FRAUD -​ Any salary increase, decrease, or

-​ The fraud triangle is a triad of factors change must be approved and

associated with management and employee documented using this form. This
fraud: ensures that only authorized
-​ situational pressure (includes personnel can change wage rates,
personal or job-related stresses that protecting against fraud or errors
could coerce an individual to act (e.g., someone giving themselves or
dishonestly); a friend a raise without approval).
-​ opportunity (involves direct access
to assets and/ or access to SEGREGATION OF DUTIES
information that controls assets); -​ Segregation of Duties means splitting
and responsibilities among different people to
-​ ethics (pertains to one’s character reduce the risk of errors or fraud.
and degree of moral opposition to -​ When you separate timekeeping (recording
acts of dishonesty). hours worked) from personnel functions
(like hiring, firing, and changing pay rates),
FRAUDALANT SCHEMES you make sure that:
-​ Payroll fraud is the distribution of -​ The person who records how many
fraudulent paychecks to existent and/or hours employees worked cannot
nonexistent employees. also hire, fire, or change their pay.
-​ This prevents someone from, for
(this is where need to apply the COSO internal example, adding fake hours for a
control framework) fake employee they "hired" or
adjusting pay rates without approval.
5 COMPONENT
-​ Control environment, risk assessment, -​ In short:
information and communication, monitoring, -​ Timekeeping tracks what's happening daily,
control activities -​ Personnel controls who works and how
much they earn.
CONTROL ACTIVITIES -​ Keeping these apart helps protect the
-​ 2 categories: IT Control and Physical company.
Controls
-​ But I will be focusing on the Physical SUPERVISION
Controls. -​ Supervision means managers or
supervisors need to actively watch and
TRANSACTION AUTHORIZATION check that employees are following
-​ The personnel action form is an internal timekeeping rules.
control document used by the Human -​ One common issue is "buddy
Resources (HR) department to authorize punching" — when one employee
and document employment-related clocks in or out for another who isn’t
changes, such as hiring, termination, really there.
promotions, salary adjustments, and job role -​ Good supervision helps prevent this by:
changes. -​ Physically monitoring clock-ins and
clock-outs.
1.​ Prevents terminated employees from -​ Using systems like ID badges,
receiving checks: biometrics (fingerprint scanners), or
-​ When an employee is officially cameras.
terminated, the personnel action -​ Setting rules and consequences if
form is completed and sent to someone gets caught.
payroll. This notifies payroll to stop -​ In short: Supervision protects the honesty
issuing paychecks to that individual. of time records and ensures employees are
Without this form, payroll might not getting paid only for the hours they actually
be aware that the employee has left, work.
and could continue processing their
salary, leading to unauthorized ACCOUNTING RECORDS
payments. -​ An audit trail is like a clear, step-by-step
path showing how payroll numbers were
2.​ Prevents improper wage rate changes for created and recorded. It helps prove that
current employees: everything was properly done.
 -​ The pieces of the audit trail are: -​ ➔ Only authorized personnel (like
-​ Time cards, job tickets, and supervisors or payroll staff) should be able
disbursement vouchers to edit or approve time cards.
-​ These are the source -​ Unsigned checks:
documents showing hours -​ If someone can get to blank or
worked, jobs performed, and unsigned checks, they might write
payments made. fraudulent checks to themselves or
-​ Journal information others.
-​ Information from the labor -​ ➔ Unsigned checks must be locked
distribution summary (which up and only accessible to trusted,
shows how labor costs are authorized staff.
divided across
jobs/departments) and the -​ In short:
payroll register (listing -​ Access controls protect payroll
employees, hours worked, records and company money from
gross pay, deductions, and fraud or mistakes.
net pay) gets recorded in the
accounting journals. INDEPENDENT VERIFICATION
-​ Subsidiary ledger accounts -​ Independent verification means someone
-​ These detailed accounts not involved in the original work
track each employee’s double-checks that everything is correct.
earnings, deductions, and This helps catch errors and fraud.
withholdings, and also track
expenses (like salaries, Here’s how it applies:
wages, benefits) by category. -​ Verification of time cards
-​ General ledger accounts -​ A supervisor or someone else
-​ Big-picture accounts like: reviews the time cards to make sure
-​ Payroll control (to the recorded hours are real and
track payroll costs approved, not just taken at face
before they're paid) value.
-​ Cash (for the actual -​ Paymaster: distribution of paychecks to
money paid out) authorized employees
-​ Payroll clearing -​ A separate person (the paymaster)
(imprest) account (a hands out paychecks only to the
temporary account to right employees, preventing ghost
manage payroll employees (fake workers) from
transactions until getting paid.
they’re fully -​ Accounts Payable: verification of payroll
processed). register
-​ In short: -​ The Accounts Payable department
-​ Source documents ➔ Journals ➔ reviews the payroll register (list of
Subsidiary ledgers ➔ General payments) to make sure everything
ledger matches approved records before
-​ This creates a full trail that auditors payments go out.
and managers can follow if they -​ General Ledger: reconciliation of labor
need to verify anything. distribution summary and payroll
disbursement voucher
ACCESS CONTROLS -​ The General Ledger team
-​ Access controls are rules and protections cross-checks the labor cost
put in place to limit who can see or change summary and the disbursement
important documents. (payment) records to ensure what
-​ In payroll, access controls are important was recorded matches what was
because: paid.
-​ Time cards:

✅
-​ If employees can access and -​ In short: Independent verification =
edit time cards, they could “Double-checking by someone neutral.”
change their hours to get -​ It keeps the payroll process
paid more than they worked. accurate, honest, and secure.
MANUAL PAYROLL SYSTEM
Terms:
●​ Time cards:
○​ These are used to record the total
hours an employee works.
○​ Employees punch in and out (or log
hours) on time cards to show when
they started and ended work each
day.
○​ → Focus: "How long did you work?"
●​ Job tickets:
○​ These record how much time was
spent on specific tasks or jobs
during the day.
○​ For example, if a worker handles
different projects, they fill out job
tickets showing which project they
worked on and for how long.
○​ → Focus: "What did you work on?"

Process:
1.​ Payroll authorization and hours worked
enter the payroll department from two
different sources: personnel and production.
2.​ The payroll department reconciles this
information, calculates the payroll, and
distributes paychecks to the employees.
3.​ Cost accounting receives information
regarding the time spent on each job from
production. This is used for posting to WIP
account.
4.​ AP receives payroll summary information
from the payroll department and authorizes
the cash disbursements department to
deposit a single check, in the amount of the
total payroll, in a bank imprest account on
which the payroll is drawn.
5.​ The general ledger department reconciles
summary information from cost accounting
and AP. Control accounts are updated to
reflect these transactions.