All of the following practices are acceptable to an external auditor EXCEPT:

All of the following practices are acceptable to an external auditor EXCEPT:

• A. The accounting department reconciling the payroll checking account
• B. The payroll supervisor verifying that the deposits are made timely
• C. Storage of blank payroll checks in the payroll department
• D. The treasury department being responsible for the signature of payroll checks

Answer: (C)

The key idea is safeguarding payroll cash through proper segregation of duties and restricted access to check stock. External auditors expect that cash disbursement controls separate custody, authorization, and record-keeping so that no single person has control over the entire process. Allowing the accounting department to reconcile the payroll checking account supports independent verification: those who prepare payroll and issue checks are not the ones reconciling the bank statements, which helps detect irregularities. It demonstrates a check on cash disbursements and reduces the chance of errors slipping through. Having the payroll supervisor verify that deposits are made timely ensures funds are properly deposited and that payroll payments are processed on schedule. This provides management with assurance that the payroll cash flows are monitored and that timing issues are caught promptly. Assigning signature authority for payroll checks to the treasury department aligns with best practice for custody and authorization. The treasury function typically handles signatory control, safeguarding check stock and ensuring only authorized individuals can sign checks, thereby preventing unauthorized disbursements. Storing blank payroll checks in the payroll department creates a significant risk. Blank checks are a valuable cash asset, and access to them should be restricted and controlled by an independent custodian (often treasury) with dual controls and proper logkeeping. Keeping blank checks in the payroll area defeats segregation of duties and increases the opportunity for theft or unauthorized issuance. So the practice that would not be acceptable to an external auditor is storing blank payroll checks in the payroll department, due to the risk to asset security and breakdown of proper internal controls.

The key idea is safeguarding payroll cash through proper segregation of duties and restricted access to check stock. External auditors expect that cash disbursement controls separate custody, authorization, and record-keeping so that no single person has control over the entire process.

Allowing the accounting department to reconcile the payroll checking account supports independent verification: those who prepare payroll and issue checks are not the ones reconciling the bank statements, which helps detect irregularities. It demonstrates a check on cash disbursements and reduces the chance of errors slipping through.

Having the payroll supervisor verify that deposits are made timely ensures funds are properly deposited and that payroll payments are processed on schedule. This provides management with assurance that the payroll cash flows are monitored and that timing issues are caught promptly.

Assigning signature authority for payroll checks to the treasury department aligns with best practice for custody and authorization. The treasury function typically handles signatory control, safeguarding check stock and ensuring only authorized individuals can sign checks, thereby preventing unauthorized disbursements.

Storing blank payroll checks in the payroll department creates a significant risk. Blank checks are a valuable cash asset, and access to them should be restricted and controlled by an independent custodian (often treasury) with dual controls and proper logkeeping. Keeping blank checks in the payroll area defeats segregation of duties and increases the opportunity for theft or unauthorized issuance.

So the practice that would not be acceptable to an external auditor is storing blank payroll checks in the payroll department, due to the risk to asset security and breakdown of proper internal controls.