Payroll System

Personnel records and time cards are maintained by the secretary to the president, Louise McWhorter. Notifications of hires and/or dismissals are sent to Ms. McWhorter by the various department supervisors. She then routes these notifications to Larry Lancaster for approval. For new hires, Ms. McWhorter enters the appropriate data into the LAN Payroll module, assigning the proper rate and deductions. The Payroll application creates a new Employee Master File record for each new employee entered. Louise McWhorter retains copies of this documentation for the personnel files. Weekly, the approved time cards for the hourly workers are sent to Ms. McWhorter by the various supervisors; she batches these cards and forwards them to Don McKenna. Monthly, she sends Don approved time reports for salaried personnel indicating sick days and other absences.

Don prepares the payroll by entering the time cards, time reports, and other payroll data into a computer screen template at the appropriate time. The program calculates the pay for each person, updates the Employee Master File records, and produces a payroll register containing the name, gross pay, deductions, and net pay for each employee. After having prepared the payroll, Don files the time cards and other documentation. He then sends a copy of the payroll register to Cheryl Palmer. After verifying the accuracy of the payroll, Cheryl uses the payroll register report and a menu in the Payroll module to initiate the preparation of the checks. In addition to processing the checks, the Payroll application produces a listing of the checks. This listing is used to generate the daily cash disbursements journal (register). A Journal Entry Transaction File is also produced by the Payroll module to update the General Ledger Master File (payroll expense, payroll accruals, and cash accounts). After the checks are processed, Cheryl sends the checks and a copy of the payroll register to Ms. Stockton for signature. Ms. Stockton approves the payroll by initialing the payroll register copy. After the checks are signed (by Ms. Stockton and Mr. Shelton-dual signature), they are sent to Dave Dull for distribution. Ms. Stockton files her copy of the payroll register.

Questions:(answer based on the follow questionnaires)

1. Describe the control procedures (strengths) related to payroll processing. For each strength, list a test of controls you could perform to test the effectiveness of the control. Remember to think about the six categories of control procedures.
2. For each weakness you find, list the weakness, a potential error or irregularity that may occur because of the weakness, as well as a compensating substantive test of transactions or balances to detect the error or irregularity, assuming the necessary records and documents are available to you.

Internal control Questionnaire - payroll system

1. Are the personnel, timekeeping, payroll and disbursement functions independent? -No, (Timekeeping and personnel functions are performed by Louise McWhoster)
2. Does the person who handles the personnel records notify the payroll clerk of personnel changes? -Yes
3. Are checks prepared by personnel who do not prepare payroll or have access to the payroll records? -Yes
4. Are the checks signed by personnel who do not have access to the payroll records? - No, (Controller signs checks, also has access to payroll records)
5. Is a time-clock employed for hourly employees? -Yes
6. Are time cards and time reports approved by supervisors? - Yes
7. Are all hires and terminations approved by a responsible official? -Yes, (President initials)
8. Are all wages rates approved by a responsible official? - Yes, (President initials)
9. Are all employees paid by checks that are pre-numbered? -Yes
10. Is the payroll recalculated for mechanical accuracy as to hours worked, wage rates, and deductions? -Yes, (Payroll software is used)
11. Does a responsible official approved the payroll prior to payment? -Yes, (Treasurer initials)
12. Are paychecks distributed by someone who has no other payroll responsibilities? -Yes
13. Is a separate payroll bank account employed? - Yes
14. Is this account reconciled by someone who does not have payroll responsibilities? -No, (Reconciliation is performed by treasurer, who also sign checks)