CASE STUDY: THE TROLLEY DODGERS
Identify the key audit objectives for a client’s payroll function. Comment on both objectives related to tests of control and those related to tests of control s and those related to substantive audit procedure.
The key audit objectives for client’s payroll function in this Trolley Dodgers Case are: i.
Posting & Summarization
Key Audit Objective : Occurrence
Dodgers must recorded payroll payments for existing employees only and should have separation of duties for each task.
Test of Control: Examine internal control to see if the payroll payments are for exiting work and existing employees. The test could be examining all the workers time cards, personnel files and review organization chart. They also can discuss with employees and observe duties being performed. The tests would examine printouts of transactions rejected by the computer as having nonexistent employee numbers.
Substantive Test of Transactions: The test to see if the right dollar amount in the payrolls were recorded and paid properly. They also test to review large dollar amount in the journal entries, general ledger and payroll earnings. Examine cancelled checks for proper endorsement could be compare with a personnel record.
Key Audit Objective : Completeness
Dodgers must record all existent payroll transactions.
Test of Control: The test is to see if the existing payrolls are recorded. If employees do not get any payment, so they can directly report to the employer. They also test to review the renumbered payroll check to find the missing one.
Substantive Test of Transaction: They can compare the book and payroll bank statement. Therefore, they will prove the bank reconciliation and can look for unmatched dollars amount.
Key Audit Objective : Accuracy
Dodgers recorded payroll transactions are for the amount of time actually worked and at the proper pay rates accuracy.
Test of Control: The test is to see if the right hours and right rate are recorded and tax withholding is correct. Batch totals are compared with computer summary reports. Auditors could examine authorization in payroll records and personnel files.
Substantive Tests of Transaction: To test for exact dollar amount, auditors could recalculate gross and net pay. They also can compare pay rate with the industry, review cancel check withholdings by referring to tax tables and authorization forms in personnel file.
Key Audit Objective: Posting and Summarization.
Dodgers recorded payroll transaction properly included in the master file also properly summarized.
Test of Control: When payroll master file totals are compared with general ledger totals, auditors should examine initialed summary total reports indicating that comparison has been made. They also must examine indication of internal verification.
Substantive Test of Transaction: Test clerical accuracy by footing the payroll journal and tracing postings to the journal ledger and the payroll master files.
Key Audit Objective : Classification
Dodgers classify all payroll transaction properly and efficiently.
Test of Control: They should review charts of accounts. If the account classifications are internally verified, then they can examine indication of internal verification.
Substantive Test of Transaction: They can review time cards and job ticket, and trace through to labor distribution. They should compare classification with chart of accounts or procedures manual. vi.
Key Audit Objective : Timing
Dodger must record all payroll transaction immediately, on the correct date and right amount.
Test of Control: Auditors should examine procedures manual and observe when recording takes place and examine indication of internal verification.
Substantive Test of Transaction: The auditor compare date on checks with date in the payroll journal and...
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