The following are various asset misappropriations involving the payroll and personnel cycle:
1. A supervisor does not notify human resources that an hourly employee has left
the company. He continues to submit time records for the employee. The money is
Required
In-class
Discussion
Required
Chapter 20 / AUDIT OF THE PAYROLL AND PERSONNEL CYCLE 697
directly deposited in the former employee’s bank account, and he splits the amount
paid with the supervisor.
2. The payroll clerk increases his salary by $100 each pay period, and he also in-
creases the hourly rate for his friend who works in the shipping department.
3. The payroll clerk submits payroll information for a fictitious employee and has the
funds directly deposited to a bank account that he controls.
4. An employee adds 10 overtime hours that she did not work to her time record each
pay period.
5. Two factory employees have an arrangement that one of them will take each Friday
off, and the other employee will record their time worked so that the absent employee
will be paid.
a. For each misappropriation, indicate the transaction-related audit objective that was
not met.
b. Indicate one or more controls that would be most effective in preventing or detecting the misappropriation.
c. Because the controller is concerned about fictitious employees, she has recom-
mended a surprise payroll payoff. Which misappropriations would be detected by the
surprise payroll payoff? How is the payoff done if employees do not receive payroll
checks because payment is directly deposited into their bank accounts?
