5.

As the internal auditor for No-Wear Products, you have been asked to document
the company’s payroll processing system. Based on your documentation, No-Wear
hopes to develop a plan for revising the current system to eliminate unnecessary
delays in paycheck processing. The head payroll clerk explained the system:
The payroll processing system at No-Wear Products is fairly simple. Time data are
recorded in each department using time cards and clocks. It is annoying, however,
when people forget to punch out at night, and we have to record their time by hand.
At the end of the period, our payroll clerks enter the time card data into a payroll
file for processing. Our clerks are pretty good—though I’ve had to make my share
of corrections when they mess up the data entry. Before the payroll file is processed
for the current period, human resources sends us personnel changes, such as
increases in pay rates and new employees. Our clerks enter this data into the payroll
file. Usually, when mistakes get back to us, it’s because human resources is
recording the wrong pay rate or an employee has left and the department forgets to
remove the record. The data are processed and individual employee paychecks are
generated. Several reports are generated for management—though I don’t know
what they do with them. In addition, the government requires regular federal and
state withholding reports for tax purposes. Currently, the system generates these
reports automatically, which is nice.
Required
a. Prepare a context diagram and Level 0 DFD to document the payroll processing
system at No-Wear Products.

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 b. Prepare a document flowchart to document the payroll processing system at No-
Wear Products.

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 Read the article “Ferret Out Spreadsheet Errors” by Mark G. Simkin, in
the Journal of Accountancy (February 2004). You can find a copy online
by accessing www.aicpa.org.
b. Download the worksheet referenced in the article.
c. Enter the following erroneous data in the worksheet you downloaded in step b:
• Change regular hours worked for Adams to 400,
• Change regular hours worked for Englert to 4, and
• Change regular hours worked for Hartford to –40.
Create a chart like that shown in Exhibit 2 of the article. Which of the errors are
easily found by the chart? What are the strengths and limitations of creating such
charts to detect errors? Print out your chart and save your work.

The errors on Adams, Englert, and Hartfort’s timecards are easy to

see. In the chart, you can see the employees whose reported hours are
different from their fellow employees.

A downside of the chart is that it would be difficult to identify less

obvious errors. Example of recording 41 hours instead of 40 isn’t as
easy to see.

d. Create the three data validation rules described in the article (Exhibits 4–7
illustrate how to create the first rule). Print out screen shots of how you create
each rule, and save your work. (Note: The article “Block That Spreadsheet
Error” by Theo Callahan, in the Journal of Accountancy (August 2002)
provides additional examples of data validation rules.)

Rule 1
Payrates must be between $6.75 and $14.00.
1. Select the relevant range of cells
2. On the data tab, select Data Validation
3. Complete the windows as follows:

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 Rule 2
Hours worked must be between 0 and 40

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 Rule 3
Overtime must be between 0 and 10

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 e. Follow the instructions for using the formula auditing tool. Print out a screen
shot showing use of the tool to circle invalid data (yours should be similar to
Exhibit 9 in the article).

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 f. Follow the instructions to run the “trace precedents” audit tool. Print screen
shots that show the results, and save your work. How useful is this tool? What
are its limitations, if any?
Trace Precedents may help visually identify problem, but it may also be easy to overlook
missing dots.

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 g. Enter the following data for new employees (inserting new rows in proper order
to maintain alphabetical listing of employees):
• Name = Able, payrate = 11.11, regular hours = 40, overtime hours = 5
• Name = Easton, payrate = 10.00, regular hours = 40, overtime hours = 0
• Name = Johnson, payrate = 12.00, regular hours = 35, overtime hours = 10
Which audit tests and validation rules change? Why? Print screen shots, and
save your work.

Several audit tests and validation rules changed because their parameters were
established with the unadjusted cell references. The following audit tests and validation
rules should be adjusted to include the new entries:

 All input validation rules

 All Control totals using the CountIf formula
 All formulas used to calculate totals, minimums, and maximums
 Also need to adjust the formulas for calculating pay for Easton and Johnson

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