Question

Lakeview Builders is a construction company (building houses, offices, and hotels) employing a large number of workers on various construction sites. The internal audit department of Lakeview Builders is currently reviewing cash wages systems within the company. The following information is available concerning the wages systems:

(a) Hours worked are recorded using a clocking in/out system. On arriving for work and at the end of each day’s work, each worker enters their unique employee number on a keypad.

(b) Workers on each site are controlled by a foreman. The foreman has a record of all employee numbers and can issue temporary numbers for new employees.

(c) Any overtime is calculated by the computerized wages system and added to the standard pay.

(d) The two staff in the wages department make amendments to the computerized wages system in respect of employee holidays, illness, as well as setting up and maintaining all employee records.

(e) The computerized wages system calculates deductions from gross pay, such as employee taxes, and net pay. Finally, a list of net cash payments for each employee is produced. (f) Cash is delivered to the wages office by secure courier.

(g) The two staff place cash into wages packets for each employee along with a handwritten note of gross pay, deductions and net pay. The packets are given to the foreman for distribution to the individual employees.

Required:

(1) Identify and explain deficiencies in Lakeview Builders system of internal control over the wages system that could lead to misstatements in the financial statements

(2) For each deficiency, suggest an internal control to overcome that deficiency.

(3) Compare the responsibilities of the external and internal auditors to detect fraud

Answer 1

1) In the whole process of internal controls over the wages system, there are certain deficiencies:

1. The whole process is computerized except the feeding of the holidays, illness and the setting up and maintaining all employee records . This feeding system should be stopped and made computerized to avoid any fraud.
2. The computer wages drawing system should be kept under proper security to avoid fraud.
3. The packaging of the cash packets is through the staff people, so proper watch should be kept to avoid any kind of fraud.

2) To avoid the fraud, the deficiencies should be controlled through:

1. The computer has to lift the holidays and illness holidays through the clocking in/out system.
2. The Human resource manager should keep the password of the wages packages with him/her.
3. The packaging of cash should be under the supervision of senior official.

3) The responsibilities of the external and internal auditors to detect fraud are:

1. To go through the system each and every time, so that any kind of suggestion could be updated.
2. Any fraud or deficiency detected should be rectified and systematized so that it should not be repeated.
3. Rectification of the mistakes and frauds should be under the supervision of the management, so that appropriate non-repeated system could be established.
4. The audit of the wages system should be done periodically, so that all kinds of mistakes are tackled on time.

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