III. Inrernal Control: Transaction Cycles - Payroll Cycle Flashcards
Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?
Approving a summary of hours each employee worked during the pay period.
A large retail enterprise has established a policy which requires that the paymaster deliver all unclaimed payroll checks to the internal auditing department at the end of each payroll distribution day. This policy was most likely adopted in order to
Detect any fictitious employee who may have been placed on the payroll.
Why?
The issuance of payroll checks for individuals who either never did work for the firm or who did work for the firm and have resigned may be detected by this procedure since no one will pick up the check.
This is why the paymaster would send it to the internal auditing department
In meeting the control objective of safeguarding of assets, which department should be responsible for
Distribution
of paychecks
Custody of
unclaimed paychecks
These custody functions should not be performed by the payroll department which is a recordkeeping function.
Treasurer should be the one because they have custody function.
Remember:
Under proper internal control recordkeeping, custody, and authorization of transactions should be segregated.
To minimize the opportunities for fraud, unclaimed cash payroll should be
Deposited in a special bank account.
Why?
best procedure is to deposit the unclaimed cash in a special bank account, thereby relieving the client of physical control.
In determining the effectiveness of an entity’s controls relating to the existence or occurrence assertion for payroll transactions, auditor most likely would inquire about and
Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
Note:
by Proper segregation of duties between personnel and payroll disbursement eliminates many frauds in which “phantom” employees are being paid.
The auditor may observe the distribution of paychecks to ascertain whether
Employees of record actually exist and are employed by the client.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
The hiring of personnel is an authorization function while the distribution of checks is a custody function.
- Thus, in order to properly segregate authorization from custody, these duties should not be performed by the same individual. The combination of these two functions in the same position would create the possibility of the addition of a fictitious employee to the payroll and subsequent misappropriation of paychecks.
What control most likely could help prevent employee payroll fraud?
The personnel department promptly sends employee termination notices to the payroll supervisor.
Proper internal control over the cash payroll function would mandate which of the following?
Each employee should be asked to sign a receipt.
One of the auditor’s objectives in observing the actual distribution of payroll checks is to determine that every name on the payroll is that of a bona fide employee. The payroll observation is an auditing procedure that is generally performed for which of the following reasons?
(What this question is saying that, the reason why an auditor would generally perform payroll observation is because of what?)
The various phases of payroll work are not sufficiently segregated to afford effective internal control.
Why?
Typical problem in the payroll area is the apparent existence of fictitious employees which may arise due to inadequate segregation in the payroll area. The observation of a payroll distribution should detect any such irregularity.
In the audit of which of the following types of profit-oriented enterprises would the auditor be most likely to place special emphasis on testing the controls over proper classification of payroll transactions?
A manufacturing organization.
Why?
A manufacturing organization would require a portion of the salaries paid to be inventoried in the manufactured product. Therefore, proper classification of payroll transactions would be very important in order to properly determine the correct portion of salaries to be included in inventory.
What type of control is the payroll department consider to fall under?
Recordkeeping
Note: The payroll department, which is essentially a recordkeeping function, should not also authorize payroll rate changes.
Remember:
Under strong internal control recordkeeping, authorization, and custody over assets should be segregated.
Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?
Personnel
Why?
has the primary objective of planning, controlling and coordinating employees, will determine that proposed salary increases (often recommended by supervisors of employees) are consistent with the company’s salary guidelines and will approve changes in deductions.
The proper use of prenumbered termination forms by the payroll department should provide assurance that all
Terminated employees are removed from payroll.
What are some responsibilty of the payroll department supervisor?
- Reviewing and approving time reports for subordinate employees.
- Hiring subordinate employees.
- Initiating requests for salary adjustments for subordinate employees.
Note:
Distributing payroll checks to employees. is not one of them - that is the responsibilty of the treasurer
