1.

Segregation of Duties
Explain why each of the following combinations of tasks should or should
not be separated to achieve adequate internal control.
a. Approval of bad debt write-offs and the reconciliation of the accounts
receivable subsidiary ledger and the general ledger control account.
- Recommendation: These tasks should be separated.
- Explanation:
+ Authorization: Approving bad debt write-offs is an authorization
function.
+ Recording: Reconciling the accounts receivable subsidiary ledger and
the general ledger control account is a recording function.
-> If one person handles both tasks, they could potentially write off
fraudulent debts and then cover up the fraud by manipulating the
reconciliations.
b. Distribution of payroll checks to employees and approval of employee
time cards.
- Recommendation: These tasks should be separated.
- Explanation:
+ Custody: Distributing payroll checks involves handling cash or checks, a
custody function.
+ Authorization: Approving employee time cards is an authorization
function.
-> If one person handles both tasks, they could potentially approve
fraudulent time cards for themselves or others and then steal the resulting
payroll checks.
c. Posting of amounts from both the cash receipts and the cash
disbursements journals to the general ledger.
- Recommendation: These tasks doesn’t need to be separated.
- Explanation:
-> The employee have access to the assets; therefore, no danger exists.
d. Writing checks to vendors and posting to the cash account.
- Recommendation: These tasks should be separated.
- Explanation:
+ Custody: Writing checks to vendors involves handling cash or checks, a
custody function.
+ Recording: Posting to the cash account is a recording function.
-> If one person handles both tasks, they could potentially write checks to
themselves or fictitious vendors and then cover up the theft by
manipulating the cash account entries.
e. Recording cash receipts in the journal and preparing the bank
reconciliation.
- Recommendation: These tasks should be separated.
- Explanation:
-> The employee records the transactions and has access toassets. The
employee to verify the accuracy of the records would allow him or her to
cover up any money embezzled by doctoring the bank reconciliation.
7. Each of the following internal controls has been taken from a standard
internal control questionnaire used by a CPA firm for assessing control risk
in the payroll and personnel cycle.
1. Approval of department head or foreman on time cards is required
before preparing payroll.
2. All pre-numbered time cards are accounted for before beginning data
entry for preparation of checks.
3. The computer calculates gross and net pay based on hours inputted and
information in employee master files, and payroll accounting personnel
double-check the mathematical accuracy on a test basis.
4. All voided and spoiled payroll checks are properly mutilated and
retained.
5. Human resources policies require an investigation of an employment
application from new employees. Investigation includes checking the
employee’s background, former employers, and references.
6. The payroll accounting software application will not accept data input
for an employee number not contained in the employee master file.
7. Persons preparing the payroll do not perform other payroll duties
(timekeeping, distribution of checks) or have access to payroll data master
files or cash.
8. Written termination notices, with properly documented reasons for
termination, and approval of an appropriate official are required.
9. All checks not distributed to employees are returned to the treasurer for
safekeeping.
10. Online ability to add employees or change pay rates to the payroll
master file is restricted via passwords to authorized human resource
personnel.
Required:
a. For each internal control, identify the type(s) of specific control activity
(activities) to which it applies (such as adequate documents and records
or physical control over assets and records).
1. Proper authorization of transactions and activities
2. Design and use of documents and records
3. Independent checks on performance
4. Safeguard assets, records, and data
5. Independent checks on performance
6. Design and use of documents and records
7. Segregation of duties
8. Proper authorization of transactions and activities
9. Safeguard assets, records, and data
10. Safeguard assets, records, and data
b. For each internal control, identify the transaction-related audit
objective(s) to which it applies.
1. Occurrence
2. Completeness
3. Accuracy
4. Occurrence
5. Occurrence, Accuracy
6. Occurrence
7. Accuracy, Completeness
8. Occurrence
9. Completeness
10. Accuracy
c. For each internal control, identify a specific misstatement that is likely
to be prevented if the control exists and is effective.
1. Employees may cheat by adding unrealistic hours to their time cards to
receive higher pay.
2. It is possible for time cards to be added or subtracted, resulting in
inaccurate payroll calculations.
3. There may be calculation errors in the software or errors in data entry
that result in incorrect salary calculations.
4. Cancelled checks can be reused for unauthorized payments.
5. It is possible to pay people who do not exist or do not work.
6. It is possible to add fake employees to the system to receive salaries.
7. One person can manipulate the payroll and payment process, creating
opportunities for fraud.
8. It may be necessary to continue paying employees who have left.
9. There may be loss or fraud associated with undelivered checks.
10. It is possible to add or modify employee information without
authorization, resulting in inaccurate salary calculations.
d. For each control, list a specific misstatement that could result from the
absence of the control.
1. Wage miscalculations may occur due to incorrect information on the
time card.
2. It is possible to pay people who do not work or to double pay one
person.
3. Misapplication of wages, allowances or other deductions may occur.
4. Loss or fraud may occur in connection with checks.
5. It is possible to hire incompetent people.
6. It is possible to double pay one person.
7. It is possible to double pay one person.
8. Disputes may arise regarding the termination of employment.