Question

Glazer Company is a small manufacturing firm with 60 employees in seven departments. When the need arises for new workers in the plant, the departmental manager interviews applicants and hires on the basis of those interviews. The manager has each new employee complete a withholding form. The manager then writes the rate of pay on the W‐4 and forwards it to payroll.

When workers arrive for their shift, they pull their time cards from a holder near the door and keep the time card with them during the day to complete the start and end times of their work day. On Friday, the time cards are removed from the holder and taken to payroll by any employee who is not busy that morning. If there were any pay rate changes for the payroll period due to raises or promotions, the manager calls the payroll department to inform payroll of these rate changes.

Using the rate changes and the time cards, the payroll department prepares the checks from the regular bank account of the Glazer Company. The manager of the payroll department signs the checks, and the checks are then forwarded to each department manager for distribution to employees.

 

Required:

Describe any improvements you would suggest to strengthen the payroll internal controls at Glazer.

Answer 1

Currently, the department managers hire employees and distribute paychecks. This gives managers the opportunity to create fictitious workers and have custody of those checks. The improvement would include two things. Final hiring approvals should be in the HR department, not the department managers. Paychecks should be distributed by independent paymasters, not the department managers.
 
Currently, the pay rate is written on the employee W-4 by the department manager. The HR department should determine pay rates.
 
Time cards are now kept in a holder near the door and workers keep them all day. This gives employees too much opportunity to misuse time cards. They can easily be stolen, altered, or use for “buddy punch” where an employee clocks in for his buddy. Time cards should be more secure or the company should use a more advanced solution such as automated time keeping through ID badges or biometric time recording.
 
Currently, the time cards are removed fro the holder on Friday and taken to payroll by “an employee who is not busy”. Two improvements are needed. First, the supervisor should review and approve each time card. Second, there should be a designated person charged with delivering time cards to payroll.
 
Rather than the manager calling the payroll department to report pay rate changes, there should be written documentation of pay rate changes using a personnel action form. Without such documentation, there is no audit trail of rate changes. In addition, a manager may suggest rate changes, but final approval should occur in the HR department.
 
The company should use an imprest payroll account for paychecks rather than the regular checking account.
 
There is no mention of the cash disbursements department approving a check from the regular account to be deposited in the payroll account. This should occur if a separate payroll account exists.

There is no mention of the cash disbursements department approving a check from the regular account to be deposited in the payroll account. This should occur if a separate payroll account exists.