Question

Rossi Industries has payroll processes as described in the following paragraphs:

When a new employee is hired, the human resources department completes a personnel action form and forwards it to the payroll department. The form contains information such as pay rate, number of exemptions for tax purposes, and the type and amount of payroll deductions. When an employee is terminated or voluntarily separates from Rossi, the human resources department completes a personnel action form to indicate separation and forwards it to the payroll department.

Each employee in the production department maintains his own time card weekly. Employees fill out their time cards in ink each day, and at the end of the week, the time cards are forwarded to the payroll department. Employees in the payroll department use the time cards and employee records to prepare a weekly paycheck for each employee who has turned in a time card. A copy of the payroll checks is forwarded to the accounts payable department, and the original payroll checks are forwarded to the cash disbursements department to be signed. The payroll department updates the payroll subsidiary ledger. After the paychecks are signed, they are given to department supervisors to distribute. Any unclaimed checks are returned to the payroll department.

 

Required:

a. Prepare a process map of the payroll processes at Rossi.

b. Identify both internal control strengths and internal control weaknesses of the payroll processes.

c. For any internal control weaknesses, describe suggested improvements.

Answer 1

STRENGTHS
There is a separate HR department involved in hiring and terminations, including the completion and approval of documents related to hiring and terminations.
Hiring, terminations, and pay rate changes are all initiated by HR on personnel action forms. This creates proper approval and an audit trail.
Two copies of each paycheck are generated: the original is forwarded to cash disbursements and a copy goes to accounts payable.
Cash disbursements, not payroll signs the checks.

The payroll department, the proper department to do so, is updating the payroll ledger.
 
WEAKNESSES
An automated time keeping system would be more accurate and less susceptible to fraud.
There is no supervisory approval of time cards.
There is no reconciliation or independent check of employee hours worked.
There is no separate payroll checking account.
There is no mention of vouchers for payroll that are forwarded to cash disbursements so that a check can be written to the payroll account for the total of the payroll.
There is no independent paymaster to distribute checks.
Unclaimed checks are returned to payroll, not a paymaster.
 
c.

Purchase and use an automated time keeping system.
Have supervisors approve time cards before they are forwarded to payroll.
There should be a reconciliation to job cards or an independent verification of hours worked.
Use a separate bank account for payroll.

Accounts payable should prepare a voucher for the total payroll amount and cash disbursements would write a check to be deposited in the payroll account.

An independent paymaster should distribute checks.
Unclaimed checks should go to a department not involved in the authorization or preparation of paychecks. For example, they could be returned to internal audit.