Internal Control Information:

The Financial Controller for RCD has provided you with the latest internal control manual which includes details of the controls over contract payments. As the system is new you also walk through the system checking that the walkthrough matches the information in the internal control manual.

Details of the controls over contract payments evidenced in your walkthrough are listed below:

RCD tenders for a contract to lease a number of machines and provide the operator at a set price over a certain period.

When the contract is accepted an accounts receivable account is set up by the accountant responsible for the machine contract, and a payroll account is set up for the employee who operate the machine.

The payroll clerk demonstrates the setup of the payroll account entering a super user name and password specifically set up for the walk through. The menu screen appears and displays many functions.

The clerk selects the add new employee function. You are advised that the details can only be entered from a hard copy form signed by the employee and the contracts manager and a signed income tax instalment declaration form. The clerk then enters the following information:

employeename employeenumber contractnumber employeeaddress employeephonenumber employeeemail startdate employeedateofbirth employeetaxfilenumber hourlyrate generalexemptionfromtaxY/N

The fictitious employee is now set up in the system.

The clerk goes back to the main screen and clicks the item enter hours and explains that the employee can enter their own hours but that this must be approved by the contracts manager before the pay-run can be processed.

The clerk then approves the hours.

Then the clerk selects process pay-run and explains that the system automatically calculates the monthly payments based

on hourly rate and the current tax rate. The system also calculates the superannuation accrual for the employee.

The system then generates a standard report entitled monthly pay-run that lists the employees, their payments and the total tax paid. This report is then approved by the contracts manager who then, in a live pay run, uploads the Australian Bankers Association (ABA) file to the bank. The pay-run is automatically posted to the general ledger on approval by the contracts manager.

The contracts manager's bank login gives him the rights to approve processing of payments on the bank website. The bank account is reconciled monthly by the accountant who also has a bank login that gives him the right to approve processing of payments on the bank website. Other regular payments through the bank account occur on a weekly basis when the accountant uploads the ABA creditors payment file to the bank and approves it for processing.

You note that the contracts payroll can be checked to the contracts accounts receivable by deducting from the accounts receivable amount the standard mark-up on the contracts.

Identify (any three) internal controls in the system that are potentially effective, the risk that the control could alleviate and one test of control for each of the identified potentially effective controls.

Answer this question using the following headings in a table format:

Identify (any three) internal controls in the system that are potentially effective, the risk that the control could alleviate and one test of control for each of the identified potentially effective controls.

Answer this question using the following headings in a table format:

Effective Controls

Risk Alleviated

Test of Control

PART D

List and identify (any three) weaknesses in internal control for contract payroll

Internal Control Weakness

What might go wrong