Third Floor Ltd is a construction company with many contracts being executed concurrently. A large number of workers are on various construction sites. Third Floor Ltd has an internal audit department and the Team is currently reviewing cash wages systems within the company.
The following information is available concerning the wages systems:
- Workers on each site are controlled by a foreman. The foreman has a record of all employee numbers and can issue temporary numbers for new employees.
- Any overtime is calculated by the computerised wages system and added to the standard pay.
- The two staff in the wages department make amendments to the computerised wages system in respect of employee leave, illness, as well as setting up and maintaining all employee records.
- The computerised wages system calculates deductions from gross pay, such as employee taxes (PAYE), and other statutory deductions.
- Finally a list of net cash payments for each employee is produced. Cash is delivered to the wages office by secure courier. The two staff place cash into wages envelopes for each employee along with a handwritten note of gross pay, deductions and net pay. The envelopes are given to the foreman for distribution to the individual employees.
Required:
Identify and explain FIVE deficiencies in Third Floor Ltd system of internal control over the wages system that could lead to misstatements in the financial statements, and, for each deficiency, suggest an internal control to overcome that deficiency. (15 marks)
View Solution
- Deficiency
The foreman is in a position to set up fictitious employees onto the wages system as he has authority to issue temporary employee numbers. This would allow him to collect cash wages for such ghost employees.
Recommendation
The issue of new employee numbers should be authorised by a manager and supported by employee contract letters etc. - Deficiency
The two wages clerks are responsible for the set up and maintenance of all employee records. They could therefore, in collusion, set up ghost employees and collect cash wages from them.
Recommendation
The list of personnel should be matched with the payroll by a manager and all new employee records should be authorised before being set up on the system. - Deficiency
The wages clerks are responsible for making amendments to holidays and illness etc. They could make unauthorised amendments which affect individual staff members’ pay.
Recommendation
Any amendments to standing data on the wages system should be done by an authorised manager so that unauthorised amendments are not made. A log of amendments should be regularly reviewed. - Deficiency
The computer system calculates gross pay and any deductions but these are hand-written by the wages clerks for the staff pay packets, so errors could be made and incorrect wages issued.
Recommendations
A payslip should be generated by the computer system and included in the wage envelopes to reduce the chance of errors in deductions and gross pay being made. - Deficiency
The computer automatically calculates gross pay and deductions, however there is no check to ensure the calculations are accurate.
Recommendations
One of the wages clerks should check the gross pay and deductions for a sample of employees to gain assurance that the computer is calculating amounts correctly. - Deficiency
The foreman distributes cash wages to the employees. He could therefore misappropriate any wages not claimed.
Recommendation
The distribution of wages should be overseen by another manager. Unclaimed wages should be noted on a form and returned to the wages department. - Deficiency
Cash is delivered by secure courier but there is no mention of a check to verify the amount delivered. Less cash than stated was delivered may actually be delivered.
Recommendation
The amount of cash delivered should be verified and signed for by the receiving Third Floor officers and the courier.