Professional Documents
Culture Documents
Audit Program II
Accounting 492
Robert Hinske
Audit Memo
From: Gloria Ochoa, Rachel Ramos, Dale Cornn, Renee Williams and Branden Klink
The purpose of this review is to design the attached internal control questionnaire and audit
program for the current year’s audit of the financial statements, with respect to the company’s
payroll.
Audit Program
The audit program has been designed to test the controls over the payroll function and to provide
substantive tests of the account balances. During this audit we will use statistical sampling for
testing of controls, substantive tests of account balances and the application of analytical
procedures, all of which are addressed in the audit program.
Objectives
We have completed the audit of the payroll cycle for Kudler Fine Foods on behalf of their audit
committee and the Board of Directors. Our payroll cycle audit included three main objectives:
(1) to determine that payroll disbursements were made for work authorized and performed; (2)
to verify that payroll, including withholdings and deductions, is computed using rates and other
factors in accordance with federal salary schedules and applicable laws; and (3) to ensure that
payroll expense and related liabilities are recorded correctly as to amount, period and adequate
disclosure. The period of our test data was from December 31, 2005 through June 30, 2006. Our
payroll cycle audit did not constitute a certified audit of any financial statements prepared by
Kudler Fine Foods. Therefore, no opinion was given on any financial statements.
Tests of controls
Testing for control is an important tool in an audit. In the onset of an audit, it is important to
assess the risks of internal control within the company. We need to inquire what internal
controls the company has and inquire as to whether or not those internal control techniques are
being followed as prescribed by management. With this in mind, we decided to make inquires
on the following areas. The first area for review is the company’s policies and procedures. This
will show what approval processes are in place within the payroll department, if payroll
Audit Program 3
personnel are knowledgeable, and if the segregation of duties is specified. Another area of
testing is reviewing who is authorized to have access to the computer system and their levels of
authorization. A third area of review is payroll documents. As an audit team we must be able to
trace these source documents starting at time sheets to payroll accounting procedures, to payroll
distribution, to cash disbursements, and then back to the original time sheet. In going through
these procedures, we are able to make an initial risk assessment, develop strategies, and proceed
further into our actual audit testing.
Substantive test of transactions are required in order to verify processed payments. The audit
team will confirm that transactions made in payroll processing follow the guidelines of the
company. The audit team will investigate the employee time cards for accuracy, validity and for
proper authorization for duties and hours worked. The time cards will also be used to determine
whether payroll disbursements have been properly calculated, including calculation and payment
of payroll taxes and deductions. These deductions are significant to both the employer and
employee, so these numbers will be verified by sampling pay vouchers using the statistical
sampling method as outlined in our sampling outline. This will allow the audit team to determine
the allowable risk of the sample failing to detect a material misstatement and the tolerable
misstatement. Electronic funds transfers (EFT) will be validated to ensure that vendors,
customers, and banks involved in this process have sufficient controls built into their portion of
the process. This would include comparison of the payments made from the vendor, banks, etc.
with information in the EFT journal.
Analytical procedures
In conducting our audit of risk assessment we chose to investigate the training of the
accounting/payroll staff. The client must prove they operate in accordance with all the reporting
agencies and requirements, so proper training is a must. There has to be correct comprehensive
accounting methods used since the employer and employees are counting on the payroll function
to properly account for and pay all of their payroll deductions and taxes. In addition to the
abilities of the accounting staff, each employee should be authorized to conduct all of their
duties. We will test the payroll with some analytical procedures that we believe will bring to
light any weaknesses in their payroll accounting. By conducting both investigations we are
looking to see if the accounting/payroll staff of the company is both knowledgeable and certified
to conduct their normal workings with the company.
In choosing steps to perform substantive tests of account balances, the auditor must consider
what substantive tests will produce the most accurate results for dollar errors that could affect the
accuracy of the account balances. Although the payroll process for Kudler is seemingly secure,
we prefer to rely heavily on substantive tests of detail in which we will select a sample of items
from the major payroll related accounts and find hard evidence in support of these items being
recorded properly. This process will allow for a higher level of assurance that account balances
and underlying classes of transactions do not contain any material misstatements. For Kudler,
the audit team has specific areas of concern, which include whether or not salaries, wages and
withholdings are properly recorded and supported in the payroll system and whether or not the
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ending balance reported for Accrued Payroll and Benefits is fairly stated. We will be following
the full paper trail in order to validate each item sampled, which will entail going back to original
pay vouchers and journal entries to get the full picture for each item.
payroll department?
authorized personnel?
Risk Assessment
1. What training is provided to accounting to accounting staff to
3. Are payroll rates (salary, federal tax rates, state tax rates,
payroll checks?
processing?
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Question Yes/No Comments
4. Does the payroll system interface with any system other than
electronic?
relates to payroll?
deductions, etc.)?
Monitoring
by competent employees?
Test of Controls
segregation of duties.
restricted.
approved by supervisors.
payroll register.
records.
checks.
payable audit.
employee.
3(A). FICA.
3(E). Pension.
processed accordingly.
account.
an ACH file.
401(K) accounts.
application.
ANALYTICAL PROCEDURES
BALANCES
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Audit Performed Work Paper Date
Objectives Audit Procedures for Consideration By Index Completed
1. Verify that annual salaries and rates are
system.
recorded.
3. Review supporting information to determine