Question

Mark Company's audit team is evaluating the controls that Mark has implemented over the automated processing of payroll transactions. During the understanding and assessment stages of the audit, the following processing and output controls have been identified as being important in this processing:

Control totals are determined prior to the input of data and compared to computer-generated totals following transaction processing.

Consider the four methods of testing the operating effectiveness of controls (inquiry, observation, document examination, and re-performance). For this controls, provide an example of how Mark's audit team might choose to test the operating effectiveness of the control using the four methods of test of controls (e.g., how would the audit team use inquiry, observation, document examination, and re-performance to test control #1, the generation and review of the system log?). [Note: Not all types of tests of controls will be appropriate for testing all the controls.]

Answer 1

Auditing is a process which involves official inception of an organization's accounts,which is done by an independant body.There are five different main methods to audits which are used by auditors to audit the organization.With the help of these methods an auditor can can come to the conclusion of its audit results.

In case of Mark Company Auditors are require to evaluate the controls that Mark has implemented over the automated processing of payroll transactions.

Step wise Auditng of Mark company's Automated Payroll Transactions :

1.Inquiry-First of all the auditors should inquire and confirm that the pay rate listed in the system is correct for each employee.There may be typing errors like sometimes 0 may not have been added in the payment.So the auditor must double check the payment information.an auditor must inquire about the changes in payment rates,bonuses and promotions of employees.An auditor must be sure that everything is correct for a given pay period of time.An auditor must take into consideration overtime hours,sick days and vacation period.

2.Observation-After inquiring about the pay details an auditor must observe and confirm pay for active employees.He must observe that the employees who received paycheck actually worked for that period.In larger companies,it may happen that former employees come around and dangle around for the payroll due beacause of an error ,even after they are not the active employees of the company.

An auditor must observe if Mark Company make pratical and effective use of contingent workforce or depend on vendors for definite goods and services.He must confirm the current position of the contracts for the pay period.

3.Document Examination-An auditor must cross-check payroll report to the General Ledger of Mark Company.He must check that totals of gross payroll expenses,refuse to give taxes,and net check amount all match up with the General Ledger Records.He must examine any large amount or unexpected amount.He must be sure that all balances are in accordance with Generally Accepted Accounting Principles(GAAP).

The auditor must make or declare legally valid the Bank Reconcilation for the payroll account.He must compare the bank account of Mark Company with its internal ledgers.HE must assure all balances are correct and all checks issued were cleared for the amounts.

The auditor must analysis the payroll tax submissions.He must check whether the amount of tax submitted is proper or not.He must reconcile payroll tax expenses by comparing Mark Company's tax settlement reports against payment system reports.

4.Re-Permormance-In this step an auditor can independentally re-perform any of the processes to recreate it.He can do so be confirm that he is accurate and has not missed or done any faults in that particular process.In re-performance he may again review the bank reconciliation statements or he may check the pay again for active employees.

After performing these methods an auditor can evaluate the controls that Mark Company has implemented over the automated processing of pyroll transactions.