978-0134474021 Chapter 15 Solutions Manual Part 2

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b. Suggest ways to improve the Kowal Manufacturing Company’s internal controls

over hiring and payroll processing. (CPA Examination, adapted)

1. A system of advice forms should be installed so that new hires, terminations, rate

2. Before applicants are hired, their backgrounds should be investigated by

3. The supply of blank time cards should be removed. At the beginning of each week

4. The foreman should collect the time cards at the end of the week, approve them,

5. The payroll checks should be distributed to the workers by a responsible person

In addition, the following changes should be made because the problem does not state

that these procedures are being followed:

If the Company has a cost system that requires the workers to prepare production

The payroll checks should be prenumbered to control their issuance.

A responsible person other than the chief accountant and the payroll clerks should

From time to time, an officer of the Company should witness a payroll

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c. Draw a BPMN diagram that shows Kowal Manufacturing Company’s payroll

process redesigned to implement your suggestions in step b.

Specific solutions will vary, depending upon what weaknesses the student identified in

step b. The following diagram incorporates all suggestions except for HR’s role.

Employee Activity

Factory

Workers

Supervisor

Accounts

Payable

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Receive &

Reconcile bank

statement

Monthly

Complete

Timecards

Weekly

Paychecks

Accounting Information Systems

15.5 Arlington Industries manufactures and sells engine parts for large industrial

equipment. The company employs over 1,000 workers for three shifts, and most

employees work overtime when necessary. Figure 15-10 depicts the procedures

followed to process payroll. Additional information about payroll procedures

follows:

The HRM department determines the wage rates of all employees. The process

begins when a form authorizing the addition of a new employee to the payroll

master file is sent to the payroll coordinator for review and approval. Once the

information about the new employee is entered in the system, the computer

automatically calculates the overtime and shift differential rates for that

employee.

A local accounting firm provides Arlington with monthly payroll tax updates,

which are used to modify the tax rates.

Employees record time worked on time cards. Every Monday morning the

previous week’s time cards are collected from a bin next to the time clock, and

new time cards are left for employees to use. The payroll department manager

reviews the time cards to ensure that hours are correctly totaled; the system

automatically determines if overtime has been worked or a shift differential is

required.

The payroll department manager performs all the other activities depicted in

Figure 15-10

The system automatically assigns a sequential number to each payroll check. The

checks are stored in a box next to the printer for easy access. After the checks are

printed, the payroll department manager uses an automatic check-signing

machine to sign the checks. The signature plate is kept locked in a safe. After the

checks have been signed, the payroll manager distributes the paychecks to all

first-shift employees. Paychecks for the other two shifts are given to the shift

supervisor for distribution.

The payroll master file is backed up weekly, after payroll processing is finished.

(CMA Examination, adapted)

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a. Identify and describe at least three weaknesses in Arlington Industries’ payroll

process.

The payroll processing system at Arlington Industries violates the principle of

There is no authorization of employees’ time cards by a supervisor or other

Time cards are not stored securely when completed on Fridays.

There is no authorization of overtime.

b. Identify and describe at least two different areas in Arlington’s payroll

processing system where controls are satisfactory.

The personnel department determines the wage rate and initiates the setup of

payroll records, which is a good example of segregation of duties.

15.6 Excel Problem

Objective: Learn how to find and correct errors in complex spreadsheets used for

payroll.

a. Read the article “Ferret Out Spreadsheet Errors” by Mark G. Simkin, in the

Journal of Accountancy (February 2004). You can find a copy online by accessing

www.aicpa.org.

b. Download the worksheet referenced in the article.

c. Enter the following erroneous data in the worksheet you downloaded in step b:

Change hours worked for Adams to 400,

Change hours worked for Englert to 4, and

Change hours worked for Hartford to –40.

Create a chart like that shown in Exhibit 2 of the article. Which of the errors are

easily found by the chart? What are the strengths and limitations of creating such

charts to detect errors? Print out your chart and save your work.

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Note: Disable data validation on the hours worked column in order to input erroneous

data.

The errors on the time cards of Adams, Englert, and Hartfort are easily identified. The

d. Create the three data validation rules described in the article (Exhibits 4–7

illustrate how to create the first rule). Print out screen shots of how you create

each rule, and save your work. (Note: The article “Block That Spreadsheet

Error” by Theo Callahan, in the Journal of Accountancy (August 2002) provides

additional examples of data validation rules.)

Rule 1: Payrates must be between $6.75 and $14.00.

Step 1: Select the relevant range of cells

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e. Follow the instructions for using the formula auditing tool. Print out a screen

shot showing use of the tool to circle invalid data (yours should be similar to

Exhibit 9 in the article).

Note: This is now another Data Validation feature. To test it, first change all validation

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