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Payroll Checks The storage, printing, and distribution problems associated with checks of all types certainly apply to payroll checks The following list of controls is particularly applicable to those companies that process their payrolls in-house, since they handle check stock However, even companies that outsource their payroll should consider the controls related to bank reconciliations, uncashed checks, and signature cards If employees are paid solely through direct deposits, then these controls do not apply Payroll check controls are as follows: Control check stock The check stock cannot be stored in the supply closet along with the pencils and paper, because anyone can remove a check from the stack, and then is only a forged signature away from stealing funds from the company Instead, the check stock should be locked in a secure cabinet to which only authorized personnel have access Add security features to check stock Checks can be successfully modified or copied with today s advanced technologies To counteract this, purchase check stock with such security features as a Void logo that appears when a check is copied, microprinting that is difficult to copy, and holograms that are difficult to reproduce A particularly effective method is to print a small lock icon on the face of a check, which warns a bank teller that the check contains security features that are listed on the back The teller can then check the list of features and verify that they exist Control signature plates If anyone can access the company s signature plates, then it is not only possible to forge checks, but also to stamp authorized signatures on all sorts of legal documents Accordingly, these plates should always be kept in the company safe Fill in empty spaces on checks If the line on a check that lists the amount of cash to be paid is left partially blank, a forger can insert extra numbers or words that will result in a much larger check payment This can be avoided by having the software that prints checks insert a line or series of characters in the spaces Mutilate voided checks A voided check can be retrieved and cashed To keep this from happening, a stamping device that cuts the word void into the surface of the check should be used, thereby sufficiently mutilating it so that it cannot be used again Perform bank reconciliations This is one of the most important controls anywhere in a company, for it reveals all possible cash inflows and outflows The bank statement s list of checks cashed should be carefully compared to the company s internal records to ensure that checks have not been altered once they leave the company, or that the books have not been altered to disguise the amount of the checks It is also necessary to compare the bank s deposit records to the books to see if there are discrepancies that may be caused by someone taking checks or cash out of the batched bank deposits Further, one should compare the records of all company bank accounts to see if any check kiting is taking place In addition, it is absolutely.



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of times the statistical test identi ed the item as compromised) and the false alarm rates for two different effect sizes ( reduction of response time due to item preknowledge) Both test were executed at a signi cance level of 0:05 The left panel was a replication of this study for a longer test (31 items) These hit rates were much larger than the rates for a test based on the (binary) responses by these examinees; in this study the curves for this test actually showed no power at all As the two panels show, the higher hit rates were obtained at the costs of false-alarm rates larger than nominal In a practical application, the signi cance level has to be chosen at a level that guarantees the desired false-alarm rate for the test; for these and other details, see the work of van der Linden and van Krimpen-Stoop (2003)





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Payroll Procedures and Controls / 45

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fundamental that the bank reconciliation be completed by someone who is completed unassociated with the payroll function, so that there is no way for anyone to conceal their wrongdoings by altering the bank reconciliation Finally, it is now possible to call up online bank records through the Internet, so that a reconciliation procedure can be conducted every day This is a useful approach, since irregularities can be spotted and corrected much more quickly Review uncashed 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 Update signature cards A company s bank will have on file a list of check signatories that it has authorized to sign checks If one of these people leaves the company for any reason, he or she still has the ability to sign company checks To void this control problem, the bank s signature card should be updated as soon as a check signer leaves the company Payroll Expenses The controls used for payroll cover two areas the avoidance of excessive amounts of pay to employees, and the avoidance of fraud related to the creation of paychecks for nonexistent employees Both types of controls are addressed here Verify hours worked Employees may pad their time sheets with extra hours, hoping to be paid for these amounts Alternatively, they may have fellow employees clock them in and out on days when they are not working These actions can be difficult to spot, especially when there are many employees for a supervisor to track, or if employees work in outlying locations Problems in this area can be difficult to find Supervisors should review and initial all time sheets to ensure that hours have been worked, though they may not remember what happened several days earlier in the reporting period As noted in 2, an automated time clock can be used to block out the hours when an employee is allowed to clock in or out, and can be used to quickly create reports for managers that highlight timekeeping irregularities Finally, review the employee hours loaded into the payroll software to the amounts listed on employee time sheets to ensure that there have been no errors in the rekeying of hours data Require approval of all overtime hours worked by hourly personnel One of the simplest forms of fraud is to come back to the company after hours and clock out at a later time, or have another employee do it on one s behalf, thereby creating false overtime hours This can be resolved by requiring supervisory approval of all overtime hours worked A more advanced approach is to use a computerized time clock that categorizes each employee by a specific work period, so that any hours worked after his or her standard time period will be automatically flagged by the computer for supervisory approval They may not even allow an employee to clock out after a specific time of day without a supervisory code first being entered into the computer.

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