Question

OA company recently hired a payroll service provider to process its payroll-that service provider has essentially taken over the payroll function, and payroll represents OA's largest expense. Comment on the following statement: OA's auditors should make certain that the payroll service provider's most recent financial statements are audited, and that the related audit report includes no indication of a weakness in internal control related to processing its own payroll.

Answer 1

OA's auditors should make certain that the payroll service provider's most recent financial statements are audited, and that the related audit report includes no indication of a weakness in internal control related to processing its own payroll

Comment:

Purpose of the audit of most recent financial statements are audited:

1. To insure the effective operations of an payroll service provider

2. To review compliance with a multitude of administrative regulations of payroll service provider

3. To instill a sense of confidence in management that the payroll service provider is functioning well and OA company is prepared to meet potential challenges.

So that OA's auditors should make certain that most recent financial statement of the payroll service provider are audited to know the effective operations, compliance and to get confidence on management

Purpose of no indication of a weakness in internal control related to processing its own payroll

First of all we have to know about what is internal control,

Internal controls:

The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, safeguarding of assets, and compliance with applicable laws and regulations. The term “controls” refers to any aspects of one or more of the components of internal control”

Objectives of internal control:

1. Transactions are executed in accordance with management general or specific authorization;
2. All the transactions are promptly recorded in the correct amount in the appropriate accounts and in the accounting period in which executed so as to permit preparation of financial information within a framework of recognized accounting policies and practices
3. Assets are safeguarded from unauthorized access, use of disposing; and
4. The recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken with regard to any differences

If any weakness found in internal control related to processing its own payroll it leads to

1. Confidentiality may be missing
2. Negligence of internal controls may lead to inaccurate performance
3. Data may be handed over to the third parties
4. Service provided by payroll service provider may be delayed

& Strong internal controls can insure that

1. Helping protect assets and reduce the possibility of fraud.
2. Improving efficiency in operations.
3. Increasing financial reliability and integrity.
4. Ensuring compliance with laws and statutory regulations.
5. Establishing monitoring procedures

So that OA's auditors should make certain that the payroll service provider's most recent financial statements are audited, and that the related audit report includes no indication of a weakness in internal control related to processing its own payroll