10-35 1.
a.
b.
c.
d.
e.
2.
a.
b.
c.
d.
e.
3.
a.
b.
c.
d.
e.
4.
a.
b.
c.
d.
Adequate segregation of duties and proper authorization of
transactions and activities.
Recorded transactions exist.
An unauthorized or invalid time card turned in by an existing
employee. The time card may be for an employee who formerly
worked for the company or one who is temporarily laid off.
An employee could be claiming too many hours by having a friend
punch him or her in early, or by making manual changes on time
cards.
Check to see that all employees that are punched in one day are
physically present..
Adequate documents and records.
Existing transactions are recorded.
A missing time card number never could be identified before
preparation of payroll starts.
An employee would not be paid for a time period. (The employee is
almost certain to bring this to management's attention.) The primary
benefit of the control would be to prevent misstatements for a short
period of time and to prevent employee dissatisfaction from failure
to pay them.
Obtain a list of company employees and make sure that each one
has received a paycheck for the time period in question.
Proper authorization of transactions and activities.
Recorded transactions exist.
A paycheck cannot be processed for an invalid employee number.
A fictitious payroll check could be processed for a fictitious
employee if invalid employee numbers are included in the
employee master file.
Include test data transactions with invalid employee numbers in the
data to be inputted into the payroll accounting system and
determine that all invalid transactions are automatically rejected by
the software application.
Adequate separation of duties.
Recorded transactions exist.
A fictitious payroll check that is originated by the person both
preparing the payroll checks and distributing the payroll checks.
If one person kept a record of time, prepared the payroll, and
distributed the checks, that person could add a nonexistent
employee to the payroll, process the information for the employee
and deposit the paycheck in his or her own bank account without
detection.
10-35 (continued)
e.
5.
b.
c.
d.
e.
6.
a.
b.
c.
d.
e.
7.
a.
b.
c.
d.
e.
Perform a surprise payoff in which the auditor accounts for all
paychecks and distributes them to the employees, who must
provide identification in order to receive their checks.
a.
Independent check on performance.
Recorded transactions are stated at the correct amounts.
Mechanical errors of adding up the number of hours, calculating the
gross payroll incorrectly, or calculating withholding incorrectly.
Payroll checks incorrectly calculated could be paid to employees.
Recheck the amounts for gross payroll, withholding and net payroll.
Adequate documents and records.
Existing transactions are recorded.
Preparation of a check for an inappropriate person, the distribution
of that check to that person, and the recording of that check in the
cash disbursements journal as a voided check.
An employee who is supposed to void a check could record it as
voided on the books and cash the check. At month-end the amount
of the check could be covered by adjusting the bank reconciliation.
Test month-end bank reconciliations in detail to determine that the
account reconciles properly, that all supporting documents are
proper, looking especially for a check that cleared and was
supposed to be voided, and that no alterations have been made to
the bank statement.
Proper authorization of transactions and activities.
Recorded transactions exist and recorded transactions are stated
at the correct amounts.
Both errors and fraud are likely to be prevented if competent
trustworthy employees are hired. Hiring honest employees
minimizes a likelihood of fraud. Hiring competent employees
minimizes the likelihood of unintentional errors.
Several types of intentional misstatements could occur if a
dishonest person is hired. Similarly, several types of unintentional
errors could occur if an incompetent person is hired.
An examination of cancelled checks and supporting documents,
including time cards and personnel records, is a test of the
possibility of fraud. A test of the calculation of payroll is a test for an
unintentional error caused by employees who are not competent.
10-35 (continued)
8.
a.
b.
c.
d.
e.
9.
a.
b.
c.
d.
e.
10.
a.
b.
c.
d.
e.
Proper authorization of transactions and activities, and adequate
documents and records.
Recorded transactions exist.
The preparation of an inappropriate payroll check for a former
employee is prevented.
A terminated employee could be continued on the payroll with
someone else obtaining the paycheck.
Perform a surprise payoff in which the auditor accounts for all
paychecks and distributes them to the employees, who must
provide identification to receive their checks.
Physical control over assets and records, and adequate
segregation of duties.
Recorded transactions exist.
Checks prepared for nonexistent employees or employees on
vacation, or absent for other reasons are controlled and
safeguarded.
Checks could be lost which are intended for absent employees or a
check could be taken by the person responsible for distributing the
checks.
Examine cancelled checks to make certain that each check is
properly endorsed, supported by a time card, and the person for
whom the check is made out is still working for the company.
Proper authorization of transactions and activities and adequate
separation of duties.
Recorded transactions exist and recorded transactions are stated
at the correct amounts.
Preparation of a check for a fictitious employee or preparation of
checks using an unapproved pay rate are prevented.
A fictitious payroll check could be processed for a fictitious
employee if those with record keeping responsibilities are allowed
to enter new employee numbers into the master file. Also,
paychecks to valid employees could be overstated if unauthorized
personnel have the ability to make changes to the pay rates in the
master files.
Attempt to access the on-line payroll master file using a password
that is not allowed access to that master file.
10-36 1.
a.
b.
c.
Adequate documents and records and independent checks on
performance.
Transactions are stated at the correct amounts.
(1)
Make sure that the billing clerk receives the current
price list.
(2)
Internal verification by someone who has the current price
list.
2.
a.
b.
c.
Adequate documents and records.
Recorded transactions exist.
(1)
Require that payments only be made on original
invoices.
2)
Require a receiving report be attached to the vendor's
invoice before a payment is made.
3.
a.
Adequate documents and records, and independent checks on
performance.
Transactions are recorded on the correct dates.
Carefully coordinate the physical count of inventory on the last day
of the year with the recording of sales to make certain counted
inventory has not been billed and billed inventory has not been
counted.
b.
c.
4.
a.
b.
c.
5.
a.
b.
c.
Proper authorization of transactions and adequate documents and
records.
Recorded transactions exist.
Include a control in the accounts payable software that requires the
input of a valid receiving report number before the software will
process a payment on an accounts payable.
Adequate documents and records, physical control over assets and
records, and independent checks on performance.
Recorded transactions exist.
1)
Fence in the physical facilities and prohibit employees from
parking inside the fencing.
2)
Require the accounting department to maintain perpetual
inventory records and take physical counts of actual sides of
beef periodically.
6.
a.
b.
c.
Independent checks on performance.
Recorded transactions are stated at the correct amounts.
Counts by qualified personnel and independent checks on
performance.
7.
a.
b.
Proper authorization of transactions and activities.
Transactions are stated at the correct amounts.
c.
2)
8.
a.
b.
c.
1)
Make sure that the salesman has a current price list.
Require independent approval of all transactions, including
the price, before shipment is made.
Adequate separation of duties.
Recorded transactions exist.
Restrict the accounts payable clerk from being able to make
changes to the approved vendor master file. Only allow purchasing
personnel to input changes to that master file.
10-40 1.
a. 

b. 

2.
Supplying the receiving department with the purchase order
is regarded as a deficiency in that the department may be
less careful in checking goods than they would be if they
were working without a record of the quantities that should
be received.
The failure to have the storekeeper receipt for the materials
when they are sent to him or her from the receiving
department or to tie in the items placed in stores with the
acquisition constitutes a deficiency in control in that
responsibility for shortages cannot be conclusively placed on
either receiving or stores. The receiving department might, in
collusion with a vendor, report receipts of materials that were
never received. Also, either the receiving department or the
stores department might fraudulently convert some of
the materials and because of the lack of a record of
responsibility, the company would be unable to determine
which department was responsible.
This deficiency increases the likelihood of obsolete inventory
and the possibility of theft of shipments larger than the
amount ordered.
The failure to isolate responsibility for shortages also
increases the likelihood of obsolescence in that employees
are likely to be less concerned when they are not held
accountable. Because the company cannot isolate
responsibility, it might also encourage receiving or stores to
take goods.
c.
Use a "blind" copy of the purchase order or a separate receiving
report without a copy of the purchase order. Use perpetual
inventory records to hold the storekeeper accountable. The
storekeeper should also initial the receiving report or purchase
order when he or she receives the goods.
a.


b.


c.
The payroll checks should not be returned to the computer
department supervisor but should be distributed by persons
independent of those having a part in generating the payroll
data.
There is a lack of internal verification of the hours, rates,
extensions or employees by above.
Padding of payroll with fictitious names and extracting the
checks made out to such names when they are returned
after they have been signed.
There may be misstatements in hours, rates, extensions,
and the existence of nonworking employees.

Have the checks handed out by an independent
person and not returned to Strode.

3.
a.
b.
c.
Internal verification of that information by Webber or
someone else.
The bank statement and cancelled checks should not be reconciled
by the manager, but should be sent by the bank directly to the
home office, where the reconciliations should be made against the
manager's report of cash disbursements.
The manager may draw checks to herself or others for personal
purposes and omit them from her list of cash disbursements or
inflate other reported disbursement amounts.
Have all bank statements sent directly to the home office and have
Cooper report directly to the home office by use of a list of cash
disbursements and all supporting documentation.