Question

The Chesapeake Grocery Store is a small local grocery that only carries fresh produce, poultry, and meat that are grown or raised in the 50-mile radius of the grocery. The store also carries other typical grocery items (such as packaged and canned goods). The owner of the grocery, George Lampe, employs about 35–40 people. You are a local CPA with a small firm in the Chesapeake area, and George has retained you as his independent auditor. You are currently reviewing the store’s procedures for preparing and distributing the monthly payroll. You’ve identified the following procedures:

Each Monday morning, the managers of the various departments (e.g., produce, meat, etc.) turn in their employees’ time cards for the previous week and a summary report of the total for each employee to the store’s accountant (Charlie Huff).

Each month, Charlie accumulates the total hours worked by each employee for the month and enters the information in his computer. Charlie uses an Excel spreadsheet.

Charlie’s spreadsheet contains such things as each employee’s social security number, exemptions claimed, hourly wage rate, year-to-date gross wages, and FICA taxes withheld.

Charlie prints out a payroll register indicating each employee’s gross wages, deductions, and net pay each month.

Charlie uses the payroll register to print checks for each employee and distributes the checks on the last day of the month.

To date, you have been unsuccessful in persuading George or Charlie to use a software solution or to outsource the payroll function. You’ve also recommended that the store consider direct deposit for each employee’s pay.

Requirements

Assume that the store’s management refuses to change its current system of paying the employees. What risks do you see in this situation? Identify any internal controls that might mitigate the risks you identify.

Next, search the Web to see if you can find a software solution that you might recommend to George for the grocery store for the payroll. Defend your choice of software.

Now assume that George is willing to consider outsourcing the payroll function. What would you recommend? Why?

Answer 1

The whole payroll function can be broken down into various stages from risk point of view.

1. When respective departmentalmanager makes time card entry => At this point of time there is possibility of collusion between the employee and the manager in order to exaggerate the wage if wage is paid on the basis of time and they may distribute the exaggerated AMT. Amonth themselves.

Internal control => To prevent such kind of risk access of employees must be electronically recorded i.e. they must be granted access on the basis of I'd cards also biometric entrance may be enabled which act as full proof internal control but since it is a small grocery use of biometric system may be expensive and it's cost may exceed the desired benefit.

2) second stage where there is risk is where departmental manager submit there report and time card to account chief after a week. At this point of time it may be possible that the employees may cross cut the original number of hours entered into the time card by the departmental manager and since it is submitted after a week such cross cutting may remain unnoticed by the manager

Internal control => In such a case store's accountanl Charlie should either not accept such time card or report or accept only when such cross cutting is counter signed by respective departmental manager.

3) Third stage is at the level of accountant charlie when he process payroll on the basis of data stores in spreadsheet in such a situation any perpetrator may change the data already stored in spreadsheet.

Internal control => in order to avoid such a situation spreadsheet should be equipped with password so as to restrict it's access and access to spreadsheet should be granted only to authorised personnel.

Software which can be recommended for payroll processing is SUREPAYROLL. The reason for it's selection are enumerated as follows:-

a) Runs payroll anywhere and anytime.

b) US based customer service so easy understanding and availability.

c) Even weekends and evenings support.

d) Fast set up and flexible payroll option.

Following are the factors that must be consider before outsourcing payroll function are :-

a) Generally payroll function is outsourced by the org. having high workforce variations and peculiarities, if everything is simple and straightforward then it may be managed inhouse

b) Within payroll management software we have many sensitive info. Including employee social security number, bank details, salary information so it must be ensured that payroll service provider have strong data protection protocol.

c) Outsourcing cost should not exceed the cost of managing payroll function in-house.

So , all these factors must be recommended to George before considering outsourcing function.