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CHAPTER 5
INTERNAL CONTROL
OVER PAYROLL AND
PERSONNEL CYCLE

LEARNING OBJECTIVES

After studying this chapter, students can be able to:

1. Explain the characteristics of basic stages of the cycle

2. Identify the goal of the payroll cycle
3. List the types of errors and frauds occurring in each stage of the
payroll cycle
4. Identify control activities commonly used in each stage of the
payroll cycle
5. Analyze some specific frauds and how to deal with them.

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Identify the accounts and transactions in

the payroll and personnel cycle.

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Accounts and transactions in the payroll

and personnel cycle
The payroll and personnel cycle involves the employment and
payment of all employees. 2 aspects: employment and payment
The main differences between the payroll and personnel cycle
and other cycles include:
Focus on payroll and payroll
• There is only one class of transactions for payroll. deductions
• Transactions are generally far more significant than related
balance sheet accounts
• Internal controls over payroll are effective for almost all
companies, even small ones.
Typical accounts in the payroll and personnel cycle are shown
in Figure 20-1.

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Describe the business functions and the

related documents and records in the
payroll and personnel cycle.

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Business functions in the cycle and related

documents and records
The payroll and personnel cycle
- Begins with hiring employees HR dep (qualified personnel)
- Ends with paying them for the services they performed
- Includes payment to the government and other institutions for
withheld and accrued payroll taxes and benefits.
Human Resources: This department is an independent source for hiring
qualified personnel and a source for verification of wage information,
including deletions from payroll and changes in wages and deductions.
• Human resource records include date of employment, background checks,
rates of pay, authorized deductions, evaluations, and terminations.
Application form, transcripts, labor contracts, payment rates stop working
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Business functions in the cycle and related

documents and records (cont.)
Start from hiring dep
Timekeeping and Payroll Preparation: These functions are important in
the audit of payroll because they directly affect payroll expense.
The following documents are involved in timekeeping and payroll:
• Time Record: Document indicating the time the hourly employee started
and stopped working. record only the period of time: employee starting point + end
• Job Time Ticket: Form indicating which jobs employees worked on during a
given time period.
• Payroll Transaction File: Computer-generated file including all payroll
transactions processed during a given time period. cover het
• Payroll Journal or Listing: Generated from the payroll transaction file
showing payroll details for each employee. Nhat ki ve luong maybe k co khau tru cthu
• Payroll Master File: Record of every payroll check, including gross pay,
deductions, and net pay for each employee. tong individuals in master file =
How many methods to calculate the payment for empioyee? Advan + Disadvan
2 methods: time-based payment, number ofCopyright
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made 20-8

operational card/job card

Payroll summary:

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Examples of Documents used

• Application for employment

• Appointment letter
• Timesheet
• Authority for pay deduction
• Attendence at work
• Employee records
• Income taxation declaration
• Leave request
• Overtime approval
• Pay envelopes
• Payroll
• Payroll deductions
• Payroll dissection
• ………

Business functions in the cycle and related

documents and records (cont.)
Payment of Payroll: The approval and distribution of payroll must be carefully
controlled to prevent theft. To increase control, payroll disbursements are usually
processed separately from other disbursements.
• Payment of payroll may be made by check, but more often are deposited directly into
employees’ bank accounts.
Payroll Bank Account Reconciliation: An imprest payroll account is a separate payroll
account in which a small balance is maintained and the exact amount of payroll is
transferred immediately before distribution of payroll.
Preparation of Payroll Tax Returns and Payment of Taxes: Federal and state laws
require timely preparation and payment of payroll taxes.

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Payroll cycle: functions of departments

HR Department:
Department/ Factory:
• Recruiting, hiring employees
• Timekeeping, tracking working time
• Prepare reports on personnel situation
• Confirm working time, service completed
• Make a personnel book
• Approve sick leave, maternity leave, accidents
• Make a personnel profile
labor, stop production, stop working
• Issuing salary calculation policies

Payroll accountant:
• Calculating salary, bonus
Making salary payment table, bonus and other payable
• Record in accounting books
• Payment salary, bonus and related payments 13

Risks in payroll cycle

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• Salary policy hinders operations

• The recruitment, salary payment, reward...
are not in accordance with the policy of the
unit and the law
Risks in • The salaries and bonuses are
“understatement”

payroll • Error in calculating salary and bonus

• Not update HR data
• Insufficient number of existing employees in
cycle the salary period;
• Incorrect title, position, rank, department,
etc.
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• Failure to promptly update personnel changes

(retired employees, new employees, transferred
employees, employees with salary

Risks in increase/reduction, etc.)

• Time attendance risks (time attendance is
incomplete, inaccurate, late)
payroll • Payroll risk (incomplete, inaccurate, late
calculation)

cycle
• Employee's salary and bonus are misappropriated
• Financial statements and reports on personnel,
salaries are not honest and reasonable.

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5.2 Internal control objectives

Internal control objectives

1, Ensure that all transactions are recorded:
All valid employee payments should be recorded from attendance
documents, sign-on registers, ID card and sensing equipment. Wages
payments are reconciled to the wages control account at regular
intervals. Transactions not recorded could be detected by employees
advising pay staff accordingly.

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Internal control objectives

2, Record only transactions that are valid
All hours spent on jobs are recorded by the supervisor. The Internal
controls on employee hiring and the supervision of staff working
should detect and protect against the initiation off invalid labour
charge.

Internal control objectives

3, Authorise only valid transactions
Production activities are approved by managers. Factory supervisors
should not accept production orders without the correct authority. All
overtime is approved with overtime authorizations signed by section
head.

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Internal control objectives

4, Value transactions correctly and protect records from incorrect
calculations and errors recording
Normal procedure for each pay period includes making regular wage
rate checks on each department in the payroll. This is achieved by
checking wage rates and charge-out rates used in payroll calculations
with the calculations for previous payrolls.

Internal control objectives

5, Classify entries correctly in accordance with the various charts of
accounts or categorizing requirements
This is verified by comparing job costs charged against each job with
estimates, or by comparing budgeted charges for indirect and
overhead categories with the accounting manual. This ensures that
labour times and charges of each employee are allocated to the
correct labour work in process or indirect overhead control accounts.

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Internal control objectives

6, Record transactions in a timely manner so as to minimize errrors
caused by a delay between the transaction and its recording
This ensures that labour dissections are as accurate as possible and
that labour resources are effectively and efficiently used.

Internal control objectives

7, Include all transactions in the relevant subsidiary ledger and
correctly post them to the relevant ledger account.
The normal levels of labour activities can be confirmed against payroll
and clearing accounts in the cost ledgers. This includes all charges for
labour hours to production in the work in process, finished goods and
relevant factory overhead control accounts.

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Internal control objectives

 Suitable salary policy
 The recruitment, salary payment, reward... are in accordance
with the policies of the company and the law
 Calculate salary fully, accurately and timely:
 + The company's personnel is always updated in a
complete, accurate and timely manner;
 + The labor power of each employee is always evaluated
according to the company's timekeeping regulations;
 + The company's salary is calculated in a full, accurate and
timely manner on the basis of timekeeping;
 Pay salary accurately, timely and fully to employees
 Control salary costs
 Recording and making honest and reasonable financial and
labor-related reports
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Control activities

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diamonds = key control

Policy/Procedure

• PURPOSE AND SCOPE

This procedure is used to compile time sheets, process
pay changes, manually calculate wages and taxes due,
create paychecks, deposit taxes, and create journal
entries.

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Obtain Time Sheets (Payroll Clerk)

1. Obtain time sheets (see Exhibit) from all company locations. Check off the
receipts against the current employee list, and contact the factory manager of each
location from which no time sheets have been received or for missing individual
time sheets.
2. Verify that all time sheets contain a supervisor’s approval signature.
Supervisors must circle and initial all overtime hours to indicate their
authorization. If approval has not occurred, return the time sheets to the
supervisors for their immediate review and approval.

Review Time Sheets (Payroll Clerk)

1. Add up the time on all time sheets, circling those time punches that have no
clock-ins or clock-outs.
2. Review the time sheets for special work codes. If any time has been charged
to family leave, jury duty, personal holiday, sick leave, unpaid leave, or
vacation, circle those items.
3. Create a master review list of all employee names whose time sheets contain
circled items.
4. Distribute all time sheets with circled items to supervisors, who must
complete missing information and initial next to each circled item to indicate
their approval.
5. Upon receipt of the reviewed time sheets from the supervisors, verify that all
circled items have been addressed, and then check off the time sheets on the
master review list.

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Review Employee Change Requests (Payroll Clerk)

1. Assemble all employee change forms (see Exhibits 8.4 and 8.5)
and deduction authorization forms received since the last payroll was
processed.
2. Verify that all change requests have been authorized correctly

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Calculate Wages and Taxes Due (Payroll Clerk and

Payroll Clerk #2)

1. Calculate gross pay based on the most recent authorized pay rate for each
employee.
2. Calculate pretax deductions, such as 401(k) and flexible spending account
deductions. Verify that deduction goals have not been exceeded.
3. Using the appropriate IRS tax table, calculate all taxes for employees.
4. Calculate after-tax deductions based on authorized documents. Verify
that deduction goals have not been exceeded

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Review Wage and Tax Calculations (Payroll Clerk #2)

1. Review all pay calculations made by the first payroll clerk, focusing on
the following items:
• Employee deductions are correct.
• Deductions do not exceed deduction goals.
• Pay rates are accurate.
• The correct start dates are used for changes in pay rates.
• Taxes are based on the correct number of employee deductions.
2. Review all possible errors with the first payroll clerk.
3. Once all errors are corrected, sign off on the calculations and return
all payroll documents to the first payroll clerk

Create Payroll Register (Payroll Clerk)

• 1. Itemize in the payroll register who was paid, their gross pay, tax
deductions, and net pay.
2. Have the payroll manager compare the checks to the payroll register to
ensure that all information was transferred correctly.
3. Initial and date all payroll change and deduction authorization forms to
indicate that they were used in the payroll calculations, and file them in
the employee payroll files

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Create Paychecks (Payroll Clerk #2)

1. Remove a sufficient number of blank payroll checks from the locked storage
cabinet for all employees to be paid. Note the check numbers removed on a
tracking sheet, which is stored in a separate locked cabinet.
2. Transfer gross pay, deductions, and net pay information from the payroll
register to the checks, and copy the same information onto the remittance
advices attached to each check.
3. Record in the payroll register, next to the pay information for each employee,
the check number of the check used to pay him or her.
4. Take the payroll register and completed checks to an authorized check signer,
who compares the payroll register entries to the checks and signs the checks.
5. Store the signed checks in the company safe until pay day.

Deposit Withheld Taxes (Payroll Clerk #2)

1. Remove a blank Form 8109 from the IRS-supplied booklet.

2. On the form, enter the month in which the corporate tax year ends, the
dollar amount being remitted (source is the tax total on the payroll register),
and contact information, and darken the square next to the type of tax
being paid.
3. Create a check for the amount of the remittance.
4. Take the completed Form 8109 and check payment to the local bank and
obtain a receipt for the payment.
5. File the tax payment receipt by date.
6. Send the payroll register to the general ledger accountant

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Create and Post Journal Entries (General Ledger Clerk and Controller)

1. The general ledger accountant summarizes the payroll register into a journal
entry on the corporate journal entry form.
2. The controller reviews the journal entry form and initials it to indicate
approval.
3. The general ledger accountant records the journal entry in the general ledger.
4. The general ledger accountant staples the journal entry form to the payroll
register and files it by date.

Issue Checks (Paymaster)

• 1. Divide the paychecks into groups by department.

2. Go to each department and hand out paychecks to all employees showing a

proper form of picture identification.

3. Upon receipt of a paycheck, each employee signs for it next to his or her
name on the employee register.

4. If employees are not available, highlight their names on the employee

register, and store both the register and unissued checks in the company safe.

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Some additional degree

of control over the
process.

Additional control over the process

Continually review all outstanding advances.

When advances are paid to employees, it is necessary to continually review and follow up on
the status of these advances. Employees who require advances are sometimes in a precarious financial position
and must be issued constant reminders to ensure that the funds are paid back in a timely manner. A simple control
point is to have a policy that requires the company to automatically deduct all advances from the next employee
paycheck, thereby greatly reducing the work of tracking advances.
Require approval of all advance payments to employees.
When employees request an advance for any reason—as a draw on the next paycheck or as funding for a company
trip—this should always require formal signed approval from their immediate supervisors. The reason is that an
advance is essentially a small short-term loan, which would also require management approval. The accounts
payable supervisor or staff should be allowed to authorize advances only when they are in very small amounts.

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Additional control over the process

Limit access to payroll change authorization forms.

When the payroll clerk receives a signed payroll change authorization, he or she should
store it in a locked cabinet until used to calculate payroll. By doing so,
no one (except the payroll clerk) has an opportunity to modify the authorization document.

Payroll manager verifies payroll register entry.

The payroll clerk can
both calculate paychecks and record this information in the payroll
register, as long as the payroll manager verifies that all information was
transferred correctly to the payroll register.

Additional control over the process

Require approval of all negative deductions.
A negative deduction from a paycheck is essentially a cash payment to an employee. Though
this type of deduction is needed to offset prior deductions that may have been too high, it can be
abused to increase a person’s pay artificially. Consequently, all negative deductions should be
reviewed by a manager.

Audit pay deductions.

It is useful to audit the deductions taken from
employee paychecks, since these can be altered downward to effectively yield an increased rate of
pay. This audit should include a review of the amount and timing of garnishment payments, to
ensure that these deductions are being made as required by court orders.

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Additional control over the process

 Look for paychecks having no tax or other deductions.
A paycheck that has no tax deductions or personal deductions is more likely to be a check issued for a ghost
employee, where the perpetrator wants to receive the maximum amount of cash. The easiest way to spot these
checks is to create a custom report that runs automatically with each payroll and that itemizes only checks of this
nature.

 Issue lists of paychecks issued to department supervisors.

It is quite useful to give supervisors a list of paychecks issued to everyone in their departments from time to
time, because they may be able to spot payments being made to employees who are no longer working there.
This is a particular problem in larger companies, where any delay in processing termination paperwork can
result in continuing payments to ex-employees. It is also a good control over any payroll clerk who may be
trying to defraud the company by delaying termination paperwork and then pocketing the paychecks produced in
the interim.

Additional control over the process

Compare the addresses on employee paychecks.

If payroll staff members are creating additional ghost employees and having the resulting paychecks mailed to
their home addresses, then a simple comparison of addresses for all check recipients will reveal duplicate
addresses. (Employees can get around this problem by having checks sent to post office boxes; this control
issue can be stopped by creating a policy to prohibit payments to post office boxes.)

 Compare pay records to employee files.

A good detective control is to see if an employee human resources file exists for each check payment, on the grounds that
these files typically are maintained by someone other than the payroll clerk and so represent a good independent verification
of the existence of an employee. If there is no employee file, payments probably are being made to a ghost employee.

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Additional control over the process

 Prohibit payment of wages in cash.
If a company pays its employees in cash, there are additional opportunities for the funds to be stolen,
which require additional controls. It is better simply to not allow cash payments. For a discussion of the
controls needed for wage payments made in cash

 Have employees sign for paychecks received.

Though not common, an extra level of control over the payment process is to require employees to sign
for paychecks received. This is not as necessary as would be the case if payments were in cash (see the
next section). Generally, giving responsibility for the paycheck distribution process to a paymaster is a
sufficient level of control.

Additional control over the process

Review paychecks for double endorsements.
If a payroll clerk has continued to issue checks to a terminated employee and is pocketing the
checks, the cashed checks should contain a forged signature for the departed employee as well as a
second signature for the account name into which the check is deposited.
Review uncashed payroll checks.
If checks have not been cashed, it is possible that they were created through some flaw in the payroll
system that sent a check to a nonexistent employee. An attempt should be made to contact these
employees to see if there is a problem.

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Additional control over the process

Independently verify tax remittances
Given the large penalties associated with late or incorrect tax remittances, some companies protect themselves by having an
additional person calculate the amount of taxes remitted, and the timing and manner of remittances, to be doubly sure that
remittances are handled correctly.

Reconcile the payroll bank account.

The payroll bank account always should be promptly reconciled, so that any discrepancies between payments made and the
totals listed in the payroll register will be noted, indicating the presence of fraud. An earlier control that described how to
match the payroll register to authorizing documents could be negated by false entries in the payroll register. The bank
reconciliation will highlight any such false entries. This reconciliation should be conducted by someone not otherwise
involved in the payroll process.

Additional control over the process

Compare the payroll salary budget to actual expenditures.

A very high-level control over the reasonableness of the payroll expense is to
compare it to the budgeted expense, department by department. As long
as the budget was designed roughly to mirror actual operations (as opposed to a stretch budget that is
designed to be quite difficult to attain),
this can be a reasonable indicator of problems with the payroll calculations. It is especially good for indicating
the presence of ghost employees, since they will not be listed in the budget.
Outsource payroll processing. Outsource IT function
A supplier of payroll processing services is responsible for remitting payroll taxes, which removes a
considerable responsibility from the company; for this reason, outsourcing
payroll is in itself a control point. Outsourcing is described in greater
detail in Section 8–8, “Controls for Outsourced Payroll Processing.”
Dua tren economic contract ma mik da ki ket voi ben doi tac (partner) --> check li cluong xem có dat dc
ycau cua mik k --> thanh toan

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Appendix: Documents in payroll cycle

Control activities
 Issue series of documents for recording salary:
 For workers: use the job tracking sheet to determine
the amount of work done in each day/week
 For office staff: it is necessary to make a salary estimate
for each month/per job. Make periodic reports on the
work done
 Prepare a salary slip for each individual on the basis of
an updated personal file and transfer it to a competent
person for approval;
 Prepare a summary table of salary transferred to the
accounting department for recording;

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Control activities

Issue series of documents for recording salary (Cont):

(According to Circular No. 200/2014/TT-BTC on 22 Dec.2014)

- Working time table

- Individual Timesheets
- Payroll Table (for each Department)
- Payroll Slip (for each staff)
- Payment slip
- Payment order via bank….

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EXCERCISES AND CASE STUDIES

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• CASE # 1
• You are an audit senior of Scarlet & Co and are in the process of
reviewing the systems testing completed on the payroll cycle of
Bronze Industries Co (Bronze), as well as preparing the audit
programmes for the final audit. Bronze operate several chemical
processing factories across the country, it manufactures 24 hours a
day, seven days a week and employees work a standard shift of eight
hours and are paid for hours worked at an hourly rate. Factory
employees are paid weekly, with approximately 80% being paid by
bank transfer and 20% in cash; the different payment methods are due
to employee preferences and Bronze has no plans to change these
methods.

• The administration and sales teams are paid monthly by bank

transfer. Factory staff are each issued a sequentially numbered clock
card which details their employee number and name. Employees
swipe their cards at the beginning and end of the eight-hour shift and
this process is not supervised. During the shift employees are entitled
to a 30-minute paid break and employees do not need to clock out to
access the dining area. Clock card data links into the payroll system,
which automatically calculates gross and net pay along with any
statutory deductions. The payroll supervisor for each payment run
checks on a sample basis some of these calculations to ensure the
system is operating effectively. Bronze has a human resources
department which is responsible for setting up new permanent
employees and leavers. Appointments of temporary staff are made by
factory production supervisors. Occasionally overtime is required of
factory staff, usually to fill gaps caused by staff holidays.

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• Overtime reports which detail the amount of overtime worked are

sent out quarterly by the payroll department to production supervisors
for their review. To encourage staff to attend work on time for all
shifts, Bronze pays a discretionary bonus every six months to factory
staff; the production supervisors determine the amounts to be paid.
This is communicated in writing by the production supervisors to the
payroll department and the bonus is input by a clerk into the system.
For employees paid by bank transfer, the payroll manager reviews the
list of the payments and agrees to the payroll records prior to
authorising the bank payment. If any changes are required, the
payroll manager amends the records. For employees paid in cash, the
pay packets are prepared in the payroll department and a clerk
distributes them to employees; as she knows most of these
individuals she does not require proof of identity.

CASE # 1
5 strengths in the internal control system of the payroll cycle:
Factory employees are issued continuous numbered timecards with detailed name
and number information. This procedure will ensure that employees are paid for
“real time” work. And ensure that the hourly report fully reflects the employee.
The payroll system is linked to the hourly tracking system. And automatically
calculate gross, net, deduction. This action will reduce the risk of employee wages
being miscalculated.
The supervisor will check some calculations to make sure the system is working
properly. This procedure will minimize the risk of employee salaries being
miscalculated by the system.
The company has its own human resources department in charge of recruiting new
employees and leaving jobs. The separation of responsibilities between HR and
payroll will help reduce the risk of creating “virtual” employees for payroll.
The company pays salary via bank. The payment list is reviewed in detail and
compared with the payroll before approving the payment. This procedure reduces
the risk of fraud by “virtual employees” and employees who are left unpaid.

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CASE # 2
• Freesia Co is a company listed on a stock exchange. It manufactures furniture which it supplies to a wide range of retailers
across the region. The company has an internal audit (IA) department and the company’s year end is 30 June 20X9. You are
reviewing extracts from the internal control documentation
Payroll
Freesia Co employs a mixture of factory staff, who work a standard shift of eight hours a day, and administration and sales
staff who are salaried. All staff are paid monthly by bank transfer. Occasionally, overtime is required of factory staff. Where
this occurs, details of overtime worked per employee is collated and submitted to the payroll department by a production
clerk. The payroll department pays this overtime in the month it occurs. At the end of each quarter, the company’s payroll
department sends overtime reports which detail the amount of overtime worked to the production director for their review.
Freesia Co’s payroll package produces a list of payments per employee which links into the bank system to produce a list of
automatic bank transfer payments. The finance director reviews the total to be paid on the list of automatic payments and
compares this to the total payroll amount to be paid for the month per the payroll records. If any issues arise, then the
automatic bank transfer can be manually changed by the finance director.

CASE # 2

• Required: In respect of the internal controls of Freesia Co:

(i) Identify and explain deficiencies?
(ii) Recommend a control to address each of these deficiencies?

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CASE # 3
• The Ghost Employee
• A bookkeeper in a New York City condo put a dummy person on the payroll and,
for a year-and-a-half, sent salary checks to a post office box. "There was an actual
person cashing the check and splitting it with the bookkeeper," Glodstein says.
• The bookkeeper, however, knew the chance of getting caught was low. She had
worked for the condominium association for over five years, and, since it was
convenient for the board to give one person sole responsibility for paying its bills,
she controlled the checking account.
• "Because the board trusted her," says Glodstein, "they thought she would never
take money." But after about three-and-a-half years of this, the bookkeeper, very
simply, added the name of a relative to the list of maintenance employees. Neither
the board treasurer nor the condo's accountants ever tried to verify all the employees'
existences, and there was no red flag since it was slow and consistent.

CASE # 3
• The Ghost Employee (Cont.)
• Eventually, however, "a member of the board came to us because he noticed there
was a person on the books, and he didn't know who this person was," Glodstein
says. Armed with some basic research from this member, the board called in
Glodstein's company. In typical forensic-accounting fashion, an accountant went in
person to the building to look at the condo's books and records, and an investigator
started interviewing staff – none of whom were notified beforehand in order to
prevent staff members from colluding and "getting their stories straight."
• The scheme began unraveling when they talked to the bookkeeper. "We didn't
even know she was doing anything wrong," Glodstein says. "But you talk to
everybody, try to find out what their responsibilities are, and follow through. She
was handling all the money coming in and going out. That gives you the feeling that
something could go wrong here."

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CASE # 3
• The Ghost Employee (Cont.)
• Then they got their break: a name on the employee list suspiciously similar to the bookkeeper's.
Under questioning, the bookkeeper eventually allowed that he was a relative. They took that
information to the board treasurer, who confirmed he didn't know who the person was. That did it.
The sordid scheme was out in the open.
• But unlike TV's CSI, the perpetrator profited and didn't go to jail. The condo association fired her,
but since the roughly $15,000 she'd stolen was already spent, the board felt it would cost more to
pursue the case than what might eventually be recovered. "The sad part in these situations," Glodstein
says, "is these people move on to the next gig, and they know that, in the majority of cases, they're
not going to get prosecuted.”
• Required:
(i) Identify and explain deficiencies?
(ii) Recommend a control to address each of these deficiencies?

CASE # 4
• MANILA, Philippines — The Sandiganbayan has sentenced former Quezon City councilor Roderick Paulate
to up to 62 years in prison for graft and falsification of public documents in connection with the hiring of
“ghost” employees in 2010.
•
• In a 130-page decision promulgated on Nov. 25 but made public only yesterday, the court’s Seventh Division
found Paulate guilty of one count of violation of Section 3 (e) of Republic Act 3019 or the Anti-Graft and
Corrupt Practices Act and nine counts of falsification of public documents under Article 171 of the Revised
Penal Code.
•
• He was sentenced to six years to eight years for graft and six months to six years for each count of
falsification – a minimum of 10 years and six months to up to a maximum of 62 years.
• Convicted with Paulate for the graft case was his driver and former liaison officer Vicente Bajamunde.

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CASE # 4
• Paulate and Bajamunde were also ordered to indemnify the government P1.109 million, with six percent
interest per annum until fully paid.
• The amount of indemnity was equivalent to the amount of public funds that Paulate, through Bajamunde,
collected from the city treasurer’s office for the supposed salaries of the hired employees.
•
• Bajamunde was acquitted of the falsification charges while Paulate was fined P10,000 for each count of
falsification.
•
• Filed by the Office of the Ombudsman in April 2018, the cases stemmed from Paulate’s office hiring 30
“ghost” or fictitious job contractors from July to November 2010.
• The ombudsman said Paulate falsified a job order/contract of service including the signatures therein of the
fictitious contractors to oblige the city government to allocate funds for their salaries.

CASE # 4
• The ombudsman said Paulate and Bajamunde also prepared fictitious personal data sheets of the non-existent
contractors as well as eight general payrolls certifying that the contractors each rendered 40 hours of service per
week.
• With the falsified payrolls, Paulate, through Bajamunde, was able to collect from the City Treasurer’s Office a
total of P1.109 million fund, representing the contractors’ salaries from July 1 to November 15, 2010, the
ombudsman said.
• The court said that while Paulate denied participation in the preparation of the subject documents, claiming
that they were only submitted to him for signature, the prosecution was able to establish that the documents were
falsified upon his instruction.
• The decision was penned by Associate Justice Zaldy Trespeses with the concurrence of Associate Justices Ma.
Theresa Dolores Gomez-Estoesta and Georgina Hidalgo.
• Required:
(i) Identify and explain deficiencies?
(ii) Recommend a control to address each of these deficiencies?

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CASE # 5
• Holly Comp any is a small family-ru n manufacturer of wooded garden furniture,
sheds, and storage containers. The company is located outside Pittsburgh,
Pennsylvania, and currently employs 185 workers. Much of the manufacturing wor
k involves casual labor in the lumberyard and sawmill. The work is hard and
employees often move on after a few months. Its owner has retained your firm to
conduct a review of its internal controls. The focus of your review at this time is the
payroll process.
• Payroll Processing System

CASE # 5
• Payroll Processing System (Cont.)
• Holly employees use a time clock in an unsupervised area to record their time on
the job. The time-keeping clerk tries to monitor the process but is often distracted
by other duties. Every Friday, the shop foremen collect the timecards for their
subordinates, review and approve them, and deliver them to the payroll clerk.
The payroll clerk uses a stand-alone PC to record the employee earnings in the
employee records and print a hard-copy payroll register. The payroll clerk sends
one copy of the payroll register to the accounting department. The clerk then files
the timecards and a copy of the payroll register in the payroll department.

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CASE # 5
• Payroll Processing System (Cont.)
• The accounting department clerk receives the payroll register, reviews it for
accuracy, and uses the department computer to record the transaction by posting to
subsidiary and general ledger accounts including wages expense, cash, and various
withholding accounts. The clerk then prints the hard-copy checks, which are written
on the general cash account. The clerk signs the paychecks and s ends them to the
foremen who distribute them to the employe es. Finally, the clerk files the payroll
register in the department.
• Required: Analyze the internal control weaknesses in the system.

THE END
CHAPTER 5

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