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Payroll Fraud: Internal Controls

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Payroll fraud is a type of fraud that's not very difficult to find, if there are controls in place. What often happens, however, is that the payroll clerk is well respected and trusted and allowed free reign. The individual in charge of payroll at my ex-husband's former place of employment was fired because of payroll fraud. She'd had her husband and brother on the payroll for over three years, and neither of them worked for the company. Her supervisor didn't review and reconcile the account like he was supposed to, so it wasn't caught until he was replaced and his replacement performed a reconciliation.

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When the proper internal controls are in place, this type of fraud is quite simple to detect, as stated. Even ...

Solution Summary

This solution explains the controls and other methods that could be implemented to detect payroll fraud.

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Control activities in payroll processing

As part of the audit of Manor Company, you are assigned to review and test the payroll transactions of the Galena plant. Your tests show that all numerical items were accurate. The proper hourly rates were used, and the wages and deductions were calculated correctly. The payroll register was properly footed, totaled, and posted.

Various plant personnel were interviewed to ascertain the payroll procedures being used in the department. You determine that:

1. The payroll clerk receives the time cards from the various department supervisors at the end of each pay period, checks the employee's hourly rate against information provided by the personel department, and records the regular and overtime hours for each employee.

2. The payroll clerk sends the time cards to the plant's data processing department for compilation and processing.

3. The data processing department returns the time cards with the printed checks and payroll register to the payroll clerk on completion of the processing.

4. The payroll clerk verifies the hourly rate and hours worked for each employee by comparing the detail in the payroll register to the time cards.

5. If errors are found, the payroll clerk voids the computer-generated check, prepares another check for the correct amount, and adjusts the payroll register accordingly.

6. The payroll clerk obtains the plant signature plate from the accounting department and signs the payroll checks.

7. An employee of the personnel department picks up the checks and holds them until they are delivered to the department supervisors for distribution to the employees.


a) Identify the shortcomings in the payroll procedures used in the payroll department of the Galena plant and suggest corrective actions.

b) Identify the weaknesses, if any, that you believe are material and the reasons why.

ICMA (adapted).

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