiary and GL accounts, including wages expense, cash, and various withholding accounts. The clerk then prints the hard-copy checks, which are written on the general cash account. The clerk signs the paychecks and sends them to the foremen who distribute them to the employees. Finally, the clerk files the payroll register in the department.

Questions:

A. Describe the uncontrolled risks associated with this system as it is currently designed.

B. Describe the physical and IT controls needed to reduce the risks identified in A above.