Question

Linda is assigned to audit some items in the financial statements for Work Hard Sdn Bhd for the year ended 31 August 2020. She has discoverred the following information:

1. Client company’s cash account balance and its bank account balance have shown different figures. The company has prepared a bank reconciliation statement for the month ended 31 August 2020.
2. Linda has been told by the company’s management that there are few cheques outstanding which were issued in July 2020 to pay for some expenses. There is no other issue with the bank reconciliation items.
3. The company has 1000 workers who are paid weekly. The payroll function has not been operating smoothly for some time. Errors often reported where workers received pay cheques for an amount considerably larger than they should have. Further investigation revealed that the mistake was due to wrong number of hours worked reported.
4. In other instance, a computer operator has purposely included a pay rate increase for one of his friends in the factory. This was discovered by chance by another employee.
5. There were also cases of missed payments to workers. They were not detected until the pay cheques for that department were distributed by the supervisors.

Required:

I) Suggest substantive test that Linda can perform for item (a) dan (b).

(6 Markah/Marks) II) Identify the related assertions in item (c) to (e).

(3 Markah/Marks)

III) State one (1) control that should have prevented each item (c) to (e) from occurring on a continuing basis; and

3. Markah/Marks)

IV) State one (1) substantive audit procedure that could uncover the misstatements in each item (c) to (e).

4. Markah/Marks)

Answer 1

(I)

(a)

Carry out physical verification of cash at the date of the balance sheet. However, if this is not feasible, physical verification may be carried out, on a surprise basis, at any time shortly before or after the date of the balance sheet

Examine the bank reconciliation statement prepared as on the last day of the year.

Examine the reconciliation statements as at other dates during the year

Pay special attention to those items in the reconciliation statements which are outstanding for an unduly long period. Ascertain the reasons for such outstanding items from the management. Examine whether any such items require an adjustment/ write off.

Examine whether a reversal of the relevant entries would be appropriate under the circumstances.

In relation to balances/deposits with specific charge on them, or those held under the requirements of any law, examine that suitable disclosures have been made in the financial statements.

In respect of fixed deposits or any other type of deposits with banks, examine the relevant receipts/ certificates, duly supported by bank advices.

Remittances shown as being in transit should be examined with reference to their credit in the bank in the subsequent period.

Examine whether suitable adjustments are made in respect of cheques which have become stale as at the close of the year.

Where material amounts are held in bank accounts which are blocked, e.g. in foreign banks with exchange control restrictions or any banks which are under moratorium or liquidation, examine whether the relevant facts have been suitably disclosed in the financial statements. Examine whether suitable adjustments on this account have been made in the financial statements, where required.

(b)

Cheques issued by the entity but not presented for payment, and

Cheques deposited for collection by the entity but not credited in the bank account, have been duly debited/credited in the subsequent period. For this purpose, examine the bank statements of the relevant period.

If the cheques issued before the end of the year have not been presented within a reasonable time, it is possible that the entity might have prepared the cheques before the end of the year but not delivered them to the parties concerned. In such a case, examine whether the entity has reversed the relevant entries.

If there are post dated cheques issued by he entity, verify that any cheques pertaining to the subsequent period have not been accounted for as payments during the period under audit.

In case a large number of cheques have been issued/deposited in the last few days of the year, and a sizeable proportion of such cheques have subsequently remained unpaid/ uncleared, it may be appropriate to obtain confirmations from the parties concerned, especially in respect of cheques involving large amounts. This may indicate an intention of understating creditors/debtors or understating/ overstating bank balances.

(II)

(c) Assertions for audit the payroll accounting are as follows:

Verify pay rates

To start off, confirm that the pay rate listed in the system is correct for each employee in your payroll records. Typos happens, so double check that an extra 0 didn’t get added or left off of a payment.

Pay rates change. Employees get promotions, raises, and bonuses. Be sure everything is accurate for the specific pay period.

Compare pay rates to time and attendance records

In this step, check overtime hours, sick days, and vacation time. Be sure you’ve classified employees correctly to determine overtime pay eligibility.

Confirm proper pay rate and eligibility for paid time off like sick days and vacation time. Review anything a manager may have overlooked that could result in overtimes hours exceeding the payroll budget.

During this step, it’s a good idea to report to HR or your benefits manager about any employees who qualify as full-time equivalent employees during the period for ACA compliance purposes.

(d) Check your employees’ qualifications and job duties

Depending on the award or agreement which covers your employees, their pay rate will be based on their:

·job duties

·qualifications (eg. trade certificate)

·age

·a combination of all of these.

(E) Following are the assertions to be made for the missed payments to workers:

Agree total wages and deductions per selected payrolls to the amounts recorded in the individual general (nominal) ledger accounts

Perform analytical procedures such as proof in total by using number of employees and average wage. Investigate any significant fluctuations.

Carry out month-by-month comparisons of total wages with prior year/budgets and investigate differences.

Agree sundry payables for tax outstanding at the year end to the payroll records and check subsequent payment to cash book.

(III)

( c )

Cross-check payroll reports to the general ledger

Check that the totals from gross payroll expenses, withheld taxes, and net check amount all matchup with the general ledger records. Review any large or unusual amounts.

Be sure all balances are in accord with Generally Accepted Accounting Principles (GAAP).

Review payroll tax submissions

Are you submitting the proper amount of business and employment taxes? This includes social security, federal and state unemployment taxes, and medicare/ medicaid taxes.

Reconcile the expenses involved with payroll taxes by comparing your tax remittance reports against your own payroll system reports.

(d)

Check award pay rates

We’ve made checking award pay rates easier. To find pay rates, including base rates, penalties, overtime and allowances:

·use our Pay Calculator to calculate individual rates

·for an overview of pay rates, overtime and the most common penalties and allowances, download your award’s pay guide from our Pay guides page.

(e)

Wages control

In order to evaluate the control system the auditor will firstly consider the objectives which the control activities should be designed to achieve. Typical control objectives for wages include the following:

1.     To ensure that employees are only paid for work done.

2.     To ensure that wages are only paid to valid employees.

3.     To ensure that all wages are authorised.

4.     To ensure that wages are paid at the correct rates of pay.

5.     To ensure that wages are correctly calculated.

6.     To ensure all wages transactions are correctly recorded in the books of account.

7.     To ensure that all payroll deductions are paid over to appropriate third parties (for example, tax authorities)

(IV)

(c) Compare pay rates to time and attendance records

In this step, check overtime hours, sick days, and vacation time. Be sure you’ve classified employees correctly to determine overtime pay eligibility.

Confirm proper pay rate and eligibility for paid time off like sick days and vacation time. Review anything a manager may have overlooked that could result in overtimes hours exceeding the payroll budget.

During this step, it’s a good idea to report to HR or your benefits manager about any employees who qualify as full-time equivalent employees during the period for ACA compliance purposes.

(d)

·For information to help you manage particular types of pay rates go to:

·Apprentice and trainee pay rates – to find out how pay increases during an apprenticeship and what pay applies after training is completed

·Salary payments

·Employment contracts

·Award and agreement free wages and conditions

·Employees with disability pay rates.

e)

1.       To ensure that employees are only paid for work done.
Test of control – observe clocking on procedures and the level of supervision.
Substantive procedure – select a sample of employees from the payroll and agree hours paid to individual clock cards.

2.       To ensure that wages are only paid to valid employees.
Test of control – attend the wages pay out.
Substantive procedure – select a sample of employees from the payroll and vouch to individual contracts of employment in HR department.

3.       To ensure that overtime paid is for additional hours required by the business.
Test of control – review overtime forms/lists for authorised signatures.
Substantive procedure – compare overtime costs each month with the prior year and investigate significant variances.