Scenario

Nailed It Construction Company operates throughout California. The owner, George Smith, employs 15 work crews. Construction supervisors report directly to Smith, and the supervisors are trusted employees. The home office staff consists of an accountant and an office manager.
Because employee turnover is high in the construction industry, supervisors hire and fire their own crews. Supervisors notify the office of all personnel changes. Also, supervisors forward the employee W-4 forms to the home office. Each Thursday, the supervisors submit weekly time sheets for their crews, and the accountant prepares the payroll. At noon on Friday, the supervisors come to the office to get paychecks for distribution to the workers at 5 p.m.

The company accountant prepares the payroll, including the paychecks. Smith signs all paychecks. To verify that each construction worker is a bona fide employee, the accountant matches the employee’s endorsement signature on the back of the canceled paycheck with the signature on that employee’s W-4 form.

Assignment

As a newly hired auditor tasked with reviewing the payroll procedures at Nailed It Construction Company, you are to assess the adequacy of the current system. Write a memo to your instructor that addresses the following points:

Identify one way a supervisor can defraud Nailed It Construction Company under the present payroll system.

Discuss a control feature that the company could implement to safeguard against the fraud you identified.

Instructions

Format your memo as follows:
Memo
To: [Instructor’s Name]
From: [Your Name]
Date: [Current Date]
Subject: Review of Payroll Procedures and Fraud Prevention
The memo should be a minimum of three paragraphs and include:
Summary: Briefly outline the payroll procedures at Nailed It Construction Company.
Analysis: Describe one potential fraud risk under the current system and the suggested control feature to prevent this risk.
Recommendation: Justify your proposed control feature and explain its benefits for safeguarding against the identified fraud risk.

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