- 15 Marks
Question
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’s 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)
Answer
- Deficiency: The foreman has the authority to issue temporary employee numbers, which allows the possibility of creating fictitious employees and misappropriating wages.
Recommendation: The issuance of new employee numbers should require authorization from a manager and must be supported by formal documentation, such as an employment contract. - Deficiency: The two wages department staff are responsible for both setting up and maintaining employee records, including amendments for leave and illness. This creates the risk of collusion and unauthorized modifications.
Recommendation: A segregation of duties should be implemented, where one person maintains employee records and another authorizes any amendments. All changes should be reviewed and authorized by a manager. - Deficiency: Handwritten notes of gross pay, deductions, and net pay are included in wage envelopes, which increases the risk of errors in pay calculation and distribution.
Recommendation: Computer-generated payslips should be produced and included in the wage envelopes to ensure accuracy and consistency between the calculated wages and the actual cash distributed. - Deficiency: The foreman distributes the cash wages to employees, allowing for the possibility of wage misappropriation or failure to return unclaimed wages.
Recommendation: Another manager should oversee the distribution of wages, and any unclaimed wages should be recorded and returned to the wages department for safekeeping. - Deficiency: There is no check to verify the amount of cash delivered to the wages office by the secure courier, creating the risk of cash shortages.
Recommendation: The cash delivered should be counted and verified in the presence of two staff members, and both should sign a receipt acknowledging the amount received from the courier.
(Total: 15 marks)
- Tags: Deficiencies, Internal Control, Misstatements, Recommendations, Risk, Wages system
- Level: Level 2
- Topic: Audit and Assurance Risk Environment
- Series: MAY 2018
- Uploader: Dotse