Question

In: Accounting

The audit senior on the audit of Frankel Factors is preparing the audit plan for the...

The audit senior on the audit of Frankel Factors is preparing the audit plan for the year ended June 30, 2023. The following notes relate to the payroll application system that went live on January 1, 2023:

1. The new payroll application is more complex than the old system, but its reporting function provides more detail. For example, the new application calculates leave, pension, payroll tax, and employee benefit expenses, as well as the corresponding accruals.
2. Due to the brief time available to implement the new system, the previous application ceased operation on December 31, 2022, and the new application went live on January 1, 2023, without running parallel with the previous application. Staff training and testing of the new application was limited.
3. Access to the master files is restricted to the payroll supervisor and her assistant. Access to transaction files is restricted to payroll staff who are responsible for the processing of bi-weekly and monthly pay.
Prior to the introduction of the new payroll application system, the payroll master file and transaction files were kept in a separate database from the general ledger application. At the end of each month, the IT staff imported transaction data from the database into the general ledger. Management decided to upgrade the existing accounting system due to the frequent problems encountered by IT staff when importing data into the general ledger.

Payroll controls
1. a.Analysis: Based on the information above, explain two concerns about the payroll application's integration with the general ledger application.
2. b.Analysis: Describe (don't just list) one IT application control to ensure the accuracy of the salaries and wages expenses transaction.
3. c.Analysis: Describe (don't just list) one IT application control to ensure the occurrence of the salaries and wages expenses transaction.
4. d. Evaluation: design and describe in details appropriate tests of controls you would use to satisfy yourself about the effectiveness of these internal controls.

Solutions

Expert Solution

Answer :

(a)

The new system provides expenses and accruals for the accounting system, and thus any errors in its calculations can have a direct effect on the accounts. No testing prior to the new system going ‘live’. The auditor cannot review evidence of the system’s ability to operate in the same way as the old system (i.e., would the same data be generated under both systems). Limited staff training increases the risk that there will be errors in either the system and its financial data or the way it is interpreted and used by the client’s staff.

(b)

Accuracy is affected by the raw data and the calculations. Controls could be over the entry of data (e.g. hours worked, approved pay rates linked to the position classification, limits on total amounts calculated to prevent 10 hours being entered as 100 hours because the total would be over the approved limit), and over the calculations (e.g., reasonableness tests such as overall limits on total payments).

(c)

Occurrence relates to whether the payment is for hours actually worked, there would need to be a control that did not allow payment to be made until a supervisor had authorised the hours worked; controls to prevent duplicate payments (i.e., same worker paid twice for hours worked). There should be a reconciliation between payments made and recorded in the general ledger with records of hours worked via the payroll report.

(d)

Tests of controls could include use of dummy data (feed in new data to determine if the controls prevented the payment if it was not authorised, feed in deliberately incorrect data, such as duplicate payments); gathering documentary evidence of approvals of hours worked; reconciling hours worked for a pay period with total payments made that period; seeking documentary evidence for supervisor reviews of salary payments; etc.

An example of a control test:

Client name: xxxxx

Year end: June 30, 2023.

Working paper: Payroll control testing

Purpose of test:

The purpose of this test is to verify that the payroll reconciliation control for hours worked with overall payments is adequately designed and implemented for the 12 months ending June 30, 2023.

Work to be performed:

Select two payroll reconciliations from different months, tie the total payments as per the general ledger to the payroll report, and the payments on the payroll report with the approved hours worked, tie the payments listed on the payroll report to the bank statement, and vouch all differences between the payroll report and the approved hours worked, and payroll report with general ledger and bank statement greater than 10% to supporting documentation to ensure valid reconciling items and that the reconciliation has been performed correctly. Ensure the reconciliation has been prepared and reviewed on a timely basis.

Findings/results of testing:

Conclusion:

Prepared by: Reviewed by: Index: P1.1


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