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Internal control procedures Dave’s Scooters is a small manufacturer of specialty scooters. The company employs 14 production workers and four administrative persons. The following procedures are used to process the company’s weekly payroll: a. Whenever an employee receives a pay raise, the supervisor must fill out a wage adjustment form, which is signed by the company president. This form is used to change the employee’s wage rate in the payroll system. b. All employees are required to record their hours worked by clocking in and out on a time clock. Employees must clock out for lunch break. Due to congestion around the time clock area at lunch time, management has not objected to having one employee clock in and out for an entire department. c. Whenever a salaried employee is terminated, Personnel authorizes Payroll to remove the employee from the payroll system. However, this procedure is not required when an hourly worker is fired. Hourly employees only receive a paycheck if their timecards show hours worked. The computer automatically drops an employee from the payroll system when that employee has six consecutive weeks with no hours worked. d. Paychecks are signed using a check-signing machine. This machine is located in the main office so that it can be easily accessed by anyone needing a check signed. e. Dave’s Scooters maintains a separate checking account for payroll checks. Each week the total net pay for all employees is transferred from the company’s regular bank account to the payroll account. State whether each of the procedures is appropriate or inappropriate, after considering the principles of internal control. If a procedure is inappropriate, describe the appropriate procedure.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 11, Problem 16E
Textbook Problem
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Internal control procedures

Dave’s Scooters is a small manufacturer of specialty scooters. The company employs 14 production workers and four administrative persons. The following procedures are used to process the company’s weekly payroll:

  1. a. Whenever an employee receives a pay raise, the supervisor must fill out a wage adjustment form, which is signed by the company president. This form is used to change the employee’s wage rate in the payroll system.
  2. b. All employees are required to record their hours worked by clocking in and out on a time clock. Employees must clock out for lunch break. Due to congestion around the time clock area at lunch time, management has not objected to having one employee clock in and out for an entire department.
  3. c. Whenever a salaried employee is terminated, Personnel authorizes Payroll to remove the employee from the payroll system. However, this procedure is not required when an hourly worker is fired. Hourly employees only receive a paycheck if their timecards show hours worked. The computer automatically drops an employee from the payroll system when that employee has six consecutive weeks with no hours worked.
  4. d. Paychecks are signed using a check-signing machine. This machine is located in the main office so that it can be easily accessed by anyone needing a check signed.
  5. e. Dave’s Scooters maintains a separate checking account for payroll checks. Each week the total net pay for all employees is transferred from the company’s regular bank account to the payroll account.

Chapter 11, Problem 16E, Internal control procedures Daves Scooters is a small manufacturer of specialty scooters. The State whether each of the procedures is appropriate or inappropriate, after considering the principles of internal control. If a procedure is inappropriate, describe the appropriate procedure.

To determine

State whether each of the procedures is appropriate or inappropriate, after considering the principles of internal control.

Explanation of Solution

Internal control: Internal control is a process which ensures continuous reliability of accomplishment of a company’s objectives, related to operations, financial reporting, and in conformity with laws and regulations. The following are the principles of internal control:

  • Authorizing the responsibility
  • Segregation of duties
  • Documenting and recording transactions
  • Physical controls
  • Periodic independent verification
  • Human resource controls

Payroll: The total payment that a company is required to pay to its employee for the services received is called as payroll.

a.

Justification: The changes in the employee’s wage rate in the payroll system is authorized by the company president; a person who is outside the payroll department. Hence, this process is appropriate.

b.

Justification: The process is inappropriate. Each employee is not maintaining a single clock to record in and out time. The company may paying the employees for more time than they actually worked. Hence, this process is inappropriate.

Appropriate method: The Company should arrange one clock system for entire department to record in and out time...

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Chapter 11 Solutions

Financial Accounting
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