Part 1

Chapter 15

Skip-Rope manufacturing (page 475)

15.3 You have been hired to evaluate the payroll system for the Skip-Rope Manufacturing Company. The company processes its payroll in-house. Use Table 15-1 as a reference to prepare a list of questions to evaluate Skip-Rope’s internal control structure as it pertains to payroll processing for its factory employees. Each question should be phrased so that it can be answered with either a yes or a no; all no answers should indicate potential internal control weaknesses. Include a third column listing the potential problem that could arise if that particular control were not in place.

Part 2

Chapter 15

Kowal Manufacturing Company (page 475)

15.4 Although most medium and large companies have implemented sophisticated payroll and HRM systems like the one described in this chapter, many smaller companies still maintain separate payroll and HRM systems that employ many manual procedures. Typical of such small companies is the Kowal Manufacturing Company, which employs about 50 production workers and has the following payroll procedures:

•The factory supervisor interviews and hires all job applicants. The new employee prepares a W-4 form (Employee’s Withholding Exemption Certificate) and gives it to the supervisor. The supervisor writes the hourly rate of pay for the new employee in the corner of the W-4 form and then gives the form to the payroll clerk as notice that a new worker has been hired. The supervisor verbally advises the payroll department of any subsequent pay raises.

•A supply of blank time cards is kept in a box near the entrance to the factory. All workers take a time card on Monday morning and fill in their names. During the week they record the time they arrive and leave work by punching their time cards in the time clock located near the main entrance to the factory. At the end of the week the workers drop the time cards in a box near the exit. A payroll clerk retrieves the completed time cards from the box on Monday morning. Employees are automatically removed from the payroll master file when they fail to turn in a time card.

•The payroll checks are manually signed by the chief accountant and then given to the factory supervisor, who distributes them to the employees. The factory supervisor arranges for delivery of the paychecks to any employee who is absent on payday.

•The payroll bank account is reconciled by the chief accountant, who also prepares the various quarterly and annual tax reports.

a. Identify weaknesses in current procedures, and explain the threats that they may allow to occur.

b. Suggest ways to improve the Kowal Manufacturing Company’s internal controls over hiring and payroll processing. (CPA Examination, adapted)