Modern Motor Company (MMC):

MMC Company manufactures engine parts for lawnmowers, snow blowers and other types of yard care equipment. The company employs approximately 100 production employees. Production employees alternate back and forth between two shifts and are sometimes asked to work overtime. You, CPA, are a Senior Auditor at ABC LLP and you have been assigned as the lead auditor on the financial statement audit engagement for MMC for the year-ended March 31, 2020. The Audit Partner at ABC LLP for the engagement has asked you to gather information about the controls over the company's Human Resources and Payroll process.

You, CPA, reviewed the process, interviewed selected personnel and documented the following information about the process:

Background Information:

The Human Resources Department prepares an Employee Action Form (EAF) when an employee is either hired or terminated. Employee Action Forms (EAF) are also used to update employee details such as employee names and employee addresses. Employee Action Forms can be used to change pay rates of existing employees; however, they must be signed and approved by the Human Resources Director and the employee's direct manager. A Human Resources Clerk will manually key the information from the Employee Action Forms (EAF) into the computer system each week to update the personnel master file. For terminated employees or resignations, it is the responsibility of the HR Manager to notify the Technology Services Help Desk of the employee's end date. The purpose of this process is to provide authorization to the Help Desk to deactivate the terminated employee's access to the information systems at MMC to ensure the employee no longer has access to the internal computer systems at MMC after their last day of work. Employees use a time clock system to record the hours they work. At the end of each week, supervisors collect the time cards, verifies the number of hours worked for each employee and documents the total number of hours worked on each employee's time card. Each supervisor also counts the number of time cards collected and e-mails the count to MMC's Treasury Manager. Every Monday morning, the Payroll Clerk collects the previous week's time cards from the supervisors, sorts them by employee number, recalculates the total hours on each time card, keys the data from the time cards into the computer and processes the payroll. The system automatically assigns a sequential number to each payroll check produced. Employees usually verbally communicate any overtime hours worked directly to the Payroll Clerk, who then adjusts their paycheck depending on the number of additional hours indicated by the employee. Blank checks are stored in a box next to the printer for immediate and convenient access for all employees. Controls are included in the payroll application software to detect invalid employee numbers. The Payroll Clerk will print off an error listing from the payroll application software and typically review the listing on a semi-annual basis. MMC has experienced substantial turnover during the year which has resulted in the employees within the Payroll and HR Departments to be overworked. In addition, MMC employees have not received a pay increase for the past 2 years and consequently the overall employee morale has suffered. To help alleviate some of the workload pressures, MMC have granted all Payroll Clerks and Human Resources Clerk's to have each other access rights within the system. MMC management thought this may help in situations where either the Human Resources or Payroll Department do not have the capacity to finish all the required tasks and need additional assistance. As a result, the Human Resources Clerks often find themselves performing the key functions of entering new employee information in the computer system and also processing payroll when the need arises.

Payroll Clerks also perform the following tasks:

a) Print the payroll register and payroll checks

b) Separates the checks into a valid batch and a batch of those that were included in the error listing.

c) Uses the results of the payroll check run to update the employee earnings master file.

d) Prepares the weekly payroll journal entry and posts the entry to the general ledger.

The Payroll Manager then prepares a backup of the employee earnings master file on an encrypted USB device that is stored in a locked cabinet in the payroll manager's office.

The treasurer agrees the number of valid checks received with the total number of time cards emailed by the production supervisors, signs the valid checks and stores the invalid checks in the mailroom. The treasurer stores the signed checks in the safe until they are given to the production supervisors for distribution on Friday. Therefore, the production supervisors are responsible for distributing all checks to employees. If the respective production supervisor is absent on a paycheck distribution day, the checks are left for pickup in the mailroom.

Furthermore, an Active Payroll Listing is used which lists all of the employees who are currently listed as "Employed" in the payroll system. This listing is downloaded from the payroll system and analyzed and approved by the Human Resources Director and Payroll Manager once every 2 years. The HR Director and Payroll Manager are required to identify any individuals on the listing who are no longer valid employees at MMC.

MMC's payroll department recently implemented a new electronic payroll system. This system was implemented to allow employees to be able to view and update their personal information, salary history and download pay statements. As MMC is currently in the process of setting all employee's personal login details for the new system, they have provided all employees with the same generic login and password details for the interim period. Therefore, employees are required to log in to the system (using the common login username and password) and locate their name and data profile.

REQUIRED:

Based on the information presented above, describe the following:

a) Identify 5 internal control strengths in MMC Company's HR and Payroll process. For each control strength identified, explain WHY it is a strength. In this format

Internal Control Strength - Identification Internal Control Strength - Explanation

b) Identify 5 deficiencies in MMC Company's payroll process. For each control weakness identified, explain WHY it is a deficiency and provide a recommendation of an effective internal control to address the weakness.

Weakness Implication Recommendation