Matt Demko is the loading dock supervisor for a dry cement packaging company.

His work crew is

composed of unskilled workers who load large transport trucks with bags of cement, gravel, and sand.
The work is hard, and the employee turnover rate is high. Employees record their attendance on
separate time cards. Demko authorizes payroll payments each week by signing the time cards and
submitting them to the payroll department. Payroll then prepares the paychecks and gives them to
Demko, who distributes them to his work crew.

Required:
a. Prepare a systems flowchart of the procedures described here.
b. Identify any control problems in the system.
c. What sorts of fraud are possible in the system?
a.

b. The following segregation of functions problem exists:

Demko authorizes the transaction (signs and submits timecards) and has asset custody (he
distributes the checks to employees).

c. The following frauds could result from these control weaknesses:

i. Kickback fraud—Demko permits employees to inflate the hours worked and approves
payment. The employee then splits the excess pay with the supervisor as a kickback.
ii. Nonexistent employee fraud—After an employee leaves the company, the supervisor
continues to submit timecard for him. When the paychecks are distributed to Demko, he keeps the
ones for the terminated employees and cashes them by forging their names.