You are the senior auditor in charge of the annual audit of Onward Manufacturing Corporation for the year ending December 31. The company is of medium size with only 300 employees. All 300 employees are union members paid by the hour at rates set forth in a union contract, a copy of which is furnished to you. Job and pay rate classifications are determined by a joint union– management conference, and a formal memorandum is placed in each employee’s personnel file. Every week, clock cards prepared and approved in the shop are collected and trans-mitted to the payroll department. The total of labor hours is summed on a calculator and entered on each clock card. Batch and hash totals are obtained for the following:
(1) Labor hours and
(2) Last four digits of Social Security numbers. These data are input into a disk file, batch balanced, and batch processed. The clock cards (with cost classification data) are sent to the cost accounting department. The payroll system is computerized. As each person’s payroll record is processed, the Social Security number is matched to a table (in a separate master file) to obtain job classification and pay rate data, then the pay rate is multiplied by the number of hours, and the check is printed. (Ignore payroll deductions for the following requirements.)
a. What audit procedures would you recommend to obtain evidence that payroll data are accurately totaled and transformed into machine- readable records? What deviation rate might you expect? What tolerable deviation rate would you set? What “items” would you sample? What factors should you consider in setting the size of your sample?
b. What audit procedures would you recommend to obtain evidence that the pay rates are appropriately assigned and used in figuring gross pay? In what way, if any, would these procedures be different if the gross pay were calculated by hand instead of on a computer?