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INTERNAL CONTROL CASES

1)

Solution for Holly Company Payroll Systems

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C. Control Weaknesses
1) Supervision Timekeeping process is unsupervised
2) Segregation of Duties Accounting Department Prepares Paychecks
3) Segregation of Duties Accounting department maintains both sub and GL
accounts
4) Accounting Records Payroll drawn on general cash account
5) Segregation of Duties Accounting clerk prepares and signs paychecks
6) Segregation of Duties Foremen authorize time cards and distribute
paychecks
7) Transaction verification - Payroll clerk prepares paychecks without
authorization from a personnel action form.

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d) IT Contols

e. Student solutions should address the following:

1) Provide supervision over timekeeping Process
2) Paychecks should be prepared by Payroll Department
3) Create separate GL function or provide access control to GL
4) Establish separate cash disbursement department
5) Establish an Impress account for payroll
6) Employ a paymaster to distribute paychecks to employees
7) Verify the status of employees before preparing paychecks.

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2.

Solution for Walker Books, Inc.Payroll and Fixed

Asset Systems

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C. Control Weaknesses
Payroll System

1) Supervision Timekeeping process is unsupervised

2) Transaction verification - Payroll clerk prepares paychecks without
authorization from a personnel action form.

3) Segregation of Duties Accounts Payable department has access to

accounting records and also writes checks.
Fixed Asset System
1) Accounting Records Requests for fixed assets are informally submitted
2) Accounting Records Open PO is not closed when goods arrive
3) Supervision/Accounting Records Blind copy of PO should be provided to
the receiving clerk.

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4) Segregation of Duties Accounts Payable department has access to

accounting records and also writes checks.

D.
IT Controls

E. Flowcharts for this part of the case will vary. Solutions should address the issues
presented in part C of the case.

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3. Solution for Steeles Payroll and Fixed Assets

a, b, see following pages.

c,
ControlWeaknessesFixedAssetSystem
1. Segregation of duties necessary for asset acquisition, maintenance, and
disposal (departmental manager has charge of all decisions).
2. Need fixed assets department to authorize the managers asset functions.
3. No receiving department to prepare a receiving report for AP to match
with purchase order, etc.

ControlWeaknessesPayrollSystem
1. Should have personnel action form (prevents submitting time cards for
past employees, transaction authorization of time cards).
2. Time-keeping and personnel function should be separated from
supervisor, so pay rates are less likely to contribute to fraud.
3. Supervisor does the time card verification and collecting and distributing
of paychecks. This allows the supervisor to verify paychecks for false
employees and collect them for him/herself. A paymaster should take
responsibility to verify and distribute checks to ensure no checks from
non-existing employees.
4. AP should not review Cash Disbursement department activities regarding
accuracy of paycheck amounts and creating voucher packet.
5. No (verified) journal voucher from cash disbursement sent to general
ledger.

d,

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e,
Student solutions will vary for this part of the case. They should
address the internal control issues presented in part C.

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4. Solution for Music Source, Inc.Payroll and

Fixed Assets

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C. Internal Control Weaknesses

Payroll
1) Transaction Authorization Employees Validate their own time cards
2) Segregation of duties Supervisors should submit time card and also
prepare personnel action forms that authorize employees to be paid.
3) Independent Verification The AP department should be in the process
to authorize cash disbursements to write the payroll check.
4) Independent Verification The general ledger department should
receive a journal voucher from cash disbursements and an account
summary from the AP department.
5) Cash disbursements should prepare a single payroll check that is
deposited into an imprest account to cover the paychecks.

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Fixed Assets
1) Accounting Records No formal receiving report is prepared
2) Independent Verification No three way match is performed. Missing a
receiving report.
3) Segregation of Duties AP should not also update the FA inventory
records.
4) Segregation of Duties The end user should not be solely responsible
for determining asset disposal. Need a fixed asset department to
manage authorization, maintenance and disposition of fixed assets.
D.
IT Controls

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5)

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5.

Solution for Green Mountain Coffee Roasters,

Inc.Payroll and Fixed Asset
Systems

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C. Internal Control Weaknesses

Payroll
1) Transaction Authorization No personnel action report to validate employees
2) Segregation of duties Supervisors should not submit and review time cards
and also distribute paychecks.
3) Segregation of duties The AP department should not be writing checks.
They should authorize cash disbursements to do so.
4) Accounting Records No journal record of the cash disbursement
5) Independent Verification The general ledger department should receive a
journal voucher from cash disbursements and an account summary from the
AP department.
Fixed Assets
1) Accounting Records PO is never closed when goods arrive
2) Independent Verification No formal receiving report is prepared.
3) Segregation of Duties AP should not also update the FA inventory records.
4) General Ledger should receive a journal voucher from Cash Disbursements
5) Segregation of Duties The end user should not be solely responsible for
determining asset disposal. Need a fixed asset department to manage
authorization, maintenance and disposition of fixed assets.

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D.

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6.