Auditing & Assurance - Internal Control and Payroll System Analysis

Running Head: AUDITING & ASSURANCE AUDITING & ASSURANCE Name of the Student: Name of the University: Author Note: 1 AUDITING & ASSURANCE Answer to Question 1) As per the given case study of The Kleer Glass Co, the five identified sources of strength in the internal control of the payroll system of the company are explained as below: 1. All production staff of the company are issued and provided with aclock card that is sequentially numbered which comprises of the personal details of the employees such as the name of the employee and employee number. This card allows the employees to swipe the card during the beginning and ending time frame of their daily eight hour shift. Furthermore, a total paid break of 30 minutes is also allotted to the employees and employees are not required to clock out in order to obtain the access of the dining area. Hence the payroll system will detect and identify any gaps in the sequence as the same is directly linked to the clock card. 2. This clock card is directly linked to the payroll system of the company and is involved in automated calculations of the net and gross pay alongside treating for any statutory deductions. Hence this helps in mitigating the risk of errors occurring with respect to the wages and applicable deductions in the case of the employees of the company. 3. The payroll supervisor is involved in random sampling wherein a sample of calculations which are automatically calculated by the payroll system are checked for by the supervisor in order to ascertain the operating effectiveness of the system which in turn helps to test the automated controls in the company. 4. The company also has ahuman resource department which have been vested with the responsibility of for setting up any new potential employees and also for removing staff as and when they leave the company. Hence this allows for segregation of duties and responsibilities that reduces pressure off the payroll supervisor. Such segregation 2 AUDITING & ASSURANCE also allows for mitigating the risk of any fraud involved which involves the act of setting up any fictitious employees and paying the same. 5. The company is also involved in payment of discretionary bonus in every six months to all the factor staff in an effort to motivate them for performing better which are determined by the production supervisor. The production supervisor communicates the same in writing to the payroll department which allows the clerk of the payroll department to enter the same into the payroll system. Since the flow of information is written in nature instead of being verbal or oral communication in nature, the risk of inaccurate entries and errors get mitigated allowing for efficiency of the payroll department in the company. Answer to Question 2) The given case study in the assignment also brings to attention the possibility of different control deficiencies within the payroll system of the company. In this context, atotal of six deficiencies have been identified which have been listed and explained below alongside the relevant control recommendations: 1. The production staffs are required to swipe their clock cards at the beginning and at the end of their total eight hours working shift. However, swiping of such cards are not supervised. This increases the risk of employee swipes irrespective of the fact if they are actually physically present or not. All of this will lead to an increase in payroll costs for the company. This can easily be catered to by the company employing areliable supervisor to supervise the swiping process in order to avoid an individual employee indulging in multiple swipes for someone who is not physically present. The concerned supervisor can also indulge in random checks to check for who is physically present or not. 3 AUDITING & ASSURANCE 2. The employees of the company within their work timings are allotted a30 minutes paid break for which they have access to the dining area without the need of using their clock cards. Again, the same is not monitored or backed up by card swipes which can result in employees taking longer breaks than what is allotted to them which decreases the overall productivity and can possibly increase the payroll expenses for the company. This can easily be reversed if there is asupervisor who monitors their break activity and if employees are provided with fixed break timings. Also, if the dining area is made to require clock swipes for obtaining access then the risk of default automatically reduces. 3. The overtime reports of the company are sent on a quarterly basis by the payroll department to the production supervisor for the purpose of review. These reports are reviewed after such bonus payments are already made to the employees of the company. Thus there is arisk of unauthorised overtime or fraudulent manipulations which can increase the payroll expenses for the company. The control deficiency can easily be mitigated if the overtime report is authorised by aresponsible official before processing the overtime payment by the payroll team which easily caters to the deficiency. 4. The production supervisors are vested with the responsibility of determining the total amount of discretionary bonus that shall be paid to the production staff. These supervisors may indulge in favouritism resulting in biased bonus payments to particular production staff. This can be catered to if the decision making criteria of bonus payments are vested with an authoritative figure that is senior to the production supervisor such as the owner Robert Kleer. 5. The payroll clerk is involved in manually entering the discretionary bonus which is provided by the production supervisor in awritten form. There is no indication of any 4 AUDITING & ASSURANCE review of the same as amanual entry is being done which increases the risk of errors, frauds, manipulations or incorrect payments getting processed. This can be easily fixed by another member of the team indulging in reviewing the manual entry of such bonuses with the written confirmation which is received thus double checking the same to debunk any deviations. 6. The payroll clerk is involve in distributing cash to employees without the need of acquiring any identity or proof as she is personally aware of most of the employees. Again, this increases the risk of incorrect wage payments. This can be rectified by introducing acontrol that any cash payments must be subject to verification of the employee clock card and identity proof of employees. Answer to Question 3) The analytical procedures that must be performed to confirm the payroll expenses must be substantive in nature. Following are the list of substantive analytical procedures that must be performed for validating the payroll costs of KG Co Industries Co: 1. The total payroll expenses in the current year must be compared to the total payroll expenses incurred in the previous year and upon observing any such significant deviations or differences must be subject to investigation. 2. The monthly payroll charges should be reviewed and must be compared to similar data from prior years along with established budgets. Any noticeable deviations or variations must be then discussed with the management. 3. The total overtime pay which is paid by the company must be ascertained as a percentage in terms of normal factory hours pay. The same should be compared with acomparison in between present year percentages and prior year percentages. If the 5 AUDITING & ASSURANCE deviations are not within the acceptable range then the same must be investigated for any significant differences in between the two. Answer to Question 4) Three substantive audit procedures that one should perform in order to obtain any sufficient and appropriate audit evidence with respect to inventory are discussed as follows: 1. The auditor of any company must at first obtain aschedule for all the raw materials, work in progress inventory and finished products. This must then be casted for the auditor to confirm the accuracy and completeness of the relevant balances and the same must be in conformity with the trial balance and the financial statements of the company. 2. The auditor is also required to observe the counting procedures which are opted by the company for counting their inventory. The auditor hence must discuss the procedure with the concerned department, observe counts when done, test inventory for counts on a sample basis, trace counts to company records and verify for the accounting of count tags. Confirmations may also be asked for by the auditor from the warehouse custodian where the company is involved in storing their inventory. 3. The auditor should select arandom sample of the closing inventory and review the year-end sales invoices for ascertaining whether the NRV (net realisable value) of the same is above cost or whether any adjustments are needed to account for the same. The chemical ‘XZ215 ’is subject to the following two substantive audit procedures for obtaining sufficient and appropriate audit evidence: 1. The auditor with respect to the defective chemical must discuss with management as to how the NRV of the compound was valued at NZD 225,000 along with disposal 6 AUDITING & ASSURANCE plans. Furthermore, supporting documentation must be received to ascertain that the cost of the compound is correct at NZD 665,000. 2. The auditor must check if the inventory is written off to the net realizable value or not by making an adjustment of NZD 440,000 (665,000-225,000). 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