Question

SOALAN/ QUESTION 2

Toyyib Biz employs 500 production, maintenance and janitorial workers in eight separate departments. In addition to supervising operations, the supervisors of departments are responsible, for recruiting, hiring and firing workers within their areas of responsibility. The organization attracts casual labour and experiences a 15 to 25 percent turnover rate in employees per year.

Toyyib Biz designs specialised procedures for payroll process, which is separated from general purchasing and disbursement procedures. The payroll procedures for Eximus Company, are as follows. Employees clock on and off the job each day to record their attendance on time cards. Each department has its own clock machine located in an unattended room away from the main production area.

Each week, the supervisors gather the time cards, review them for accuracy, sign and submit them to the payroll department for processing. In addition, the supervisors submit personnel action forms to reflect newly hired and terminated employees. From these documents, the payroll clerk prepares payroll checks and updates the employee records. The supervisor of the payroll department signs the paychecks and sends them to the department supervisors for distribution to the employees. A payroll register is sent to the AP for approval. Based on this approval, the cash disbursements clerk transfers funds into a payroll clearing account.

Dikehendaki / Required:

a. Discuss three reasons why Toyyib Biz needs to create specialised procedures for payroll process.

(9 markah/marks)

b. Discuss two risks for the payroll fraud in the Toyyib Biz payroll system. For each risk, suggests how control procedures could be implemented to reduce the risks.

(12 markah/marks)

c. Describe an internal control that would prevent an employee from removing a computer and then reporting it as scrapped.

(4 markah)

(Jumlah markah/Total marks = 25)

Answer 1

Answer a)

3 reasons why Toyyib biz needs to create specialized procedures for pay roll process:

Employees are considered the most important resource of the organisation. Thus companies spend copious amounts of time recruiting, training and maintaining sufficient employment for their business operations. One of the most important tasks thus is processing of their payroll. Employees need to be able to rely on being paid on a consistent basis without delays. Irrespective of the size of the organisation, payroll plays a huge role in maintaining the morale of employees to the financial stability of the company.

i) Determine compensation

Payroll shows an employee what his net worth is within the company. Every individual’s total compensation is built into payroll. This covers everything from their salary, benefits to bonuses, increments. Usually everyone has to go annual performance evaluations by their managers after which they are either given an increase in their salary or a bonus or both.

ii) Increase morale

Out of all the aspects of payroll, one of the most important is its impact on employee morale. If at any point of time payroll is late, employees may begin to question the company’s financial integrity. It may eventually lead to employees to start underperforming and be less engaged in their job if they feel it is not secure. They may also look for better opportunities and leave the company without prior warnings. Thus it is necessary that payroll be paid in a timely manner to keep employee morale high.

iii) Maintain company reputation

Apart from all the financial obligations that the companies has towards its employees, they also have to ensure that all payroll activities adhere to the country's tax obligations and comply with employment legislations. Efficiently being able to meet these tax obligations on time as well as upholding of legislative laws is a sure way to establish the organisation's reputation as a stable employer. It is well proven to be a value-added branding proposition which helps to ultimately attract and retain the right pool of talent to the organisation.

answer b)

2 risks of payroll fraud in toyyib biz payroll system and control procedures to reduce them:

1. Ghost Employees

No, these aren’t the Employees of Christmas Past, Present and Future. They’re either employees on paper only, are dead but kept on the payroll, or they’re real people who don’t even work at the business that’s sending out paychecks to them. The last of the three ghosts splits the fraudulent profits with a person inside the company who is committing the crime… almost always the person who manages payroll.

1. Hour Padding

Padding hours is a nice way of saying that someone is lying about the time they actually worked. If you still use paper time cards or let employees enter their time another manual way, this is easy fraud to perpetrate. Especially if there’s little managerial oversight or the employee works remotely.

Control procedures to reduce payroll risk:

1. Audits, change logs, segregation of duties.

To control the access to data, it’s important to ensure you have an independent auditor periodically look at your books. You should also only allow changes to important employee information by staff with password access that’s tracked to the minute. And when it comes time to process payroll, have one person prepare, another to authorize and another to actually run the checks.

1. Calculation controls

If you manually run payroll, always have someone as backup to review the numbers. Be sure to include hours worked, pay rates, deductions and withholdings in your review.

3. Check payment controls

Be sure to remove check authorizers when they leave the company. Hand checks to employees to prevent paying those ghost employees. Pay employees from a separate checking account that mirrors exactly what you’re calculating on the books.

4. Regular Variance Analyses

You should run payroll variance analyses monthly. Be sure to split the data by department, function or division and run the results against your budget and prior year. See any major changes without an explanation? Investigate! To find additional outliers, try looking at salary per FTE, payroll tax ratios and employee benefits ratios. Be sure to consider running these payroll reports for error-free payruns.

answer c)

Know your employees and examine behavior changes: Always verify employee references before hiring. Also, consider the need for conducting other background checks as appropriate, including but not limited to the need for credit information, motor vehicle reports, and criminal searches. Many white-collar crimes go unreported and continue to be repeated. Watch for trouble signs: possible substance abuse, change in lifestyle, living beyond means, possessiveness of work, or not taking vacations.