Describe a test of control Viola & Co should perform to assess if each of these controls is operating effectively
Trombone Co (Trombone) operates a chain of hotels across the country. Trombone employs in excess of 250
permanent employees and its year end is 31 August 2014. You are the audit supervisor of Viola & Co and are currently
reviewing the documentation of Trombone’s payroll system, detailed below, in preparation for the interim audit.
Trombone’s payroll system
Permanent employees work a standard number of hours per week as specified in their employment contract. However,
when the hotels are busy, staff can be requested by management to work additional shifts as overtime. This can either
be paid on a monthly basis or taken as days off.
Employees record any overtime worked and days taken off on weekly overtime sheets which are sent to the payroll
department. The standard hours per employee are automatically set up in the system and the overtime sheets are
entered by clerks into the payroll package, which automatically calculates the gross and net pay along with relevant
deductions. These calculations are not checked at all. Wages are increased by the rate of inflation each year and the
clerks are responsible for updating the standing data in the payroll system.
Employees are paid on a monthly basis by bank transfer for their contracted weekly hours and for any overtime worked
in the previous month. If employees choose to be paid for overtime, authorisation is required by department heads of
any overtime in excess of 30% of standard hours. If employees choose instead to take days off, the payroll clerks
should check back to the ‘overtime worked’ report; however, this report is not always checked.
The ‘overtime worked’ report, which details any overtime recorded by employees, is run by the payroll department
weekly and emailed to department heads for authorisation. The payroll department asks department heads to only
report if there are any errors recorded. Department heads are required to arrange for overtime sheets to be authorised
by an alternative responsible official if they are away on annual leave; however, there are instances where this
arrangement has not occurred.
The payroll package produces a list of payments per employee; this links into the bank system to produce a list of
automatic payments. The finance director reviews the total list of bank transfers and compares this to the total amount
to be paid per the payroll records; if any issues arise then the automatic bank transfer can be manually changed by
the finance director.
(a) In respect of the payroll system of Trombone Co:
(i) Identify and explain FIVE deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a test of control Viola & Co should perform to assess if each of these controls is operating
Note: The total marks will be split equally between each part. (15 marks)
(b) Explain the difference between an interim and a final audit. (5 marks)
(c) Describe substantive procedures you should perform at the final audit to confirm the completeness and
accuracy of Trombone Co’s payroll expense. (6 marks)
Trombone deducts employment taxes from its employees’ wages on a monthly basis and pays these to the local
taxation authorities in the following month. At the year end the financial statements will contain an accrual for income
tax payable on employment income. You will be in charge of auditing this accrual.
(d) Describe the audit procedures required in respect of the year end accrual for tax payable on employment
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