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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

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
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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).

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
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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. a. Process the acquisition of fixed assets as needed and in

accordance with formal management approval and procedures;

b. Maintain adequate accounting records of asset acquisition, cost

description, and physical location in the organization;

c. Maintain accurate depreciation records for depreciable assets in

accordance with acceptable methods;

d. Provide management with information to help them plan future

fixed asset investments; and

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

12. The fixed asset system processes non-routine 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 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.


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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

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


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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.


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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 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


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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 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
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is being paid on assets no longer owned, an unnecessary expense will be incurred,

thus lowering net income and retained earnings.

9. a. 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.

b. 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.

c. Independent verification controls.

i. 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.

ii. 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.

iii. The automatic depreciation charges calculated by the fixed asset


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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 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.
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MULTIPLE CHOICE

1. D

2. D

3. B

4. A

5. B

6. D

7. C

8. E

9. A

10. D
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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.

i. 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.

ii. 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.


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3. PAYROLL CONTROLS

Risks:

a. Foremen have too much control over the human resources they are

responsible for recruiting, hiring, and firing.

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

abuse.

c. High employee turnover rate makes identifying absent or nonexistent

employees difficult.

d. Clock machines are unsupervised and located in remote areas.

e. Foremen submit personnel action forms.

f. Foremen distribute the paychecks to the employees, checks written for

nonexistent employees can be kept and cashed by the foremen.

Controls:

a. Authorization. A separated personnel function should be established to

account for employees and to authorize their payment

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

employees. This should be the task of a paymaster.

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

4. FLOWCHART ANALYSIS

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

account. This can result in undetected payroll errors and payroll fraud.

b. Recommendations: The payroll register should be reviewed by AP who then


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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

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

that data they may or may not access include:

Personnel Employees:

i. 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.

ii. 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.

ii. Should initiate the payroll process from time and

attendance data

iii. Should not be able to change employee status.

iv. Should not be able to view or edit performance evaluation

data, health records, pension plan balances or

contributions, injury claims, etc.

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.
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6. PAYROLL FLOWCHART ANALYSIS

Risks:

a. Supervisor submits the personnel action form and time cards. This allows

him/her to create nonexistent employees.

b. Supervisor distributes the paychecks to the employees. Checks written for

nonexistent employees can be kept and cashed by the supervisor.

c. 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:

a. Authorization: A separated personnel function should be established to

prepare personnel action forms and manage the human resource.

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

to employees. This should task should be performed by an independent

paymaster.

c. Accounts Payable should approve the register and authorized payment

by Cash Disbursements.

7. COMPREHENSIVE FLOWCHART ANALYSIS

a. Transaction authorization

i. Payroll clerk prepares paychecks without authorization from a personnel

action form.
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ii. Cash disbursements department prepares vendor payments based solely

on the Invoice. No supporting documents are used.

b. Segregation of duties

i. Cash disbursements department prepares the paychecks; this should be

done by payroll.

ii. Cash disbursements department maintains the AP ledger and approves

and writes checks.

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

account. An imprest account should be used to clear the payroll checks.

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

should task should be performed by an independent paymaster.

c. Accounting records

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

from source documents.

8. FIXED ASSET SYSTEM

Risks:

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

independent approval allows for fraudulent behavior.

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

verification allows purchasing frauds to be concealed.

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


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

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

unauthorized purchases by the user.

Controls:

a. Implement formal procedure for approving user requests for assets.

b. 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.

9. FIXED ASSET SYSTEM

Risks:

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

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

b. The assets involved are particularly subject to misappropriation.

c. User can overstate mileage to accelerate the depreciation on a vehicle to

reduce the book value of the asset.

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

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

employee.

Controls:

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


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b. Formal procedures for disposal of assets by an independent group.

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

10. FIXED ASSET FLOWCHART ANALYSIS

Risks:

a. User prepares purchase order for assets without independent approval.

b. User receives and validates the invoice. No independent verification.

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

d. Cash disbursements makes payment base on the invoice and receiving

report, which are provided by the user.

e. Accounts payable is not involved in the process.

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

Controls:

a. Implement formal procedure for approving user requests for assets.

b. The invoice, receiving report, and approved purchase order should be

reviewed by accounts payable, which approves payment by cash

disbursements.

c. A fixed asset function should be implemented to account for acquisition,

use, and disposal of the assets.


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11. PAYROLL PROCEDURES: Albright Manufacturing

a. See flowchart on a following page

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.

1. 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.

c. Recommendations

1. Supervision over the time keeping function. To reduce the opportunity

for fraudulent time and attendance records.


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2. Employ personnel action forms to identify authorized employees and

reduce the risk of payroll fraud.

3. Use paymaster to distribute the paychecks.

4. Establish an imprest payroll clearing account at the bank.


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12. PAYROLL FLOWCHART ANALYSIS

a. Risks in current payroll system:

i. Fictional employees: the supervisor is in position to add a time card to

batch that he submits to payroll and cover this act by providing a falsified

payroll action form and by receiving and distributing the paychecks to

employees.

ii. Overpayment: his access to payroll action forms allows him to change

(increase) the pay rate of an employee with whom he is colluding.

b. Internal control improvements to reduce risks in part a (above)

i. Remove personnel action authority from the supervisor. This should be

a separate and independent function of the personnel function.

ii. Implement a paymaster function to remove paycheck distribution from the

supervisor
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INTERNAL CONTROL CASES

1. HOLLY COMPANY – PAYROLL SYSTEMS (SMALL COMPANY USES MANUAL

PROCEDURES WITH PC SUPPORT)

a. Payroll DFD

Employee
Information Employee
Records
Time Cards Reviewed
Record Review
Time Cards Prepare
Hours Time
Payroll
Worked Cards

File
Time Cards , Payroll
Register Copy
Hours Worked
Payroll Register

Print
Employees checks Payroll Register
and File
Update
Accounts

Signed Paychecks
Paychecks

Signed Paychecks
Sign
Distribute Checks
Checks

Holly Company Payroll System DFD


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b. Payroll System Flowchart

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.
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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.

d.

Physical Controls:

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


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4. Password control over access to the system

5. Error Messages

6. File backup

7. Automated posting to accounts

2. GREEN POND NURSERY (STAND-ALONE PC-BASED ACCOUNTING SYSTEM) –

GREEN PRODUCTS

a and 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.


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d. Internal Controls to Reduce Risks

i. Physical Controls

Payroll:

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 disbursements

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


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department to manage authorization, maintenance and

disposition of fixed assets.

ii. IT Controls

a. Limit tests,

b. Validation controls,

c. Password control over access to computers

d. Error Messages

e. File backup

f. Automated posting to accounts


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


a. and 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:

i. Physical Controls

Payroll

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

2. Employ paymaster to distribute checks to employees.


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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.

ii. IT Controls

a. Limit tests,

b. Validation controls,

c. Password control over access to computers

d. Error Messages

e. File backup

f. Automated posting to accounts


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4. GENERATORS R US (MANUAL AND STANDALONE PC PROCEDURES)

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. Controls to Reduce Risks:

i. Physical Controls

Payroll

1. Transaction Authorization – Employ personnel action report to validate

employees

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.
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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

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

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

asset records.

ii. IT Controls

a. Limit tests,

b. Validation controls,

c. Password control over access to computers

d. Error Messages

e. File backup

f. Automated posting to accounts


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5. OUTDOOR ADVENTURE: WHITE WATER AND CAMPING SUPPLIES

(NETWORKED COMPUTER SYSTEM AND MANUAL PROCEDURES)

a and 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. Controls to reduce risks identified above

i. Physical Controls

Fixed Assets

1. Need a formal Fixed asset purchases approval process

2. Implement a formal receiving department

3. Segregation of duties. Create a Fixed asset department with record keeping

responsibility for asset acquisition, maintenance, and disposal.


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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.

ii. 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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6. CLASSIC RESTORATION (MANUAL AND STAND-ALONE

COMPUTER PROCESSING)

a. and 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. Controls to reduce risks identified above

i. Physical Controls
Chapter 6 page 310

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.

ii. IT Controls

a. Limit tests

b. Validation controls

c. Password control over access to computers

d. Error Messages

e. File backup

f. Automated posting to accounts


Chapter 6 page 311
Chapter 6 page 312

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