The key audit objectives for a client’s payroll function include completeness, occurrence and existence, and accuracy. For completeness, it is meant to ensure that all existing payroll transactions have been recorded. The test of control is to ascertain whether existing payrolls have been recorded. Renumbered payroll checks are also reviewed to ascertain whether there are ones that might be missing. Substantive audit procedures for this objective include comparing the books with the bank’s payroll statement; also known as reconciliation.
Occurrence and existence are meant to ascertain that the payments are for existing employees only (meant to eradicate ghost workers). The test of control that can be used is assessing the employees’ personnel files and time cards. Discussing with employees to ascertain several issues would also be effective. Substantive audit procedures here would include examining any canceled checks to ensure they are properly endorsed and also make a comparison with personal records. Another thing would be to ensure that the appropriate amount has been included in the payroll.
Accuracy, on the other hand, is meant to ensure that the payroll reflects the actual time worked and the pay rates are appropriate. The test of control is to assess whether the appropriate hours and rates have been recorded. For substantive audit procedures, auditors can recalculate both gross and net payments to ensure that the amount included is exact. Comparing the rates with the industry standards would also be appropriate.
In this case, auditors ought to have been on high alert given that this case had a high control risk. This was as a result of the fact that only one individual had access to the payment system hence a high probability of fraudulent activities. Possible audit procedures include:
i). Interviewing a sample of employees included in the payroll. This would have helped in ascertaining that that these employees actually exist.
ii). Conducting limit tests to help disclose if there are employees being paid for excessive hours.
iii). Making a comparison of pay rates with those of other entities in the same industry.
iv). Examining the large payroll checks. These are the checks that are likely to entail fraudulent activities.
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