The Kowal Manufacturing Company employs about 50 production workers and has the following payroll procedures.
The factory foreman interviews applicants and on the basis of the interview either
hires or rejects them. When applicants are hired, they prepare a W-4 form and give it to the foreman. The foreman writes the
hourly rate of pay for the new employee in the corner of the W-4 form and then gives the form to a payroll clerk as notice that the worker has been employed. The foreman verbally advises the payroll department of rate adjustments.
A supply of blank time cards is kept in a box near the time clock at the entrance to the
factory. Each worker takes a time card on Monday morning, fills in his or her name, and punches the time clock upon their daily arrival and departure. At the end of the week, the workers drop the time cards in a box near the door to the factory.
On Monday morning, the completed time cards are taken from the box by a payroll
clerk. One of the payroll clerks then enters the payroll transactions into the computer,
which records all information for the payroll journal that was calculated by the clerk and automatically updates the employees’ earnings records and general ledger. Employees are automatically removed from the payroll when they fail to turn in a time card.
The payroll checks that are not directly deposited into employees’ bank accounts are
manually signed by the chief accountant and given to the foreman. The foreman distributes the checks to the workers in the factory and arranges for the delivery of the checks to the workers who are absent. The payroll bank account is reconciled by the chief accountant, who also prepares the various quarterly and annual payroll tax reports.
a. List the most important weaknesses in their processes and state the misstatements
that are likely to result from the weakness.
b. For each weakness that increases the likelihood of fraud, identify whether the likely
fraud is misappropriation of assets or fraudulent financial reporting.
