The Generous Loan Company has 100 branch loan offices. Each office has a manager and four or five subordinates who are employed by the manager. Branch managers prepare the weekly payroll, including their own salaries, and pay employees from cash on hand.
Employees sign the payroll sheet signifying receipt of their salary. Hours worked by hourly personnel are inserted in the payroll register sheet from time cards prepared by the employees and approved by the manager.
The weekly payroll register sheets are sent to the head office along with other accounting statements and reports. The head office compiles employee earnings records and prepares all federal and provincial salary reports from the weekly payroll sheets.
Salaries are established by head office job-evaluation schedules. Salary adjustments, promotions, and transfers of full-time employees are approved by a head office salary committee based on the recommendations of branch managers and area supervisors. Branch managers advise the salary committee of new full-time employees and terminated employees. Part-time and temporary employees are hired without advising the salary committee.

Required:
a. Prepare a payroll audit program to be used in the head office to audit the branch office payrolls of the Generous Loan Company. See Exhibit 13€“9 for sample audit procedures.
b. Based on your review of the payroll system, how might funds for payroll be divertedfraudulently?

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EXHIBIT 13A-2 Payroll Application INTERNAL CONTROL QUESTIONNAIRE FOR PRODUCTION PROCESS AUDITEE: FINANCIAL STATEMENT PERIOD: PROCESS: Invent OVERALL COMPANY-LEVEL CONTROL AND CONTROL ACTIVITIES ASSESSMENT FILE INDEX -555 duction costin Audit File References Auditor Res efer to responses recorded for APPLICATION CONTROL ASSESSMENTS PAYROLL APPLICATION CONTROLS Environment and general controls relevant to this application questions in Exhibit 9A-1 in Appendix 9 1. Are all employees paid by cheque or direct deposit to their bank accounts? 2. If a special payroll bank aocount is used, is the payroll bank account reconciled by someone who does not prepare, sign, or deliver paycheques? 3. Are payroll cheques signed by persons who neither prepare cheques nor keep cash funds or accounting records? 4. If an outside payroll processing service is used, is the list of employees paid by the service reviewed by the employees' supervisor or someone else who cannot add or make changes to the employee payroll list submitted to the processing service? 5. Are payroll department personnel rotated in their duties? required to take vacations? bonded? 6. Is there a timekeeping department (function) independent of the payroll department? Application Control Assessments Consider whether the auditee has appropriate policies and procedures in place to meet the following control objectives: Validity objective: 7. Are names of terminated employees reported in writing to the payroll department? 8. is the payroll compared with personnel files periodically? 9. Are cheques distributed by someone other than the employee's immediate supervisor? 10. Are unclaimed wages controlled by a responsible officer? 11. Do internal auditors conduct occasional surprise distributions of paycheques? Completeness objective 12. Are names of newly hired employees reported in writing to the payroll department? 13. Are blank payroll cheques prenumbered and the numerical sequence checked for missing documents? Authorization objective 14. Are all wage rates determined by contract or approved by a personnel officer? 15. Are authorizations for deductions, signed by the employees, on file? 16. Are time cards or piecework reports prepared by the employee approved by his or her supervisor? 17. Is a time clock or other secure time recording system used to record hours worked by each employee? 18. Is the payroll register sheet signed by the employee preparing it and approved prior to payment? Accuracy objective 19. Are timekeeping and cost accounting records (such as hours, dollars) reconciled with payrol department calculations of hours and wages? 20. Are payrolls audited periodically by internal auditors? Classification objective: 21. Do payrolil accounting personnel have instructions for classifying payroll debit entries? Accounting objective 22. Are payroll records reconciled with govermment tax reports (e.g., T4 summary)? Proper period objective 23. Are monthl terly, and annual wage accruals reviewed by an accounting officer? Auditor's conclusion on the effectiveness of application controls in the production process Prepared by Date