Dave’s Scooters is a small manufacturer of specialty scooters. The company employs 14 production workers and four administrative persons

Dave’s Scooters is a small manufacturer of specialty scooters. The company employs 14 production workers and four administrative persons. The following procedures are used to process the company’s weekly payroll:

a. Whenever an employee receives a pay raise, the supervisor must fill out a wage adjustment form, which is signed by the company president. This form is used to change the employee’s wage rate in the payroll system.

b. All employees are required to record their hours worked by clocking in and out on a time clock. Employees must clock out for lunch break. Due to congestion around the time clock area at lunch time, management has not objected to having one employee clock in and out for an entire department.

c. Whenever a salaried employee is terminated, Personnel authorizes Payroll to remove the employee from the payroll system. However, this procedure is not required when an hourly worker is terminated. Hourly employees only receive a paycheck if their time cards show hours worked. The computer automatically drops an employee from the payroll system when that employee has six consecutive weeks with no hours worked.

d. Paychecks are signed by using a check-signing machine. This machine is located in the main office so that it can be easily accessed by anyone needing a check signed.

e. Dave’s Scooters maintains a separate checking account for payroll checks. Each week, the total net pay for all employees is transferred from the company’s regular bank account to the payroll account.


State whether each of the procedures is appropriate or inappropriate, after considering the principles of internal control. If a procedure is inappropriate, describe the appropriate procedure.


Answer:
a. Appropriate. All changes to the payroll system, including wage rate increases, should be authorized by someone outside the Payroll Department.

b. Inappropriate. Each employee should record his or her own time out for lunch. Under the current procedures, one employee could clock in several employees who are still out to lunch. The company would be paying employees for more time than they actually worked.

c. Inappropriate. Payroll should be informed when any employee is terminated. A supervisor or other individual could continue to clock in and out for the terminated employee and collect the extra paycheck.

d. Inappropriate. Access to the check-signing machine should be restricted.

e. Appropriate. The use of a special payroll account assists in preventing fraud and makes it easier to reconcile the company’s bank accounts.