Question

b. Magnificent Homeware Ltd was a subcontractor on two significant contracts. In one month, costs on the first contract were inadvertently charged to the second contract. The work on the second contract was still in progress at the end of the financial year however the first contract was completed prior to balance date and the costs for the first contract were transferred to cost of sales.

c) A direct credit for one employee’s monthly salary was made for an amount of $6,100 instead of the correct amount which was $1,600.

d) On every two weekly payroll run the computer system incorrectly deducted an extra $1 from every employee’s wages for PAYE purposes. The correct amount was credited to the payroll deduction account and on the 20th of the following month is paid to the Inland Revenue Department. The excess amount is paid into the bank account of the payroll supervisor.

Discuss a control that should have prevented the situation and the audit risk that exists if the situation is not discovered. Investigate and discuss a substantive audit procedure that would discover each of the above problems. State the audit objective that each procedure meets.

Answer 1

In case b)

Control - A cost group must be attached to every different contract undertaken and costs must be allocated on the basis of contract. A proper ratio of gross margis must be calculated to check for any un accounted or over accounted sum in respective contracts.

Audit Risk- Risk of under reporting of project costs.

Procedure- Gross margin ratios, check on bills.

audit objective- to disclose true and fair costs.

In case c)

control - In payroll directory maximum monthly cost of every employee to the company must be maintained and it must be linked with the payment module and program must be run to verify that payment is less than or equal to maximum monthly cost.

Audit Risk- Risk of excess payment.

Procedure- Verification of payroll vouchers with payment entries.

audit objective- to avoid errros.

In case d)

Control- checking and maintenance of computer program on regular basis and conduct IT audit of the system.

Audit Risk- Risk of fraud by payroll supervisor

Procedure- Verification of bank entries with supporting

audit objective- to eliminate fraud and fraud risks

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