Question

The company controller has provided the following description of the payroll system for Sharp Manufacturing Company: 1. Each worker is provided with a unique swipe card, and each day upon arrival and departure, the employee swipes the card in a card reader where the system records the employee number as well as arrival and departure times. Each Monday morning, the data collected by the card reader are printed by a payroll clerk and then keyed into the computerized payroll system. 2. The payroll system is run every two weeks. The program updates the payroll records and prints out the employee paycheques. The cheques are imprinted with the electronic signatures of the president and vice-president, finance, at the time of printing. 3. The data processing department sends the cheques to the plant supervisors on Friday morning; they distribute them to the workers who are working that day or hold them for absent workers to pick up later. 4. The plant supervisors do the hiring and handle terminations. The data processing department is informed by the plant supervisors when a new employee has been hired or an employee leaves the company. Any changes in hourly pay are communicated directly to data processing by the plant supervisors. 5. The workers complete a job ticket for each individual production order that they work on each day. These job tickets are collected each day and sent to cost accounting, where they are used to prepare a cost distribution analysis. Required: 1. Identify four weaknesses in control procedures based on the controller’s description of the company’s payroll system. For each payroll system procedure listed, state the risk that it creates for the company and recommend an improvement in the controls to address the identified risk. Use three columns headed "Control weakness," "Risk," and "Recommendation." 2. Assess control risk for the payroll cycle at the company (one sentence is an appropriate length for your answer) 3. Provide three examples of procedures that the auditor would likely perform in response to the control risk assessment for the payroll cycle. Be sure to provide procedures that address the control issues you identified.

Answer 1

The payroll cycle at Sharp Manufacturing Company reveals several control weaknesses, including risks of human errors, fraud, unauthorised personnel changes, theft, and cheque misallocation, leading to a high control risk. Recommendations include automating data transfer, formalizing HR processes, segregating duties, and securing payment distribution. Likely auditor procedures to address these risks would include verifying accuracy of records, reviewing authorization processes, and inspecting distribution and cashing of cheques.

Step-by-step explanation:

Weaknesses in Payroll System's Control Procedures

Based on the description provided, there are several weaknesses present in the payroll system for Sharp Manufacturing Company. Listed below are the control weaknesses, the risks they pose to the company, and recommendations for improving these controls.

Control Weakness
Risk
Recommendation
Manual entry of swipe card data
Potential for human error or fraud during data entry
Automate the transfer of swipe card data to the payroll system
Plant supervisors handle hiring and terminations
Unauthorised personnel changes and risk of ghost employees
Implement a formal HR process for employment changes
Payment process lacks segregation of duties
Increased risk of theft or misallocation of funds
Separate responsibilities for payroll processing and distribution
Physical distribution of cheques by supervisors
Security risk and possibility of lost or uncollected cheques
Move to direct deposit or secure cheque distribution system

Assessment of Control Risk

The control risk for the payroll cycle at Sharp Manufacturing Company is high due to these identified weaknesses in the system.

Auditor's Procedures in Response to Control Risk Assessment

Review the authorization process for hiring, termination, and pay rate changes.

Inspect the distribution and cashing of cheques for signs of unauthorised activities.