Bronze Industries (Sep/ Dec 15)

(a) FIVE KEY CONTROLS (5mks)

1. Factory staff are each issued a sequentially numbered clock card which details their employee
number and name. This should ensure the completeness and accuracy of information
processing as employees are only paid for hours they have worked and-that the payroll records
record completely all employees, as any gaps in the sequence would be identified.

2. Clock card data links into the payroll system, which automatically calculates gross and net pay
along with any statutory deductions. This reduce the risk of error occurring, reduce the risk of
employee’s wages statutory deduction recorded incorrectly.

3. The payroll supervisor for each payment run checks on a sample basis some of these
calculations to ensure the system is operating effectively. This test the automated control
within the system.

4. Bronze has a human resources department which is responsible for setting up new permanent
employees and leavers. Having a segregation of roles between human resources and payroll
departments reduces the risk of fictitious employees being set up and also being paid.

5. Discretionary bonus of the staff are communicated in writing by the production supervisors to
the payroll department. As this is in writing rather than verbal, this reduces the risk of the bonus
being recorded at an incorrect amount in the payroll records.

6. For employees paid by bank transfer, the payroll manager reviews the list of payments and
agrees to the payroll records prior to authorizing the bank payment. This reduces the risk of
fraudulent payments being made through the creation of fictitious employees and other
employees being omitted from the payment run.

(b) SIX internal control DEFICIENCIES of Bronze Co’s payroll system and RECOMMENDATIONS
(12mks)

control DEFICIENCIES RECOMMENDATIONS

1. Employees swipe their clock cards at the  Should be supervised by a responsible
beginning and end of the eight-hour shift and official to prevent from one clocking for
this process is not supervised. many others

An individual help swiping multiple cards to
fake the attendance of multiple employees.
Substantially increased payroll cost.
2. During the shift employees are entitled to a 30-
minute paid break and employees do not need
to clock out to access the dining area.
Employees might take excessive break resulting
decrease in productivity and increase in payroll
cost.
 Supervisor should randomly check the
employees by reviewing who has logged in
and confirm their presence visually.
Employees should be allocated set break times
and there should be a supervisor present to
ensure that employees only take the breaks
they are entitled to.
3. Appointments of temporary staff are made by All appointment of staff should be done by HR
factory production supervisors. dept.

The supervisor could appoint unsuitable

employees and may not carry out all the
required procedures for new joiners.
This could result in these temporary employees
not receiving the correct pay and relevant
statutory deductions.
4. Overtime reports which detail the amount of All overtime should be authorized by a
overtime worked are sent out quarterly by the responsible official prior to the payment being
payroll department to production supervisors processed by the payroll department.
for their review.
This authorization should be evidenced in
Review is done after the payments have been writing.
made which could result in unauthorized
overtime or amounts being paid incorrectly and
Bronze's payroll cost increasing.
5. the production supervisors determine the The bonus should be determined by a more
discretionary bonus amounts to be paid. senior individual, such as the production
director, and this should be communicated in
Production supervisors are not senior enough writing to the payroll dept.
to determine this as they could pay extra
bonuses to friends or family members.
6. The bonus is input by a clerk into the system. All the entries done by the clerk should be
double checked with written confirmation and
There is no indication that input are reviewed. reviewed by another team member to identify
This could result in input error by the clerk or incorrect entries.
the clerk could fraudulently change the amount
which may lead to increase in payroll costs.

7. For employees paid by bank transfer, the
payroll manager reviews the list of payments
and agrees to the payroll records prior to
authorizing the bank payment. If any changes
are required, the payroll manager amends the
records.
Payroll manager should not be able to process
the amendment as well as authorization.
Authorisation should be done by individual
outside of payroll dept such as finance dept

Lack of segregation of duties as manager could

fraudulently change the amount to be paid to
favorable persons which may lead to increase in
payroll costs.
8. clerk distributes them to employees; as she Clerk should distribute the wages upon sight of
knows most of these individuals, she does not employee’s ID as the proof of confirmation.
require proof of identity.
 Without the proof of identity, there is still a risk
that wages can be paid to the incorrect
employees although clerk knows most of the
employees.

(c) substantive ANALYTICAL PROCEDURES to confirm Bronze Industries Co's payroll expense (3mks)
1. Compare the total payroll expenses to prior year amount and discuss with/ enquire management
on any significant fluctuation.

2. Review monthly payroll expense to prior year and budget and discuss with/ enquire management
on any significant variance.

3. Compare percentage of OT pay by normal pay and compare with prior year to investigate
whether it is within acceptable range. Discuss with Mgt if significant fluctuation is investigated.

4. Perform proof in total of wages and salaries, new joiner, leaver and any pay increase and
compare to actual wages and salaries in the FS. Discuss with Mgt if significant fluctuation is
investigated.