You are a CPA student who works at a public accounting firm. You are currently on the audit of Happy Sails Inc (HSI). HSI sells custom-designed luxury sailboats that they build from scratch. You have been assigned the payroll section of the audit. You have met with Tom Jones, Financial Analyst to understand the payroll process, and took the following notes:

• Payroll is paid once every two weeks. While all 85 staff are salaried, overtime can be earned by certain unionized employees who construct the sailboats.
• Tom begins preparing the pay run every other Wednesday each month for completion by Friday that week. As he has been working at HSI for three years, she is very comfortable with the process.
• If someone does leave or is terminated, Tom maintains a tracker of the person who left and the pay period they were included in. Tom does not track the exact date of the termination as she always processes the final pay for the full two weeks of the period where the person left the company.
• Tom loves the community/family feel of working at a small company. He gets along with everyone so whenever someone joins the company, leaves the company or gets a promotion (and associated pay raise) he will hear about it from one of her coworkers. Otherwise, Tom uses the last pay run as the starting point to identify all employees to be paid and how much to pay them.
• All staff work 32.5 hours per week. If a unionized staff worked any overtime over a pay period, they need to alert Tom by the Wednesday of the week the pay run is being performed. The staff member identifies the number of hours they worked, which Tom adds to their pay for the week (based on a union agreed rate of $60 per hour of overtime worked).
• Tom uses an excel spreadsheet for the pay run that automatically calculates the amount of tax that HPI needs to withhold from each persons pay as well as the net amount of pay each employee should get. Tom enters the proposed pay entry into the companys financial reporting system for the total amount of pay for that period (to record the payroll expense) and prepares an electronic fund transfer for each employees pay. When Tom has completed these tasks she alerts the finance manager, who approves the journal entry and authorizes each electronic fund transfer payment to go through.
• Tom is included as a signing authority with the bank for cheques below $500. Whenever employees have work-related expenses, they submit them to the finance manager for approval (along with their own managers approval for the expense). The finance manager also reviews the expense. If he approves the expense for payment, he provides it to Tom to prepare a cheque and to prepare an entry in the financial reporting system for the expense. Tom keeps a cheque book locked in her desk and prepares a cheque for the appropriate employee. As Tom prepares the bank reconciliation for the company each month, she would identify if a cheque was ever stolen and fraudulently deposited without receiving the proper approvals.

Required:

1. In respect of the payroll and expense controls for HSI:

i) Identify three weaknesses;

ii) Explain the implication of each weakness and

iii) Recommend a control to address each of these deficiencies;

Weakness	Implication	Recommendation