Question

Explain the implication and provide a recommendation.

To prepare this analysis, use the following table structure: Weakness Implication Recommendation

Payroll cycle:

• Employee payroll and master file information (such as pay rates and benefit rates) is maintained in a spreadsheet.

Answer 1

It is easy and automatic to perform payroll functions by using a computer. Computerised payroll systems provide a number of payroll reports for auditing and documentation. They can automatically accrue paid time off and other employee benefits based on time worked. They also offer security through hand, eye recognition time clock systems and fingerprints. This prevents reporting of false work time.

The main disadvantage is that they are vulnerable due to dishonest employees who have access to and administrative rights to those systems.

Payroll systems use employee codes individually or other methods to provide information regarding own hours worked by employees. There is a chance of falsely clock in for another by using another employees code.

So, we should maintain employee handbooks by clearly stating proper clocking in and out and consequences for falsely entering information.

Human Resource should establish procedures for requesting time off and employee pay rates changes. For all transactions effecting employees rate of pay or payroll processing,signatures should be taken.

Normally Human Resource’s is responsible for setting up new employees in payroll systems, distributing paycheques and processing payroll data.

Entering data and processing paycheques should be split between Human Resource and accounting. So that one person cannot complete the payroll cycle without scrutiny. If there is no such separation of responsibility, then there is a chance of dishonest employees setting up falsely employee worked hours, vacation hours and divert the funds to their personal accounts through direct deposits. Diverting money can be minimised only when one department records the data and the other process the payroll data and receives the paycheques.

Payroll review should be implemented by an employee or department other than those responsible for payroll processing. Terminated employees who still receive paycheques, inordinate amounts of hours worked or vacation hours posted can indicate processing errors and data manipulation.

Due to this, deliberate attempts of diverting funds go unnoticed without time for a quick audit.

There should be systematic internal audits to be conducted quarterly. The accounting and finance department should train employees to conduct an internal payroll audit.

Most employees who divert large amounts of money do so over time. Periodical audit of payroll and accounting functions helps in finding a dishonest employee from setting up a scheme to defraud his employer and thus reduce losses.