You Are Assigned to Audit a Public Client

Question

Examlex · Accepted Answer

The Answer is Answers will vary depending on student. The important points to consider include:
Define the objectives
Define the assertions
Review the internal control for payroll processing both within the company and at the service provider
Specifically:
Are there issues in the SAS 70 report? Can the firm rely on the report or is additional work needed. Note: This should be done early on in the audit to allow for time if additional tests are needed.
Who provides the input to the payroll system?
What are the access controls surrounding the terminal used to interact with the service provider? Is the terminal locked or in a safe room when not in use?
Who approves changes to the employee master file? How are these documented?
Is an imprest payroll account used?
Who reconciles the bank statement for payroll? Does that person have any payroll/cash disbursement function? Can that person access the payroll system via the terminal?
How are the data recorded in the general ledger and payroll?
Are the payroll master files and employee registers reconciled to each other and to the general ledger on a monthly basis? If yes, by someone other than HR and the payroll clerk?
Specific Substantive Tests:
Perform test of transactions, such as tracing the pay stubs back to supporting documentation, while also recalculating amounts.
Trace totals per the employee register to the cash disbursements journal, the general ledger, the bank statement, and the payroll employee master file.
Trace changes to proper authorization.
Recalculate commission expense for one or two separate time periods. Tie to sales for the respective period.
Examine the payroll bank statement for: direct deposits returned, old or unusual items, adjusting items.
Examine the sequence of direct deposit slips for missing numbers- indicating completeness issues.
Examine any returned W-2s and trace to current employee list and employee register.
Compare year-end accruals with those from previous years.
Examine executive contracts for information concerning proper accrual amounts.
Examine the valuation of stock options and determine if this is in compliance with GAAP.
Examine payments made subsequent to year-end for information concerning unaccrued items existing at year-end.
Examine output from the service provider for accuracy and completeness. Is the output printed in a secure area away from unauthorized access?
Examine the disclosures to the financial statements to determine if pension expense, stock compensation expense, and other post-employment benefits are properly recorded.
Examine any entries to deferred tax and comprehensive income required as a result of work performed in the payroll area.
Consult with in-firm or outside experts on such matters as stock compensation treatment, pension liabilities, etc. in order to accurately assess that each is properly stated/disclosed in the financial statements.

You Are Assigned to Audit a Public Client

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