Chapter 6 page 3

CHAPTER 6

THE EXPENDITURE CYCLE PART II:

PAYROLL PROCESSING AND

FIXED ASSETS PROCEDURES

REVIEW QUESTIONS

1. Job tickets capture the time spent on each job during the day and are used to

allocate the labor charges to the WIP account.

2. The personnel department, through the personnel action form authorizes

changes to employee pay rates.

3. A form of payroll fraud involves a supervisor submitting fraudulent time cards

for nonexistent employees. The resulting paychecks, when given to the

supervisor are then cashed by the supervisor. This type of fraud can be

reduced or eliminated by using a paymaster to distribute paychecks to

employees in person. Any uncollected paychecks are then returned to payroll.

4. A separate imprest account is established for the exact amount of the payroll

based on the payroll summary. When the paychecks are cashed, this account

should clear leaving a zero balance. Any errors in checks (additional checks

or abnormal amounts) would result in a non-zero balance in the imprest

 Chapter 6 page 4

account and/or some paycheck would not clear. This will alert management to

the problem so corrective action can be taken.

5. A form of payroll fraud involves employees clocking the time cards of absent

employees. By supervising the clocking in and out process, this fraud can be

reduced or eliminated.

6. The Personnel Action Form is prepared by the Personnel Department for the

authorization of new employees and changes in job class and pay rates. It

enables the Payroll Department to prepare a list of currently active

employees. Any submission of time cards by supervisors for fictitious or ex-

employees should thus be detected.

7. The payroll clerk reconciles the information received from personnel and

production, calculates the payroll and distributes the paychecks. Further, the

payroll clerk sends summary information to the accounts payable clerk.

8.

a. time cards, job tickets, and disbursement vouchers.

b. journal information which comes from the labor distribution

summary and the payroll register.

c. subsidiary ledger accounts (employee records and expense

accounts).

d. general ledger accounts (payroll control, cash, and payroll

clearing).
 Chapter 6 page 5

9. Biometric time clocks verify employees’ identities by using fingerprint or hand-

vein scan technology. To protect employee privacy, these devices use a

mathematical algorithm for verification rather than storing actual fingerprints in

a database.

10. Proximity cards are similar to swipe cards but don’t require the user to slide

the card through a reader. Instead, the employee places the card in front of

the reader to record attendance time. The advantage is that these cards can

be read through wallets, purses, and card holders..

11. 1. Process the acquisition of fixed assets as needed and in

accordance with formal management approval and procedures;

2. Maintain adequate accounting records of asset acquisition, cost

description, and physical location in the organization;

3. Maintain accurate depreciation records for depreciable assets in

accordance with acceptable methods;

4. Provide management with information to help them plan future

fixed asset investments; and

5. Properly record the retirement and disposal of fixed assets.

12. The fixed asset system processes nonroutine transactions for a wider group

of users in the organization than the expenditure cycle. Further, the

expenditure cycle processes routine acquisitions of raw materials inventories

for the production function and finished goods inventories for the sales
 Chapter 6 page 6

function. The expenditure cycle transactions are oftentimes automatically

approved by the system, while fixed asset transaction approvals typically

demand individual attention due to the uniqueness of the transactions.

Additionally, fixed asset systems must include cost allocation procedures in

order to account for the apportioned acquisition cost and depreciation of the

fixed asset. This is not required as part of the previously discussed

purchasing system, which handles inventory acquisitions that represent

current-period expenses only.

13. Asset acquisition, asset maintenance, and asset disposal.

14. The typical information found on a depreciation schedule is: type of asset,

description, month, current depreciation amount, accumulated depreciation

amount, book value, and asset location. Also, a group code may be assigned.

The physical location of the asset is recorded, and the verification that this

asset exists should be performed by physically observing the asset. The date

and amount of the purchase of the asset can be verified by locating the

original purchase order and invoice amount for the asset.

15. Because the fixed asset department authorizes the removal of the asset from

the general ledger, they must know when to record the authorization. Further,

if improvements or asset disposals are made and the fixed asset department

is unaware, then the depreciation amounts calculated and reported in the

financial statements will be incorrect.

16. The auditor should review the authorization control procedures to determine

the reasonableness of authorizations used for acquisition of fixed assets. The

 Chapter 6 page 7

auditors should also examine the supervision controls over the physical

guarding of the assets. Lastly, the auditors should periodically verify the

location, condition, and fair value of the organization’s fixed assets against

the fixed asset records in the subsidiary ledgers. Also, the depreciation

schedules should periodically be analyzed to determine the accuracy and

completeness.

17. The fixed asset department provides record keeping for fixed asset inventory.

18. The fixed asset depreciation schedule shows when and how much

depreciation to record. It also shows when to stop taking depreciation on fully

depreciated assets. This information in a management report is also useful for

planning asset retirement and replacement.

19. When an asset is taken out of service, the responsible manager issues a

request to dispose of it. Like any other transaction, the disposal of an asset

requires proper approval that will be determined by its nature and materiality.

In some cases multiple levels of management may be involved, in other

situations the manager in charge of the asset may have the authority to

dispose of it.

20. Unlike production assets, fixed asset inventory is distributed widely across the

organization. Individual items such as automobiles, computers, and office

furniture are in the custody of the end-users.

 Chapter 6 page 8

DISCUSSION QUESTIONS

1. The job ticket is used to allocate each labor hour of work to specific WIP

accounts. These job tickets are very important for cost accounting. The job

tickets are completed by production workers as they capture the total amount

of time that they spend on each production job. Upon completion, they route

these to the cost accountants who use them to post the labor costs to specific

WIP accounts such as direct labor, indirect labor and overhead. The cost

accountant prepares a labor distribution summary which contains the

information for the general ledger clerk to make the necessary entries to the

general ledger accounts.

2. Payroll costs such as wages to workers accrue each minute, hour or day that

they work. However, these costs are not recorded as a liability during the time

between when the workers earn their wages and when they are paid. These

time lags typically average from half a week to a week. This time lag is of no

concern until the firm is closing its books or preparing interim financial

statements. At these points, however, estimates or accruals of the amounts

owed should be made and the books should be adjusted.

3. In a mobile and/or distributed workforce environment in which employees

directly enter time and attendance data into the system, the organization is at

risk from data entry errors and payroll fraud. Input controls reduce these risks.

For example, limit tests are used to detect excessive hours reported per

period. Also, check digits detect transcription errors in employee identification

 Chapter 6 page 9

numbers. Finally, the use of biometric scanners, swipe cards, and PINs

reduce the risk of payroll fraud by ensuring that the individuals clocking into

the system are valid employees.

4. The primary advantage of payroll outsourcing is cost savings. By transferring

this function to a third party, the client organization avoids the salaries and

benefit costs of running an in-house payroll department. Also, the cost of

continuing education for payroll staff is a financial burden. An in-house payroll

department needs to be up to date on an ever-changing array of legal and

technical matters. Such training is disruptive, costly, and can be avoided by

outsourcing the payroll function.

5. One example is the reduction in the time it takes to record the receipt of

inventory into the inventory records. Further, the automated system will be

less likely to pay an invoice early, while at the same time not missing the

discount period. Thus, cash management is improved.

6. Law firms require their employees to log the amount of time spent on each

client for billing purposes. Accounting firms also require that their employees

keep job tickets for the time they spend on each client. Car repair shops are

another example. The mechanic must keep track of how much time he/she

spends working on each automobile.

7. The risks associated with outsourcing are nontrivial. One is that an outside

organization will have access to extremely confidential employee data and to

the client firm’s financial resources. Another risk is that the service provider

will have poor internal controls and/or act incompetently in a way that causes
 Chapter 6 page 10

material errors or fraud. A client organization may outsource any function it

chooses, but it cannot outsource its responsibility for implementing adequate

internal controls.

8. Since the asset remains on the books, depreciation on it will continue to be

calculated. Fixed assets will be overstated, the depreciation amount charged

in each period will be overstated, and equity will be misstated. Further, if

insurance is being paid on assets no longer owned, an unnecessary expense

will be incurred, thus lowering net income and retained earnings.

9. AUTHORIZATION CONTROLS. Because fixed assets are requested and

employed by end-users asset acquisitions should be formal and explicitly

authorized. Each material transaction should be initiated by a written request

from the user or department. In the case of high-value items, there should be

an independent approval process that evaluates the merits of the request on

a cost-benefit basis.

SUPERVISION CONTROLS.

Because capital assets are widely distributed around the organization, they

are more susceptible to theft and misappropriation than inventories that are

secured in a warehouse. Therefore, management supervision is an important

element in the physical security of fixed assets. Supervisors must ensure that

fixed assets are being used in accordance with the organization’s policies and

business practices.

INDEPENDENT VERIFICATION CONTROLS.

 Chapter 6 page 11

1. Periodically, the internal auditor should review the asset acquisition

and approval procedures to determine the reasonableness of key factors

including: the useful life of the asset, the original financial cost, proposed

cost savings as a result of acquiring the asset, the discount rate used, and

the capital budgeting method used in justifying decisions to buy or dispose

of assets.

2. The internal auditor should verify the location, condition, and fair value

of the organization’s fixed assets against the fixed asset records in the

subsidiary ledger.

3. The automatic depreciation charges calculated by the fixed asset

system should be reviewed and verified for accuracy and completeness.

System errors that miscalculate depreciation can result in the material

misstatement of operating expenses, reported earnings, and asset values.

10. The responsible supervisors must authorize the disposal of the computer.

11. Perform an annual physical inventory of fixed assets and adjust the records to

reflect assets no longer on hand. Prepare reports about the disposal of

assets.

12. Prepare reports about the transfer of fixed assets. Perform an annual physical

inventory and note the location of assets. Budget and then hold each

department accountable for depreciation expense for assets located in each

department.

13. Authorize fixed asset acquisitions; part of the authorization is showing that a
 Chapter 6 page 12

need for the asset exists.

14. On the financial statements, assets will be overstated and depreciation

expense could be overstated. Assets on property tax returns will be

overstated and too much tax will be paid. Insurance premiums will be paid on

nonexistent assets.
 Chapter 6 page 13

MULTIPLE CHOICE

1. C

2. C

3. B

4. A

5. B

6. D

7. C

8. E

9. B

10. C
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PROBLEMS

1. PAYROLL FRAUD

a. An employee action report from the personnel department should list

all current employees. Time cards for terminated or non-existent

employees should be identified when reconciled with the personnel report.

b. An independent paymaster should distribute the paychecks to the

employees. If an employee is not present to receive the paycheck, it will be

returned to the payroll department.

2. PAYROLL CONTROLS

a. The payroll department has no independent information as to changes

in an employee’s status. For example, the foreman may continue to submit

time cards for terminated employees. Since the foreman also distributes

paychecks, he could steal and forge the uncollected checks.

b. 1. An employee action report from the personnel department

should list all current employees. Time cards for terminated or non-existent

employees should be identified when reconciled with the personnel report.

2. An independent paymaster should distribute the paychecks to

the employees. If an employee is not present to receive the paycheck, it

will be returned to the payroll department.

 Chapter 6 page 15

3. PAYROLL CONTROLS

Risks:

Foremen have too much control over the human resources they are responsible for

recruiting, hiring, and firing.

The high degree of casual labor creates an environment that lends itself to abuse.

High employee turnover rate makes identifying absent or nonexistent employees

difficult.

Clock machines are unsupervised and located in remote areas.

Foremen submit personnel action forms.

Foremen distribute the paychecks to the employees, checks written for nonexistent

employees can be kept and cashed by the foremen.

Controls:

Authorization. A separated personnel function should be established to account for

employees and to authorize their payment

Segregation of Duties. The foremen should not distribute the paychecks to

employees. This should be the task of a paymaster.

Supervision. The clocking in and out process should be supervised.

 Chapter 6 page 16

4. FLOWCHART ANALYSIS

Control problems: Payroll checks appear to be drawn on the general cash account.

This can result in undetected payroll errors and payroll fraud.

Recommendations:

The payroll register should be reviewed by AP who then authorizes the

cash disbursements department to issue a check for the entire payroll,

which is deposited into a payroll Impress (clearing) account.

5. SEPARATION OF DUTIES

Part 1) and 2). The tasks to be performed by Personnel and Payroll employees and

that data they may or may not access include:

Personnel Empolyees:

Should be able to activate new employees and change the status of existing

employees including rank, pay rates (salary), full time, part-time, active, and

terminated.

Should not be able to submit time and attendance data for employees.

Payroll Employees:

Should be able to verify that an employee is an active valid employee.

Should initiate the payroll process from time and attendance data

Should not be able to change employee status.

 Chapter 6 page 17

Should not be able to view or edit performance evaluation data, health records,

pension plan balances or contributions, injury claims, etc

Part 3) The central storage of sensitive data requires multilevel security that ensure

privacy and accuracy of data by limiting access to certain processes and data

to authorized personnel.

6. PAYROLL FLOWCHART ANALYSIS

Risks:

Supervisor submits the personnel action form and time cards. This allows him/her to

create nonexistent employees.

Supervisor distributes the paychecks to the employees. Checks written for

nonexistent employees can be kept and cashed by the supervisor.

Cash disbursements is authorizing funds transfer into the bank account and is also

writing the funds transfer check. This is a segregation of duties problem.

Controls:

Authorization: A separated personnel function should be established to prepare

personnel action forms and manage the human resource.

Segregation of Duties. The supervisor should not distribute the paychecks to

employees. This should task should be performed by an independent

paymaster.
 Chapter 6 page 18

Accounts Payable should approve the register and authorized payment by Cash

Disbursements.

7. COMPREHENSIVE FLOWCHART ANALYSIS

Transaction authorization

Payroll clerk prepares paychecks without authorization from a personnel action form.

Cash disbursements department prepares vendor payments based solely on the

Invoice. No supporting documents are used.

Segregation of duties

Cash disbursements department prepares the paychecks; this should be done by

payroll.

Cash disbursements department maintains the AP ledger and approves and writes

checks.

Payroll checks and vendor check are paid through the general cash account. An

imprest account should be used to clear the payroll checks.

The supervisor should not distribute the paychecks to employees. This should task

should be performed by an independent paymaster.

Accounting records

No journal vouchers are prepared. The general ledger is being updated from source

documents.
 Chapter 6 page 19

8. FIXED ASSET SYSTEM

Risks:

The user’s authority to select vendors and prepare purchase orders without

independent approval allows for fraudulent behavior.

The user’s authority to receive and validate the invoices without independent

verification allows purchasing frauds to be concealed.

User receives, inspects, and takes custody of the asset.

Cash disbursements makes payment base only on the invoice from the user.

The absence of accounts payable form the process allows for the payment of

unauthorized purchases by the user.

Controls:

Implement formal procedure for approving user requests for assets.

The invoice, receiving report, and approved purchase order should be reviewed by

accounts payable, which authorizes payment by cash disbursements.

A fixed asset function should be implemented to account for acquisition, use, and

disposal of the assets.

 Chapter 6 page 20

9. FIXED ASSET SYSTEM

Risks:

Users have custody of the assets and maintain usage records. Key information

about asset value is based on information provide by the user.

The assets involved are particularly subject to misappropriation.

User can overstate mileage to accelerate the depreciation on a vehicle to reduce the

book value of the asset.

Supervisor has discretion to dispose of the asset as he/she sees fit.

An over-depreciated asset can be sold at a fraction of its real value to the employee.

Controls:

Periodic audits of the assets to verify their mileage and condition.

Formal procedures for disposal of assets by an independent group.

Private sale of used vehicles to employees should be on an open-bid basis.

 Chapter 6 page 21

10. FIXED ASSET FLOWCHART ANALYSIS

Risks:

User prepares purchase order for assets without independent approval.

User receives and validates the invoice. No independent verification.

User receives, inspects, and takes custody of the asset.

Cash disbursements makes payment base on the invoice and receiving report,

which are provided by the user.

Accounts payable is not involved in the process.

User has custody of the asset and maintains the fixed asset ledger.

Controls:

Implement formal procedure for approving user requests for assets.

The invoice, receiving report, and approved purchase order should be reviewed by

accounts payable, which approves payment by cash disbursements.

A fixed asset function should be implemented to account for acquisition, use, and

disposal of the assets.

 Chapter 6 page 22

11. PAYROLL PROCEDURES ALBRIGHT MFG

Part A, See flowchart on a following Page

Part B. Internal Control Weaknesses

Supervision

Inadequate supervision over timekeeping of employees. The timekeeping clerk is

in a separate building and cannot observe employees checking “in” and “out.”

The inherent threat here is that employees can misstate the amount of hours

worked on their time cards.

Transaction Authorization

Lack of a personnel action form from Human Resources poses a threat that

unauthorized employees are receiving paychecks. This document is essential for

preventing payroll fraud by identifying authorized employees.

Independent Verification

Coupled with the lack of a personnel action form, allowing supervisors to

distribute paychecks enables payroll fraud. Supervisors may submit time cards

for employees who no longer work or have never worked for Albright Manf.

Accounting Records

Without a payroll imprest account, Albright Manufacturing is unable to identify

payroll discrepancies such as additional paychecks checks or checks in the

wrong amount being drawn on the general cash account.

 Chapter 6 page 23

Part C, Recommendations

Supervision over the time keeping function. To reduce the opportunity for fraudulent

time and attendance records.

Employ personnel action forms to identify authorized employees and reduce the risk

of payroll fraud.

Use paymaster to distribute the paychecks.

Establish an imprest payroll clearing account at the bank.

Chapter 6 page 24
 Chapter 6 page 25

INTERNAL CONTROL CASES

1) Solution to Holly Company Payroll System

Part a) Payroll DFD

 Chapter 6 page 26

Part b) Payroll System Flowchart

 Chapter 6 page 27

Part C. Uncontrolled Risks:

1) Timekeeping process is unsupervised allowing for fraudulent time and

attendance records.

2) Accounting Department approves, prepares, and signs paychecks, which

allows payroll fraud by altering paychecks or issuing fraudulent paychecks.

3) Accounting errors and fraudulent transaction may go undetected when the

accounting department is responsible for maintain both subsidiary and control

accounts.

4) Payroll drawn on general cash account rather than a clearing account. This

enables payroll errors and fraudulent transaction to go undetected.

5) Payroll clerk prepares paychecks without authorization from a personnel

action form. This runs the risk of processing unauthorized paychecks.

6) Foremen authorize time cards and distribute paychecks. This permits the

foremen to submit fraudulent time cards and receive the paychecks.

Part d)

Physical Controls
 Chapter 6 page 28

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 and maintain an

audit trail.

4) Establish separate cash disbursement department

5) Establish an Impress account for payroll

6) Employ a paymaster to distribute paychecks to employees

7) Use payroll action form to verify the status of employees before preparing

paychecks.

IT Controls

1) Limit tests,

2) validation controls,

3) direct deposit of checks

4) Password control over access to the system

5) Error Messages
 Chapter 6 page 29

6) File backup

7) Automated posting to accounts

2. TIGHT LINES FISHING AND CAMPING SUPPLIES (NETWORKED COMPUTER

SYSTEM AND MANUAL PROCEDURES)

a, b, see following pages.

c, Uncontrolled Risks

Fixed Assets

1. The department managers can misappropriate fixed assets because they have transaction
authorization responsibility, record keeping responsibility, and asset custody.
2. The firm may pay for assets that are incorrect, damaged, or not actually received because
the process lacks a formal receiving function.
3. GL records may be inaccurately prepared because of current accounting procedures.

Payroll
1. Payroll Fraud is possible because false employee time cards may be submitted by the
supervisors, who then distribute the paychecks.
2. Absence of personnel action forms allows invalid time cards to be submitted.

d. Physical Controls

Fixed Assets

1. Need a formal Fixed asset purchases approval process

2. Implement a formal receiving department

 Chapter 6 page 30

3. Segregation of duties. Create a Fixed asset department with record keeping responsibility for
asset acquisition, maintenance, and disposal.

4. Independent verification to reconcile asset custody, condition, and records keeping.

5. Cash disbursements should prepare a journal voucher for the general ledger.

Payroll

1. Transaction authorization. Should use personnel action form to identify valid

employees.
2. Segregation of duties. A paymaster should distribute paychecks.
3. Segregation of duties. AP should not perform Cash Disbursement department
function activities such as check writing.

IT Controls

1) Limit tests,

2) validation controls,

3) direct deposit of checks

4) Password control over access to the system

5) Error Messages

6) File backup

7) Automated posting to accounts

8) Multilevel security
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 Chapter 6 page 37

3. TRV CLASSICS. (MANUAL AND STAND-ALONE COMPUTER

PROCESSING)
a, b, see following pages.

c, Uncontrolled Risks

Payroll
1. Payroll Fraud is possible because employees prepare time cards manually without a time
stamp from a timekeeping clock.
2. Absence of personnel action forms allows invalid time cards to be submitted.
3. Financial assets are at risk because AP authorizes payments and writes checks.
4. GL records may be inaccurately prepared because of current accounting procedures.

Fixed Assets

1. Unnecessary fixed assets may be ordered because requests for fixed assets are informally
submitted.
2. The firm may pay for assets that are incorrect, damaged, or not actually received because
the receiving process is flawed.
3. Financial assets are at risk because AP authorizes payments and writes checks.
4. Accounting records may be in error because the open PO is not closed when goods arrive

d. Physical Controls

Payroll
1. Transaction authorization. Should use personnel action form to identify valid employees.
2. Transaction authorization. Should employ a formal timekeeping function.
3. Segregation of duties. AP should not perform Cash Disbursement department function of
check writing.
4. GL should receive approved journal vouchers.

Fixed Assets
1. Accounting Records – Implement formal procedures and documents to authorize asset
purchases.
2. Accounting Records – Purchasing should receive a copy of the receiving report to close the
open PO.
3. Implement a formal receiving department with blind copy PO
4. Segregation of duties. AP should not perform Cash Disbursement department function of
check writing.

IT Controls
 Chapter 6 page 38

Limit tests,

Validation controls,

Password control over access to computers

Error Messages

File backup

Automated posting to accounts

Chapter 6 page 39
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 Chapter 6 page 42

4. PATRIOT GENERATORS INC.

Part A and B see following Pages.

C. Uncontrolled Risks

Payroll

1) Payroll fraud by submitting false timesheets

2) Cash asset misappropriation by AP clerk

3) Accounting errors in the General Ledger

Fixed Assets

1) Accounting errors

2) May pay for items not received

3) Cash asset misappropriation by AP clerk

D. Physical Controls to Reduce Risks

Payroll

1) Transaction Authorization – Employ personnel action report to validate

employees
 Chapter 6 page 43

2) Segregation of duties – Paymaster to distribute paychecks. Supervisors

should not submit and review time cards and also distribute paychecks.

3) Segregation of duties – Cash disbursement function. The AP department

should not be writing checks. They should authorize cash disbursements to

do so.

4) Independent Verification/Accounting records – 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. Purchasing

should receive a formal receiving report.

2) Independent Verification – No formal receiving function and no 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

Segregation of duties.

5) Segregation of Duties - User is responsible for authorization, maintenance

and disposition of fixed assets.– Need a fixed asset department to manage

asset records.
 Chapter 6 page 44

IT Controls

Limit tests,

Validation controls,

Password control over access to computers

Error Messages

File backup

Automated posting to accounts

 Chapter 6 page 45

Patriot Generators Fixed Asset DFD

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 Chapter 6 page 49

5. TURNER PATIO FURNITURE (MANUAL AND STAND-ALONE PC SYSTEM)

a), b) see diagrams on the following pages.

c) Uncontrolled Risks.

Payroll
1. Payroll Fraud is possible because supervisor approve time cards and distributes paychecks
2. Absence of personnel action forms allows invalid time cards to be submitted.
3. GL records may be inaccurately prepared because of current accounting procedures.

Fixed Assets

1. The firm may pay for assets that are incorrect, damaged, or not actually received because
the receiving process is flawed.
2. Financial assets are at risk because AP authorizes payments based only on the invoice
3. Accounting records may be in error because the open PO is not closed when goods arrive

d. Controls to Reduce Risks

Physical Controls - Payroll

1) Use personnel action form to validate employees and pay rates .

2) Employ paymaster to distribute checks to employees.

 Chapter 6 page 50

3) General Ledger should not Update GL from a CD disbursement voucher. It should receive formal

Journal vouchers

Fixed Assets

1) AP should perform a three-way-match including the purchase order, receiving report, and invoice

before authorizing payment.

2) General ledger should receive accounts payable summary from the AP department

3) Cash disbursements should submit a journal voucher to the general ledger department.

4) No formal receiving function exists to produce a receiving report.

IT Controls

Limit tests,

Validation controls,

Password control over access to computers

Error Messages

File backup

Automated posting to accounts

Chapter 6 page 51
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6. GREEN PRODUCTS GARDEN SUPPLY (STAND-ALONE PC-BASED

ACCOUNTING SYSTEM)

a), b) see diagrams on the following pages.

c) Uncontrolled Risks.

Payroll
1. Payroll Fraud is possible because supervisor approve time cards, submits personnel action
forms, and distributes paychecks.
2. Accounting errors and fraud because AP and Cash disbursements are not involved in the
process.
3. GL records may be inaccurately prepared because of current accounting procedures.

Fixed Assets

1. The firm may pay for assets that are incorrect, damaged, or not actually received because
the receiving process is flawed.
2. Financial assets are at risk because AP authorizes payments based only on the invoice and
packing slip.
3. Fraud is possible because the end user has sole responsibility for fixed asset acquisition,
maintenance, and disposal.

D. Internal Controls to Reduce Risks

Physical Controls

Payroll
 Chapter 6 page 56

1. Segregation of duties – A separate Personnel function should provide

personnel action forms that authorize employees to be paid.

2. Independent Verification – The AP and cash didbursements

departments should be included in the process to approve the payroll

and disburse funds to the payroll clearing account.

3. Independent Verification – The general ledger department should

receive a journal voucher from cash disbursements and an account

summary from the AP department.

4. Segregation of Duties. Paymaster should distribute paychecks.

Fixed Assets

1) Accounting Records. A formal receiving report should be prepared

2) Independent Verification – AP should perform a three way match which

includes 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.

 Chapter 6 page 57

IT Controls

Limit tests,

Validation controls,

Password control over access to computers

Error Messages

File backup

Automated posting to accounts

Chapter 6 page 58
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