INTERNAL CONTROLS—PAYROLL EXERCISE SOLUTIONS

1 1 INTERNAL CONTROLS payroll EXERCISE SOLUTIONS CHAPTER 4 1. payroll 2. control 3. Authorizaton, Documentation, Reconciliation 4. Possible answers include: a. Enrollment periods for benefits b. Pay periods and dates c. Holidats d. Furlough days e. Personnel policies and procedures f. Salary information g. Benefits payment h. Tax withholding 5. Risk assessment 6. Participant answers will vary CHAPTER 5 1. Answers are as follows: A. Custody of asset B. Authorization C. Record-keeping D. Authorization E. Reconciliation F. Authorization G. Custody of assets H. Custody of assets I. Record-keeping J. Reconciliation K. Authorizaton 2 2. Note participant s answsers may vary. Key is to assign different responsibilities between employees.

2 At a minimum, Record-keeping and Reconciliation should be kept separate. Task Authorization Custody Record-keeping Reconciliation Entry of time worked Nora Approval of preliminary payroll register Laura Printing of payroll Checks Nora Posting of payroll Adjustments Laura Bank Reconciliation Sam Reconciliation of payroll withholding accounts Sam 3. Compensating controls include: A. Review reports of detail transactions Managers review on a regular and timely basis system the payroll register report including reconciliations. B. Review selected transactions Managers select transactions for review of supporting documents.

3 C. Take periodic asset counts Managers periodically hand delivers payroll checks or direct deposit remittance advices to ensure all employees paid actually exist. D. Check reconciliations Managers from time to time review reconciliations of account balances such as payroll deductions payable or perform them independently. 3 CHAPTER 7 Note these are examples of possible answers. Students may identify additional appropriate responses. 1. Identify specific issues in the control environment and indicate how you would correct these deficiencies. Password availability, blank check stock readily available, signature plates for checks available, lack of responsibility for inadequate controls ( we are a small government, so we don t need to worry about it).

4 Corrective Action Require employees passwords to remain confidential. Lock check stock with limited access. Limit access to the safe with signature plates. 2. Assess the risk that the payroll process would result in errors or irregularities and document below. Risk that user can gain access to the system, access check stock, and sign checks with signature plates. Risk associated with one employee conducting the entire payroll process. Risk that improper withholdings or pay is calculated based on lack of supporting documentation. Risk that unauthorized transactions will occur. Risk that transactions will be improperly calculated. Risk that checks are misappropriated since void checks are not retained.

5 Risk that penalties and interest will be due for untimely remittance of withholdings. 3. Describe control activities that could be implemented to mitigate the risks identified in question 2. Segregate activity related to payroll processing to the extent possible. Include supervisory review when necessary. Require employee or supervisory authorization for withholdings or pay adjustments. Balance payroll data prior to processing payroll . Includes balancing gross salaries, withholdings, and benefits. Track checks by check number and retain all voided checks. Voided checks should have signature removed and be stamped VOID. Schedule remittances to avoid incurring interest and penalties. 4.

6 Describe effective methods of communicating information regarding control activities identified in Question 3. Memo to employees explaining required support for making payroll changes. Schedule required remittances on department calendar to ensure payments are made in a timely manner. 4 5. Explain how you would monitor the payroll process to ensure it is functioning as designed. Balance each payroll to ensure controls are working. Reconcile accounts in timely manner to identify issues in a timely manner. Monitor control environment to identify security lapses quickly.