Professional Documents
Culture Documents
SM-06-9th Ed Final
SM-06-9th Ed Final
CHAPTER 6
REVIEW QUESTIONS
1. Job tickets capture the time spent on each job during the day and are used to
supervisor are then cashed by the supervisor. This type of fraud can be
4. A separate imprest account is established for the exact amount of the payroll
based on the payroll summary. When the paychecks are cashed, this account
should clear leaving a zero balance. Any errors in checks (additional checks
account and/or some paycheck would not clear. This will alert management to
5. A form of payroll fraud involves employees clocking the time cards of absent
employees. By supervising the clocking in and out process, this fraud can be
reduced or eliminated.
6. The Personnel Action Form is prepared by the Personnel Department for the
authorization of new employees and changes in job class and pay rates. It
7. The payroll clerk reconciles the information received from personnel and
production, calculates the payroll and distributes the paychecks. Further, the
8.
accounts).
clearing).
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a database.
10. Proximity cards are similar to swipe cards but don’t require the user to slide
the card through a reader. Instead, the employee places the card in front of
the reader to record attendance time. The advantage is that these cards can
12. The fixed asset system processes nonroutine transactions for a wider group
for the production function and finished goods inventories for the sales
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order to account for the apportioned acquisition cost and depreciation of the
14. The typical information found on a depreciation schedule is: type of asset,
amount, book value, and asset location. Also, a group code may be assigned.
The physical location of the asset is recorded, and the verification that this
asset exists should be performed by physically observing the asset. The date
and amount of the purchase of the asset can be verified by locating the
15. Because the fixed asset department authorizes the removal of the asset from
the general ledger, they must know when to record the authorization. Further,
if improvements or asset disposals are made and the fixed asset department
16. The auditor should review the authorization control procedures to determine
auditors should also examine the supervision controls over the physical
guarding of the assets. Lastly, the auditors should periodically verify the
location, condition, and fair value of the organization’s fixed assets against
the fixed asset records in the subsidiary ledgers. Also, the depreciation
completeness.
17. The fixed asset department provides record keeping for fixed asset inventory.
18. The fixed asset depreciation schedule shows when and how much
19. When an asset is taken out of service, the responsible manager issues a
request to dispose of it. Like any other transaction, the disposal of an asset
requires proper approval that will be determined by its nature and materiality.
situations the manager in charge of the asset may have the authority to
dispose of it.
20. Unlike production assets, fixed asset inventory is distributed widely across the
DISCUSSION QUESTIONS
1. The job ticket is used to allocate each labor hour of work to specific WIP
accounts. These job tickets are very important for cost accounting. The job
tickets are completed by production workers as they capture the total amount
of time that they spend on each production job. Upon completion, they route
these to the cost accountants who use them to post the labor costs to specific
WIP accounts such as direct labor, indirect labor and overhead. The cost
information for the general ledger clerk to make the necessary entries to the
2. Payroll costs such as wages to workers accrue each minute, hour or day that
they work. However, these costs are not recorded as a liability during the time
between when the workers earn their wages and when they are paid. These
time lags typically average from half a week to a week. This time lag is of no
concern until the firm is closing its books or preparing interim financial
directly enter time and attendance data into the system, the organization is at
risk from data entry errors and payroll fraud. Input controls reduce these risks.
For example, limit tests are used to detect excessive hours reported per
numbers. Finally, the use of biometric scanners, swipe cards, and PINs
reduce the risk of payroll fraud by ensuring that the individuals clocking into
this function to a third party, the client organization avoids the salaries and
5. One example is the reduction in the time it takes to record the receipt of
inventory into the inventory records. Further, the automated system will be
less likely to pay an invoice early, while at the same time not missing the
6. Law firms require their employees to log the amount of time spent on each
client for billing purposes. Accounting firms also require that their employees
keep job tickets for the time they spend on each client. Car repair shops are
another example. The mechanic must keep track of how much time he/she
7. The risks associated with outsourcing are nontrivial. One is that an outside
the client firm’s financial resources. Another risk is that the service provider
will have poor internal controls and/or act incompetently in a way that causes
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internal controls.
from the user or department. In the case of high-value items, there should be
a cost-benefit basis.
SUPERVISION CONTROLS.
Because capital assets are widely distributed around the organization, they
are more susceptible to theft and misappropriation than inventories that are
element in the physical security of fixed assets. Supervisors must ensure that
fixed assets are being used in accordance with the organization’s policies and
business practices.
including: the useful life of the asset, the original financial cost, proposed
cost savings as a result of acquiring the asset, the discount rate used, and
of assets.
2. The internal auditor should verify the location, condition, and fair value
of the organization’s fixed assets against the fixed asset records in the
subsidiary ledger.
10. The responsible supervisors must authorize the disposal of the computer.
11. Perform an annual physical inventory of fixed assets and adjust the records to
assets.
12. Prepare reports about the transfer of fixed assets. Perform an annual physical
inventory and note the location of assets. Budget and then hold each
department.
13. Authorize fixed asset acquisitions; part of the authorization is showing that a
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overstated and too much tax will be paid. Insurance premiums will be paid on
nonexistent assets.
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MULTIPLE CHOICE
1. C
2. C
3. B
4. A
5. B
6. D
7. C
8. E
9. B
10. C
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PROBLEMS
1. PAYROLL FRAUD
2. PAYROLL CONTROLS
time cards for terminated employees. Since the foreman also distributes
should list all current employees. Time cards for terminated or non-existent
3. PAYROLL CONTROLS
Risks:
Foremen have too much control over the human resources they are responsible for
The high degree of casual labor creates an environment that lends itself to abuse.
difficult.
Foremen distribute the paychecks to the employees, checks written for nonexistent
Controls:
4. FLOWCHART ANALYSIS
Control problems: Payroll checks appear to be drawn on the general cash account.
Recommendations:
5. SEPARATION OF DUTIES
Part 1) and 2). The tasks to be performed by Personnel and Payroll employees and
Personnel Empolyees:
Should be able to activate new employees and change the status of existing
employees including rank, pay rates (salary), full time, part-time, active, and
terminated.
Should not be able to submit time and attendance data for employees.
Payroll Employees:
Should initiate the payroll process from time and attendance data
Should not be able to view or edit performance evaluation data, health records,
Part 3) The central storage of sensitive data requires multilevel security that ensure
privacy and accuracy of data by limiting access to certain processes and data
to authorized personnel.
Risks:
Supervisor submits the personnel action form and time cards. This allows him/her to
Cash disbursements is authorizing funds transfer into the bank account and is also
Controls:
paymaster.
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Accounts Payable should approve the register and authorized payment by Cash
Disbursements.
Transaction authorization
Payroll clerk prepares paychecks without authorization from a personnel action form.
Segregation of duties
payroll.
Cash disbursements department maintains the AP ledger and approves and writes
checks.
Payroll checks and vendor check are paid through the general cash account. An
The supervisor should not distribute the paychecks to employees. This should task
Accounting records
No journal vouchers are prepared. The general ledger is being updated from source
documents.
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Risks:
The user’s authority to select vendors and prepare purchase orders without
The user’s authority to receive and validate the invoices without independent
Cash disbursements makes payment base only on the invoice from the user.
The absence of accounts payable form the process allows for the payment of
Controls:
The invoice, receiving report, and approved purchase order should be reviewed by
A fixed asset function should be implemented to account for acquisition, use, and
Risks:
Users have custody of the assets and maintain usage records. Key information
User can overstate mileage to accelerate the depreciation on a vehicle to reduce the
An over-depreciated asset can be sold at a fraction of its real value to the employee.
Controls:
Risks:
Cash disbursements makes payment base on the invoice and receiving report,
User has custody of the asset and maintains the fixed asset ledger.
Controls:
The invoice, receiving report, and approved purchase order should be reviewed by
A fixed asset function should be implemented to account for acquisition, use, and
Supervision
in a separate building and cannot observe employees checking “in” and “out.”
The inherent threat here is that employees can misstate the amount of hours
Transaction Authorization
Lack of a personnel action form from Human Resources poses a threat that
Independent Verification
distribute paychecks enables payroll fraud. Supervisors may submit time cards
for employees who no longer work or have never worked for Albright Manf.
Accounting Records
Part C, Recommendations
Supervision over the time keeping function. To reduce the opportunity for fraudulent
Employ personnel action forms to identify authorized employees and reduce the risk
of payroll fraud.
attendance records.
accounts.
4) Payroll drawn on general cash account rather than a clearing account. This
6) Foremen authorize time cards and distribute paychecks. This permits the
Part d)
Physical Controls
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audit trail.
7) Use payroll action form to verify the status of employees before preparing
paychecks.
IT Controls
1) Limit tests,
2) validation controls,
5) Error Messages
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6) File backup
c, Uncontrolled Risks
Fixed Assets
1. The department managers can misappropriate fixed assets because they have transaction
authorization responsibility, record keeping responsibility, and asset custody.
2. The firm may pay for assets that are incorrect, damaged, or not actually received because
the process lacks a formal receiving function.
3. GL records may be inaccurately prepared because of current accounting procedures.
Payroll
1. Payroll Fraud is possible because false employee time cards may be submitted by the
supervisors, who then distribute the paychecks.
2. Absence of personnel action forms allows invalid time cards to be submitted.
d. Physical Controls
Fixed Assets
3. Segregation of duties. Create a Fixed asset department with record keeping responsibility for
asset acquisition, maintenance, and disposal.
5. Cash disbursements should prepare a journal voucher for the general ledger.
Payroll
IT Controls
1) Limit tests,
2) validation controls,
5) Error Messages
6) File backup
8) Multilevel security
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c, Uncontrolled Risks
Payroll
1. Payroll Fraud is possible because employees prepare time cards manually without a time
stamp from a timekeeping clock.
2. Absence of personnel action forms allows invalid time cards to be submitted.
3. Financial assets are at risk because AP authorizes payments and writes checks.
4. GL records may be inaccurately prepared because of current accounting procedures.
Fixed Assets
1. Unnecessary fixed assets may be ordered because requests for fixed assets are informally
submitted.
2. The firm may pay for assets that are incorrect, damaged, or not actually received because
the receiving process is flawed.
3. Financial assets are at risk because AP authorizes payments and writes checks.
4. Accounting records may be in error because the open PO is not closed when goods arrive
d. Physical Controls
Payroll
1. Transaction authorization. Should use personnel action form to identify valid employees.
2. Transaction authorization. Should employ a formal timekeeping function.
3. Segregation of duties. AP should not perform Cash Disbursement department function of
check writing.
4. GL should receive approved journal vouchers.
Fixed Assets
1. Accounting Records – Implement formal procedures and documents to authorize asset
purchases.
2. Accounting Records – Purchasing should receive a copy of the receiving report to close the
open PO.
3. Implement a formal receiving department with blind copy PO
4. Segregation of duties. AP should not perform Cash Disbursement department function of
check writing.
IT Controls
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Limit tests,
Validation controls,
Error Messages
File backup
C. Uncontrolled Risks
Payroll
Fixed Assets
1) Accounting errors
Payroll
employees
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should not submit and review time cards and also distribute paychecks.
do so.
Fixed Assets
report is prepared.
Segregation of duties.
asset records.
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IT Controls
Limit tests,
Validation controls,
Error Messages
File backup
c) Uncontrolled Risks.
Payroll
1. Payroll Fraud is possible because supervisor approve time cards and distributes paychecks
2. Absence of personnel action forms allows invalid time cards to be submitted.
3. GL records may be inaccurately prepared because of current accounting procedures.
Fixed Assets
1. The firm may pay for assets that are incorrect, damaged, or not actually received because
the receiving process is flawed.
2. Financial assets are at risk because AP authorizes payments based only on the invoice
3. Accounting records may be in error because the open PO is not closed when goods arrive
3) General Ledger should not Update GL from a CD disbursement voucher. It should receive formal
Journal vouchers
Fixed Assets
1) AP should perform a three-way-match including the purchase order, receiving report, and invoice
2) General ledger should receive accounts payable summary from the AP department
3) Cash disbursements should submit a journal voucher to the general ledger department.
IT Controls
Limit tests,
Validation controls,
Error Messages
File backup
c) Uncontrolled Risks.
Payroll
1. Payroll Fraud is possible because supervisor approve time cards, submits personnel action
forms, and distributes paychecks.
2. Accounting errors and fraud because AP and Cash disbursements are not involved in the
process.
3. GL records may be inaccurately prepared because of current accounting procedures.
Fixed Assets
1. The firm may pay for assets that are incorrect, damaged, or not actually received because
the receiving process is flawed.
2. Financial assets are at risk because AP authorizes payments based only on the invoice and
packing slip.
3. Fraud is possible because the end user has sole responsibility for fixed asset acquisition,
maintenance, and disposal.
Physical Controls
Payroll
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Fixed Assets
records.
IT Controls
Limit tests,
Validation controls,
Error Messages
File backup