You are the auditor of Dynamic Clothes Ltd. The company manufactures clothing for the fashion industry. A production manager heads the manufacturing division. He controls the work of 20 foremen and approximately 500 workers. Wages are paid every Friday, based on hours worked during the previous calendar week.

Question

New workers are employed by the foremen. At the start of each working week (Monday), each foreman hands a blank clock card to each of his workers. The workers insert their names and employee numbers on the clock cards and then use the cards for that working week. The clocking device is situated at the entrance to the factory. Workers clock in and out at the entrance to the factory by inserting their clock cards in the clocking device.

The foremen hand the used clock cards to a wage clerk on Monday mornings. The clock cards are divided alphabetically amongst four wage clerks. Each clerk is always allocated the same section of the alphabet for which he/she is fully responsible.

The clerks perform the following work on the clock cards:

Calculate the total number of hours worked per clock card and record this on the relevant clock card.
Enter the hours worked per individual (by employee number) into the weekly wages file on the computer.
After each wage clerk has entered the hours worked into the computer, the computer calculates each worker's gross pay, deductions, and net pay by using the wage rates and deductions in accordance with the personnel information kept on a database. The weekly wages report is then printed by the computer. This report is kept in the wages department.

One of the wage clerks verbally informs the accountant of the amount needed for the week’s net wages. The accountant then prepares a cash cheque for the exact amount of the week’s net wages, after which the cheque is cashed by a wage clerk.

The computer prints pay envelopes for the workers to be paid, bearing the workers' names and employee numbers. Each wage clerk fills the pay envelopes according to the letters of the alphabet for which he/she is responsible. After all the pay envelopes are filled, no money should be left over. If a discrepancy occurs, the pay envelopes are checked and corrected by the wage clerks.

The pay envelopes are then sealed. On Friday afternoons, the pay envelopes are handed to the relevant foremen for the weekly payout. Each foreman pays out the wages to the workers working for him. Unclaimed wages are returned by the various foremen to a wage clerk.



REQUIRED:
Identify the weaknesses in the wage system described above and recommend improvement(s) for each weakness identified. (40 MARKS)

Answer 1

Identifying weaknesses in the wage system of Dynamic Clothes Ltd is essential for ensuring the accuracy, efficiency, and security of the payroll process. Here are several weaknesses in the system along with corresponding recommendations for improvement:

Weaknesses and Recommendations

1. Lack of Dual Control in Timekeeping

   • Weakness: Workers handle their own clock cards, with opportunities to clock in/out at will. This creates an opportunity for potential time theft (e.g., buddy punching).
   • Recommendation: Implement biometric timekeeping (e.g., fingerprint or facial recognition) instead of manual clock cards to ensure that only the worker can clock in and out. Alternatively, have a supervisor oversee the clocking in/out process to enhance accountability.

2. Manual Handling of Clock Cards

   • Weakness: The process involves several manual steps with clock cards being passed from foremen to clerks. This can lead to loss, theft, or alteration of cards.
   • Recommendation: Transition to an automated electronic time attendance system where workers input their clocking data directly into the system. This reduces the risk of loss and creates an immediate electronic record.

3. Lack of Reconciliation Process

   • Weakness: There is no stated process to reconcile the hours worked with payments issued. Discrepancies might go untracked until they become significant.
   • Recommendation: Implement a monthly reconciliation process where the hours recorded in the computerized wages file should match the total hours calculated and paid out in the pay envelopes. Any discrepancies should trigger an immediate investigation.

4. Authorization and Payment Process

   • Weakness: The system relies on the verbal communication of wage amounts from the wage clerk to the accountant, which is prone to human error.
   • Recommendation: The wage calculation and reporting should be formalized by generating a report that requires acknowledgment from both the wage clerk and accountant before proceeding to payment processing. Introduce an electronic approval workflow within the payroll software.

5. Filling Pay Envelopes by Wage Clerks

   • Weakness: Clerks filling envelopes may lead to mistakes in matching pay with the workers, and discrepancies could go unnoticed until later.
   • Recommendation: Implement a bar-code or QR code system where each pay envelope is scanned against a database record before filling. This allows for automatic checks to confirm the payment matches person, amount, and the envelope order.

6. Lack of Documentation and Audit Trail

   • Weakness: The use of manual processes creates a lack of traceability and records for an audit.
   • Recommendation: Ensure that all processes (clocking, payment calculation, pay distribution) have comprehensive documentation. Create an audit log within the payroll software that tracks actions taken by each employee involved in the payroll process.

7. Timing of Pay Distribution

   • Weakness: Relying on foremen to distribute pay means a gap in accountability, as discrepancies may occur when they handle cash.
   • Recommendation: Train and designate separate, secure staff to handle the distribution of pay who have no connection to the payroll calculation. This creates a separation of duties and reduces potential for fraud.

8. Handling Unclaimed Wages

   • Weakness: Unclaimed wages could accumulate without a clear process for follow-up, leading to misplaced funds.
   • Recommendation: Establish a clear policy and timeframe for following up on unclaimed wages. Return unclaimed wages directly to a central payroll fund after a specific period rather than leaving with foremen.

9. Information Security

   • Weakness: Sensitive worker information is handled by multiple clerks and might not be securely protected, leading to potential data breaches.
   • Recommendation: Introduce strict access controls to ensure that only authorized personnel can access payroll data. Encrypt sensitive personal data and use secure password practices to safeguard this information.

Conclusion

These weaknesses expose Dynamic Clothes Ltd to risks related to financial inaccuracies and potential fraud. Implementing the recommendations can significantly strengthen the internal controls in the wage system to ensure fair and accurate payment to employees with increased efficiency.