Question

Payroll control and substantive testing You are reviewing the audit work for Dream Weevel Ltd — a design house with 50 staff in various office locations. Dream Weevel Ltd outsources its payroll process to an online payroll services provider. Staff are paid fortnightly. At the end of each fortnight each staff member must log on to the online system run by the payroll services provider and record hours worked and leave taken. Each individual is linked to a supervisor who receives an email notification that a member of their staff has completed a time submission. Supervisors must log onto the system to approve their staffs’ time records. Once these records are approved they will be available to the payroll service provider’s staff to process payroll. Once the payroll has been processed, various files are made available to the finance team of Dream Weevel Ltd by again logging on to the payroll provider’s software. The files include: (1) a report of hours worked and leave taken, (2) a variance report comparing this payroll to the previous fortnight highlighting differences, (3) a full payroll, (4) a general ledger journal, (5) a bank payment file for upload onto online banking. Once the finance team approves the files a request is sent to the managing director who then logs on and can approve the payroll. The finance manager prints out a copy of the payroll and asks the managing director to sign it. The signed copy is then filed in the finance department. Your audit assistant performed a month-to-month comparison of salary costs and has found no abnormal trends. The following conclusion was noted on the working paper: ‘I have checked that all payroll reports from the period were reviewed and signed by the managing director. This, in conjunction with the results of analytical review, led me to conclude that the payroll expense is fairly stated.’

Required

(a) Outline any queries you would raise with the audit assistant.

(b) Describe the additional audit procedures you believe should be performed to ensure that payroll is fairly stated.

Answer 1

Requirement 1

What inherent or control risks were identified with regard to payroll?

What is the materiality of the payroll costs?

What internal control testing procedures have taken place and what are the results of those procedures?

What procedures have taken place in relation to the service provider’s software?

Have any reports by the service provider’s auditors been reviewed to give comfort over their internal controls?

There appears to be minimal reliance on substantive procedures, how is this justified? I would expect to see an assessment of low control risk, supported by good results of internal controls testing.

What were your expectations with respect to monthly trends of payroll? Were you expecting any abnormal trends? (This could relate to changes in the number of staff during the year)

Requirement 2

Analytical review should be based on creating expectations of a value for comparison rather than justifying what is already known about the actual figures for the current year. Perform calculations based on prior year payroll costs adjusted for changes in staffing levels, pay rates, bonuses etc compare this calculated value to the actual costs for the year.

Set expectations and review costs month-by-month taking into account unusual periods such as Christmas bonuses, the month that pay rates increase etc.

Ascertain the level of control risk assessed for payroll.

Obtain a report from the service entity auditor.

Evaluate the evidence that has been documented and assess if sufficient appropriate evidence exists to support the audit conclusion.