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    The Kowal Manufacturing Company

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    16-34 (Potential misstatements/control activities for payroll)

    The Kowal Manufacturing Company employs about 50 production workers and has the following payroll procedures.

    The factory foreman interviews applicants and on the basis of the interview either hires
    or rejects the applicants. When the applicant is hired, a W-4 form (Employee's Withholding Exemption Certificate) is prepared and given to the foreman. The foreman writes the hourly rate of pay for the new employee in the corner of the W-4 form and then gives the form to a payroll clerk as notice that the worker has been employed. The foreman verbally advises the payroll department of rate adjustments.

    A supply of blank time cards is kept in a box near the entrance to the factory. Each
    worker takes a time card on Monday morning, fills in his or her name, and notes in pencil on the time card the daily arrival and departure times. At the end of the week, the workers drop the time cards in a box near the door to the factory.

    The completed time cards are taken from the box on Monday morning by a payroll clerk.

    Two payroll clerks divide the cards alphabetically between them, one taking the A to L section of the payroll and the other taking the M to Z section. Each clerk is fully responsible for her section of the payroll. She computes the gross pay, deductions, and net pay, posts the details to the employee's earnings records, and prepares and numbers the payroll checks.

    Employees are automatically removed from the payroll when they fail to turn in a time card.
    The payroll checks are manually signed by the chief accountant and given to the foreman.
    The foreman distributes the checks to the workers in the factory and arranges for the
    delivery of the checks to the workers who are absent. The payroll bank account is reconciled by the chief accountant, who also prepares the various quarterly and annual payroll tax reports.

    a. Identify the misstatements that may occur in the Kowal Company's procedures.
    b. For each misstatement in (a) above, give your recommended improvements.
    AICPA (adapted)

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    Solution Preview

    STEP 1
    a. Identify the misstatements that may occur in the Kowal Company's procedures.
    1. The foreman writes an incorrect rate of pay for the new hires;
    2. The payroll department incorrectly enters rate adjustment.
    3. The worker incorrectly enters the arrival and departure time on the time card.
    4. The payroll clerk wrongly enters the details of gross pay, deductions or earning records.
    5. Employees are wrongly removed from the payroll;
    6. The chief accountant enters a wrong amount in the payroll check.
    7. The chief accountant makes a misstatement in the ...

    Solution Summary

    The Kowal Manufacturing Company is discussed in great detail in this solution.