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Audit Program 1Week Five Team Assignment
Audit Program II
Rachel Ramos, Renee Williams, Dale Cornn,
Branden Klink, & Gloria Ochoa
Accounting 492
Robert Hinske
August 14, 2006
Audit Program 2Week Five Team Homework
Audit Memo
Kudler Fine FoodsPlanning MemorandumYear Ended December 31, 2003
To: Robert Hinske, Engagement Partner
From: Gloria Ochoa, Rachel Ramos, Dale Cornn, Renee Williams and Branden KlinkThe 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.
Internal Control QuestionnaireThe purpose of the internal control questionnaire is to help assess the level of control surrounding the payroll process. There are not any specific weaknesses that we have documented at this time; however the questionnaire will help reveal weaknesses that are not always available to the naked eye.
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 3personnel 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 tests of transactions
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.
Substantive tests of account balances
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
Audit Program 4ending 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.
Sampling detail sheet
Audit Program 5
Internal Control Questionnaire
Audit Program 6
Question Yes/No CommentsControl Environment
1. Is a special payroll bank account used?
2. Is the payroll bank account reconciled by someone who does not
prepare, sign or deliver paychecks?
3. Are there adequate segregation of duties in approving time
records, overtime and vacations?
4. Are payroll department personnel rotated in their duties?
5. Are payroll department personnel required to take vacations?
6. Are payroll department personnel bonded?
7. Is there a timekeeping department (function) independent of the
payroll department?
8. Are authorizations for deductions that have been signed by the
employees on file (FICA withholding, medical withholding,
federal and state income tax withholding, health insurance
premium deductions, medical and childcare flexible spending
deductions, and 401(K) deductions, etc.)?
9. Is access of personnel files restricted to specific employees?
10. Are changes made to payroll related information verified by
authorized personnel?
Risk Assessment
1. What training is provided to accounting to accounting staff to
ensure that they have an understanding of the payroll process?
2. What training is provided to accounting staff to insure that they
have an understanding of the accounting for payroll?
Audit Program 7
Question Yes/No CommentsControl Activities
1. Are timesheets being verified by management?
2. Are personnel comparing time records to payroll?
3. Are payroll rates (salary, federal tax rates, state tax rates,
FICA rates, etc) being processed accordingly in the system?
4. Do payroll personnel approve bank wire transfers for
payment of federal taxes, state taxes, FICA rates, etc?
5. Are employees required to sign for receipt of non EFT
payroll checks?
6. Is there a back-up for payroll personnel?
7. Have procedures been established to record the usage of
employees benefit time?
8. Are attendance records reviewed by management, so that
excessive absences are reviewed?
Information Systems and Communications
1. Who has passwords to access the payroll processing system?
2. Is there an audit trail function within the payroll processing
system? Is it kept turned on?
3. Do training policies communicate roles and responsibilities to
the appropriate accounting employees in regards to payroll
processing?
Audit Program 8Question Yes/No Comments
4. Does the payroll system interface with any system other than
the financial system? If yes, is that interface manual or
electronic?
5. Is there a system of verification of allocation of expenses that
relates to payroll?
6. Is there a list of authorized personnel who can call in to Intuit
to process payroll and make payroll changes (salaries, deductions, etc.)?
7. Is there a back-up for all employee files?
Monitoring
1. If there are discrepancies, are the issues handled and resolved
by competent employees?
2. Are payrolls audited periodically by internal auditors?
3. Is the accuracy, as it relates to the payroll company’s
processing, verified upon receipt of the actual payroll?
4. Are quarterly tax reports reviewed for accuracy against the
accounting system data?
5. Are the bank statements reconciled against payroll
documentation from Intuit?
Audit Program 9Audit Program
Audit Program 10
AuditObjectives Audit Procedures for Consideration
PerformedBy
Work PaperIndex
Date Completed
A. To determine that payroll disbursements
were for work authored and performed.
B. To verify that payroll, including
withholdings and deductions, is computed using
rates and other factors in accordance with
Federal salary schedules and applicable laws.
C. To ensure that payroll expense and related
liabilities are recorded correctly as to amount,
period and disclosures are adequate.
Test of Controls
1. Review policies and procedures for payroll
data entry for completeness and usefulness.
2. Inquire of personnel about procedures.
3. Determine which employees are responsible
for input of data, and ensure adequate
segregation of duties.
4. Obtain and review signed confidentiality
statements for all employees who are involved in a payroll process to ensure that an
understanding of confidentiality exists.
5. Verify that only authorized access to system
software programs and data are granted.
5(A). Access to personnel files is restricted.5(B). Access to payroll files is restricted.
Audit Program 11Audit
Objectives Audit Procedures for ConsiderationPerformed
ByWork Paper
IndexDate
Completed
5(C). Access to QuickBooks program is
restricted.
6. Review employee changes to ensure changes
were accurate and made in a timely manner and
approved by supervisors.
7. Obtain and verify all reports are utilized to
help monitor payroll transactions (budget to
actual, error/audit reports).
8. Review payroll registers and summaries to
ensure supervisors have reviewed and approved
prior to pay distribution.
9. Examine cancelled payroll vouchers for
completeness and validity; compare to the
payroll register.
10. Trace vouchers and labor distributions
(coding) to GL and: (a) from/to payroll
subsidiary records, and (b) from/to personnel
records.
11. Verify for authorization for payroll amounts
and for the physical distribution of signed
checks.
12. Verify the consistency and integration of the
payroll procedures with cash audit and accounts
Audit Program 12Audit
Objectives Audit Procedures for ConsiderationPerformed
ByWork Paper
IndexDate
Completed
payable audit.
SUBSTANTIVE TEST OF TRANSACTIONS
1. Verify time cards for legitimate work hours.
2. Verify check payments made to each
employee.
3. Verify deduction amounts subtracted from
each employee’s check.
3(A). FICA.
3(B). State tax.
3(C). Health insurance.
3(D). Life insurance.
3(E). Pension.
3(F). Allotments (charity, etc).
4. Verify electronics funds transfers (EFT) are
processed accordingly.
4(A). From the company’s regular check
account to the dedicated payroll checking
account.
4(B). The employee’s financial institutions via
an ACH file.
4(C). Administrating the flexible spending and
401(K) accounts.
4(D). The federal and state taxing authorities.
Audit Program 13Audit
Objectives Audit Procedures for ConsiderationPerformed
ByWork Paper
IndexDate
Completed
4(E). Pay voucher printing software
application.
5. Verify ETF transfers were journalized.
ANALYTICAL PROCEDURES
1. Compare the number of employees that work
from each day to the master file of employees to
make sure there are no differences.
2. Perform Analytical procedures to the
relationship of employee’s wages to the hours
that was worked. Investigate if there are less
hours actually worked.
3. Compare employee’s benefits, taxes, etc as a
percentage of sales and wages compared to last
years and this year.
4. Compare direct labor as a percentage of sales
with last year and this year.
5. Compare payroll expense as percentage of
sale with last year and this year.
SUBSTANTIVE TESTS OF ACCOUNT
BALANCES
Audit Program 14Audit
Objectives Audit Procedures for ConsiderationPerformed
ByWork Paper
IndexDate
Completed1. Verify that annual salaries and rates are
adequately supported and recorded in the payroll
system.
2. Verify withholdings are adequately
documented, properly authorized and accurately
recorded.3. Review supporting information to determine
whether the ending balance reported for Accrued
Payroll and Benefits are fairly stated.
Audit Program 15Sampling Detail Sheet
Audit Program 16
Sampling Detail Sheet
Define
The objectives:1. Determine that payroll disbursements are made for authorized work (sample of pay vouchers and time records will be examined)2. Verify time records for legitimate work hours (items in the sample will be verified)3. Verify that payroll disbursements were made to actual employees (pay voucher information in sample will be verified)4. Determine that payroll deductions were withheld from employee checks (for each pay voucher in the sample) a. Deductions to be verified: (1) Federal withholding (2) FICA (3) State tax (4) Health insurance (5) Life insurance (6) Pension (7) Allotments (charity, etc.) (8) Childcare flexible spending deductions5. Verify EFT transfers processed according to company procedure/policy a. Determine if items in sample were journalized according to company procedure
The objectives
The population:1. The period of time to be covered for pay vouchers, time records, and EFT transfer statements in the sample will be 12-31-2005 through 12-31-20062. Ensure completeness: a. Account for the numerical sequence of pay vouchers by reviewing pay voucher logs b. Review each time record in the sample to ensure proper supervisory authorization c. Compare EFT transfer to copies of wire transfer sheets in general accounting
The population
Sampling units: a. pay vouchers b. time records c. EFT bank transfer statement d. Personnel records, including wage rates or salary authorizations. e. W-4 and other deduction authorization forms. f. Payroll register. g. Payroll master file. h. Payroll master file changes report. i. Periodic payroll reports j. Various tax reports and forms.
The sampling unit
75% of planning materiality: $725,650 x 75% x .01 = $12,698
Tolerable misstatement (Related to materiality – should not exceed auditor’s preliminary judgment of materiality)
Audit Program 17Determine the Sampling Approach
Statistical Statistical or Non
Determine the Selection Method
Random-numberSystematic, every 30th item Systematic (every nth item)
Other
Determine the sample size
Based on the results of the ICQ, observations, preliminary tests and consideration of the fraud control risk factors, controls appear to be effective and the preliminary assessment of control risk will be low.
Preliminary assessment of control risk
With control risk low and inherent risk at moderate the risk of material misstatement is low-moderate. If the risk of material misstatement is low-moderate and the acceptable level of audit risk is low, then detection risk will be high.
Consider the acceptable level of risk
See above Consider the tolerable misstatementThe expected misstatement is based upon prior year audits, results of other substantive tests, audit judgment and knowledge of changes in accounting and personnel. We do not have information on any of these items on the Kudler Fine Foods internet site.
Consider the expected amount of misstatement
The population size is calculated based on 127 employees that get paid 2 times every month for the time period being audited. This comes out to be 3,048, which is why we will sample every 30th item, for an approximate population size of 102 items.
Consider the population size
Perform the sampling plan
Evaluate the sample results
Reach an overall conclusion
Document the Sampling Procedure