MVF Company manufactures engine parts for lawn mowers, snow blowers, and other types of yard care equipment. The company employs approximately 300 production employees. Production employees alternate back and forth between two shifts and are sometimes asked to work overtime.

MVFs CAE has asked Alyssa Worcshard, a first-year internal auditor, to gather information about the controls over the companys production payroll process. Worcshard reviewed the process, interviewed selected personnel, and documented the following information about the process.

The personnel department prepares a personnel action form when a production employee is hired or terminated. Action forms also are used to document personnel changes such as changes in pay rates, deductions, employee names, employee addresses, etc. A personnel department employee keys the information from the action forms into the computer each week to update the personnel master file.

Production employees use a time clock to record the hours they work. At the end of each week, production supervisors collect the time cards, verify the number of hours worked for each employee, and document the total number of hours worked on each employees time card. Each supervisor also counts the number of time cards collected and emails the count to MVFs treasurer.

Every Monday morning, a payroll employee collects the previous weeks time cards from the production 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 production payroll. The system automatically assigns a sequential number to each

payroll check produced. Blank checks are stored in a box next to the printer for immediate access. Controls are imbedded in the payroll application software to detect invalid employee numbers, unreasonably high numbers of hours worked, etc. The computer also determines whether overtime has been worked or a shift differential is required. Invalid data is printed on an error listing.

The payroll employee then:

Prints the payroll register and payroll checks.

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

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

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

Notifies the payroll manager that the weekly processing of payroll transactions has been completed.

The payroll manager prepares a backup of the employee earnings master file, which is stored on the system in the computer room and backed up in a cloud environment.

The valid and invalid batches of payroll checks are sent directly to MVFs treasurer. 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 shreds the invalid checks. The treasurer stores the signed checks in the safe until they are given to the production supervisors for distribution on Friday. If an employee is absent when the checks are distributed, the supervisor returns the unclaimed check to the treasurer who keeps it in the safe until the employee comes to get it.

A. Based on the information presented above, and taking into consideration both manual and automated controls, describe the:

1. Control strengths in MVF Companys payroll process.

2. Control deficiencies in MVF Companys payroll process.

B. MVF Companys senior management, including the CAE, realizes that the companys payroll process needs to be upgraded.

1. Brainstorm ideas as to how the company could more effectively leverage IT to improve the payroll process.

2. Discuss the risk and control implications of the ideas generated in B.1.