Payroll Controls

Sherman Company employs 400 production, maintenance, and janitorial workers in eight separate departments. In addition to supervising operations, the supervisors of the departments are responsible for recruiting, hiring, and firing workers within their areas of responsibility. The organization attracts casual labor and experiences a 20 to 30 percent turnover rate in employees per year. A portion of Sherman Company’s payroll procedures are as follows:
Employees clock on and off the job each day to record their attendance on timecards. Each department has its own clock machine that is located in an unattended room away from the main production area. Each week, the supervisors gather the timecards, review them for accuracy, and sign and submit them to the payroll department for processing. In addition, the supervisors submit personnel action forms to reflect newly hired and terminated employees. From these documents, the payroll clerk prepares payroll checks and updates the employee records. The supervisor of the payroll department signs the paychecks and sends them to the department supervisors for distribution to the employees. A payroll register is sent to accounts payable for approval. Based on this approval, the cash disbursements clerk transfers funds into a payroll clearing account.

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Discuss the risks for payroll fraud in the Sherman Company payroll system. What controls would you implement to reduce the risks? Use the COSO framework of control activities to organize your response.


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