While vouching wages auditor should examine whether there is proper segregation of duties. Which of the following activities should not be done by same department?

 Options:

a) Maintaining personnel records and approving changing in wages rates b) Proposing pay roll summary and disbursement of wages c) Making salary statements and filing tax returns d) Comparing time clock records with time reports prepared by supervisors and preparing

The Correct Answer Is:

b) Proposing pay roll summary and disbursement of wages

Correct Answer Explanation: b) Proposing pay roll summary and disbursement of wages

When auditing wages, ensuring a proper segregation of duties is crucial for maintaining internal controls and preventing errors or fraud. Among the activities listed, the correct answer as to which activities should not be handled by the same department is (b) proposing payroll summary and disbursement of wages.

The reason (b) is correct lies in the principle of segregation of duties. The segregation of duties is a fundamental concept in internal control systems that aims to prevent errors and fraud by dividing responsibilities among different individuals or departments.

When one department handles both proposing the payroll summary and disbursing wages, it creates a lack of separation between the tasks of creating financial documents and executing financial transactions.

This lack of segregation could potentially lead to errors or intentional misstatements going unnoticed, as there is no independent verification or cross-checking between the creation of financial summaries and the actual disbursement of wages.

Now, let’s delve into why the other options are not the correct answer:

a) Maintaining personnel records and approving changes in wage rates:

While ideally, these activities should be segregated to prevent unauthorized changes in wage rates, this scenario might not pose as significant a risk as option (b).

There could still be internal controls in place, such as authorization requirements and review processes, to mitigate risks associated with having the same department handle both tasks. It’s not as critical as separating payroll proposal and disbursement.

c) Making salary statements and filing tax returns:

While separation of duties is crucial, in many cases, the same department might handle these tasks without posing a substantial risk if proper controls, reviews, and oversight are in place.

Filing tax returns requires accuracy and compliance, but with appropriate checks and balances within the department, this arrangement might be permissible without significantly compromising internal controls.

d) Comparing time clock records with time reports prepared by supervisors and preparing:

This activity involves cross-referencing time-related records and preparing reports. While segregation of duties is important here as well, having these tasks handled by the same department may not present as significant a risk as (b).

There might be room for error or oversight, but with proper internal controls and periodic independent verification, the risks can be mitigated.

In summary, the crucial point here is to avoid having the same department handle both the creation (proposing) of payroll summaries and the actual disbursement of wages. Segregation of duties ensures checks and balances, reducing the likelihood of errors or fraudulent activities going undetected.

While other activities also benefit from segregation of duties, the risk associated with combining the proposal and disbursement of wages makes it the most critical to segregate among the listed options.

Related Posts

• Vendors should be approved by Management before purchase department executes an order. If this is not done then which of the following situations may arise-
• Vendors should be approved by Management before purchase department executes an order. If this is not done then which of the following situations may arise-