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. The employee signs the payroll sheet signifying receipt of his salary. Hours worked by hourly personnel are inserted in the payroll sheet from time cards prepared by the employees and approved by the manager.

The weekly payroll shtets are sent to the home office along with other accounting statements and reports. The home office compiles employee earnings records and prepares all federal and state salary reports from the weekly payroll sheets.

Salaries are established by home office job evaluation schedules. Salary adjustments, promotions and transfers of full-time employees are approved by a home office salary committee based upon the recommendations of branch managers and area supervisors. Branch managers advise the salary committee of new full-time employees and terminations. Part-time and temporary employees are hired without referral to the salary committee.

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a. Based on your review of the system, how might payroll funds be diverted?

b. Indicate your recommendations for improvement.

c. Do you believe any weaknesses in the system are material? Explain. AICPA (adapted)