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16-35 (Potential misstatements/tests of controls—payroll) The following questions are included in the internal control questionnaire on...

16-35 (Potential misstatements/tests of controls—payroll) The following questions are included in the internal control questionnaire on control procedures for payroll transactions in the Pena Company: 1. Are pay rates, payroll deductions, and terminations authorized by the personnel department? 2. Are time clocks and clock cards used? 3. Is there supervisory approval of time worked by each employee? 4. Are payroll checks signed and distributed by treasurer office personnel? 5. Is there internal verification of payroll checks with payroll register data? 6. Are unclaimed wages controlled by a treasurer’s office employee? 7. Is access restricted to personnel and employee earnings master files? 8. Are hirings authorized by personnel department? 9. Is time clock punching supervised? 10. Is responsibility assigned for the timely filing of payroll tax returns and payment of payroll taxes? Required a. Identify a misstatement that may occur if a No answer is given to each question. b. Identify a possible test of controls assuming a Yes answer is given to each question. (Present your answers in tabular form using separate columns for each part.)

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Expert Solution

Identify a misstatement that may occur if a No answer is given to each question

1. This would create a pay disparity, overdues of payment or over payments to the employees. Fraud of ghost employees getting paid to increase expenses and lower tax liability

2. This would lead to overtime of undertime with no supervision of employees productive hours

3. This may create dispute between workers and supervisor or person accountbale for failure in achieving targets

4. This may lead to fraud as the issue and checking department would be same

5. Disparity between the two may lead to situation where there is difference between salary to be paid and salary actually paid by collusion or mistake

6. This might misstate salaries paid in the financial statements in excess

7. If anyone can access earnings master file than it would get easy to add or modify fake employees and result in misstatement of information

8. Any department can hire anyone and there would be no control over number of employees working, there roles and their pay. Hiring should be done only by HR department

9. If there is no third person involved in punching of time clocks than this may create collusion as the employees and their supervisor may not perform their duty fully

10. Late filing of return may lead to penalties and interest as the taxes would not be paid on time.

Identify a possible test of controls assuming a Yes answer is given to each question.

1. Test of time card approvals

2. Test of time card acceptance by the supervisor

3. Test of validation of time worked by manual supervision

4. Test of system of approvals and segregation of departments and duties

5. Test of approval and validation of payroll

6. Test of proper documentation of unclaimed wages with propert signature checking of the concenred official

7. Test of segregaion of duties

8. Test of proper authorization and documentation of each employee

9. Test the duties performed by on the job supervision by auditor

10. Check that all the required return are filled by creating a master file of it along with their due dates, person responsible for them and the date on which it is paid.


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