Question

In: Accounting

(a) Define 'tests of control' and explain the importance of tests of control in the audit...

(a) Define 'tests of control' and explain the importance of tests of control in the audit of a
company.

(b) You are an audit senior in Asenso Boateng & Co a firm providing audit and assurance
services. One of your clients is an exclusive hotel called 'Rock City Hotel' situated in the
centre of Airport City Accra. As part of your audit procedures you are assessing the controls
surrounding payroll. You have read last year's audit file and have obtained the following
information:
The hotel employs both full and part time staff. Due to the nature of the business most of
the work is done in shifts. All staff are paid on a monthly basis.
New members of staff are given an electronic photo identification card on the day they join
by the personnel department. This card is used to 'clock in' and 'clock out' at the start and
end of the shift to record the hours worked.
At the end of each week the information recorded on the system is sent automatically to
the payroll department and also to the head of each of the three main operating divisions:
Rooms, Food & Beverage and Corporate Events. Each division head must reply back to the
payroll department by email to authorise the hours worked by their staff.
The payroll clerk collates all the authorised information and then inputs the hours worked
into a standardised computerised payroll package. This system is password protected using
an alphanumerical password that is only known to the payroll clerk and the finance
manager.
Once the hours have been entered, the calculation of the gross pay and taxation are
calculated automatically along with any other statutory deductions. At the end of the
calculations a payroll report is produced and printed. The finance manager reviews the
report and compares the data to last month to identify and follow up any unusual variances.
When he is satisfied with the information, he authorises the payroll run by signing the
payroll report and the payroll clerk submits the data.
Payslips are sent to the home address of each employee and payment is made by bank
transfer.
Required:

With reference to the scenario:
(i) Identify and explain FOUR STRENGTHS within the hotel's internal control system in
respect of payroll.

(ii) For each of the identified strengths, state a test of control the auditor could perform to
assess if the controls are operating effectively.

Please I need help on this question

Solutions

Expert Solution

(a) Test of Control: This is the essential requirement to check whether controls in place are implemented and working efficiently or not. Test of control helps to determine the control is in manual / IT or further improvement is required in place further with the changes in risk due to any factor which may palce in the business.

Secondly test of control is performed on the classification of control inplace if it is IT control, then systems are configured accordingly , here testing is done by checking the input and output are as per the controls as requried and system is enough to capture or highlight the "unmatched data " accordingly.

If the control is in manual criteria whether same actions are performed by both level of officers in order to curb the risk if any.

(b) IN the given scenario strengths are as follows:

S.No. Internal Control Test of Control
1 Weekly Attendance report Here same is checked whether weekly attendance report is submitted on weekly basis or not. Although same is automatically
2 Confirmation by Supervisor to capture the final detail On Each weekly report , each supervisior has given the confirmation over the same or not.
3 Password is known to both HR and Finance department but payout is made on the report finalised by payroll department. Control can be tested, whether same can be login by other person or by other department. Whetehr such password or login is made from any other system other than Fiannce and Payroll department.
4 Monthly comparison of payout. Payroll run is done by Payroll department. Comparision report is on monthly basis before payout is evaluated by the fiance head, variances clearification spreadsheet is maintained along with cause is documented.

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