Accounting Information Systems: The Processes and Controls, 2nd Edition

RISKS AND CONTROLS IN THE PAYROLL PROCESSES (STUDY OBJECTIVE 3)

Because payroll usually involves large sums of cash, it is especially important that sufficient internal controls are included in the related business processes. In terms of the five internal control activities introduced in Chapter 3, following are some procedures to be considered for implementation in this process.

AUTHORIZATION OF TRANSACTIONS

Management plays an especially important role in carrying out payroll transactions correctly. If management takes its responsibilities seriously by carefully reviewing the payroll documents, then most employee errors and fraud should be prevented. Departmental supervisors must be certain that all time sheets represent actual time worked by currently active employees. The supervisors are expected to be familiar enough with their respective departments that they will recognize unusual data. In particular, they should be on the lookout for fraud schemes such as overstated hours (including unapproved overtime) and time sheets or paychecks of former employees who are no longer entitled to receive compensation.

In addition to the authorization procedures covering time reports, employee personnel files should contain evidence of proper authorization for various payroll amounts. Included in the files should be approval for pay rate adjustments, hiring, promotion, and termination (authorized by management), as well as approval for all deductions (authorized by individual employees). ...