ABC Co. operates a shoe factory, which produces classic and casual shoes. The company's year-end is...

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ABC Co. operates a shoe factory, which produces classic and casual shoes. The company's year-end is 31 December 2019. You are an audit manager of their external auditing firm. The interim audit has been completed and you are reviewing the documentation describing ABC Co's payroll system. ABC Co employs over 300 people and approximately 60% of the employees work in production. There are three shifts every day with employees working eight hours each. The production employees are paid weekly in cash. The remaining 40% of employees work at the head office in non-production roles and are paid monthly by bank transfer. The human resources department (HR) is responsible for setting up all new joiners. Pre-printed forms are completed by HR for all new employees and, once verified, a copy is sent to the payroll department for the employee to be set up for payment. This form includes the staff member's employee number and payroll cannot set up new joiners without this information. To encourage staff to attend work on time for all shifts, ABC Co introduced a discretionary bonus, paid every three months, for production staff. The production supervisors determine the amounts to be paid and notify the payroll department. This quarterly bonus is entered into the system by a clerk and each entry is checked by a senior clerk for input errors prior to processing. The senior clerk signs the bonus listing as evidence of undertaking this review. Production employees are issued with clock cards and are required to swipe their cards at the beginning and end of their shift. This process is supervised by security staff 24 hours a day. Each card identifies the employee number and links into the hours worked report produced by the payroll system, which automatically calculates the gross and net pay along with relevant deductions. These calculations are not checked. In addition to tax deductions from pay, some employees' wages are reduced for such items as repayments of student loans owed to the central government. All employers have a statutory obligation to remit funds on a timely basis and to maintain accounting records which reconcile with annual loan statements sent by the government to employers. At ABC Co student loan deduction forms are completed by the relevant employee and payments are made directly to the government until the employee notifies HR that the loan has been repaid in full. On a quarterly basis, exception reports relating to changes to the payroll standing data are produced and reviewed by the payroll director. No overtime is worked by employees. Employees are entitled to take 28 holiday days annually. Holiday request forms are required to be completed and authorised by relevant line managers, however, this does not always occur. On a monthly basis, for employees paid by bank transfer, the senior payroll manager reviews the list of bank payments and agrees this to the payroll records prior to authorising the payment. If any errors are noted, the payroll senior manager amends the records. For production employees paid in cash, the necessary amount of cash is delivered weekly from the bank by a security company. Two members of the payroll department produce the pay packets, one is responsible for preparing them and the other checks the finished pay packets. Both members of staff are required to sign the weekly payroll listing on completion of this task. The pay packets are then delivered to the production supervisors, who distribute them to employees at the end of the employees' shift, as they know each member of their production team. Monthly management accounts are produced which detail variances between budgeted amounts and actual. Revenue and key production costs are detailed, however, as there are no overtime costs, wages and salaries are not analysed. Required (A) In respect of the payroll system for ABC Co identify and explain FIVE KEY CONTROLS which the auditor may seek to place reliance on. (2.5 Marks) (B) In respect of the payroll system for ABC Co describe a TEST OF CONTROL the auditor should perform to assess if each of the identified key controls is operating effectively. (2.5 Marks) (C) Identify and explain FIVE DEFICIENCIES in ABC Co's payroll system and provide a recommendation to address each of these deficiencies. (5 Marks) (D) The finance director is interested in establishing an internal audit department. You are asked to describe assignments the internal audit department of ABC Co could carry out. (5 Marks) (E) ABC Co deducts employment taxes from its employees' wages on a weekly/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 are asked to describe the substantive procedures the auditor should perform to confirm the year-end accrual for tax payable on employment income. (5 Marks) (Total: 20 Marks) ABC Co. operates a shoe factory, which produces classic and casual shoes. The company's year-end is 31 December 2019. You are an audit manager of their external auditing firm. The interim audit has been completed and you are reviewing the documentation describing ABC Co's payroll system. ABC Co employs over 300 people and approximately 60% of the employees work in production. There are three shifts every day with employees working eight hours each. The production employees are paid weekly in cash. The remaining 40% of employees work at the head office in non-production roles and are paid monthly by bank transfer. The human resources department (HR) is responsible for setting up all new joiners. Pre-printed forms are completed by HR for all new employees and, once verified, a copy is sent to the payroll department for the employee to be set up for payment. This form includes the staff member's employee number and payroll cannot set up new joiners without this information. To encourage staff to attend work on time for all shifts, ABC Co introduced a discretionary bonus, paid every three months, for production staff. The production supervisors determine the amounts to be paid and notify the payroll department. This quarterly bonus is entered into the system by a clerk and each entry is checked by a senior clerk for input errors prior to processing. The senior clerk signs the bonus listing as evidence of undertaking this review. Production employees are issued with clock cards and are required to swipe their cards at the beginning and end of their shift. This process is supervised by security staff 24 hours a day. Each card identifies the employee number and links into the hours worked report produced by the payroll system, which automatically calculates the gross and net pay along with relevant deductions. These calculations are not checked. In addition to tax deductions from pay, some employees' wages are reduced for such items as repayments of student loans owed to the central government. All employers have a statutory obligation to remit funds on a timely basis and to maintain accounting records which reconcile with annual loan statements sent by the government to employers. At ABC Co student loan deduction forms are completed by the relevant employee and payments are made directly to the government until the employee notifies HR that the loan has been repaid in full. On a quarterly basis, exception reports relating to changes to the payroll standing data are produced and reviewed by the payroll director. No overtime is worked by employees. Employees are entitled to take 28 holiday days annually. Holiday request forms are required to be completed and authorised by relevant line managers, however, this does not always occur. On a monthly basis, for employees paid by bank transfer, the senior payroll manager reviews the list of bank payments and agrees this to the payroll records prior to authorising the payment. If any errors are noted, the payroll senior manager amends the records. For production employees paid in cash, the necessary amount of cash is delivered weekly from the bank by a security company. Two members of the payroll department produce the pay packets, one is responsible for preparing them and the other checks the finished pay packets. Both members of staff are required to sign the weekly payroll listing on completion of this task. The pay packets are then delivered to the production supervisors, who distribute them to employees at the end of the employees' shift, as they know each member of their production team. Monthly management accounts are produced which detail variances between budgeted amounts and actual. Revenue and key production costs are detailed, however, as there are no overtime costs, wages and salaries are not analysed. Required (A) In respect of the payroll system for ABC Co identify and explain FIVE KEY CONTROLS which the auditor may seek to place reliance on. (2.5 Marks) (B) In respect of the payroll system for ABC Co describe a TEST OF CONTROL the auditor should perform to assess if each of the identified key controls is operating effectively. (2.5 Marks) (C) Identify and explain FIVE DEFICIENCIES in ABC Co's payroll system and provide a recommendation to address each of these deficiencies. (5 Marks) (D) The finance director is interested in establishing an internal audit department. You are asked to describe assignments the internal audit department of ABC Co could carry out. (5 Marks) (E) ABC Co deducts employment taxes from its employees' wages on a weekly/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 are asked to describe the substantive procedures the auditor should perform to confirm the year-end accrual for tax payable on employment income. (5 Marks) (Total: 20 Marks)

Answer rating: 100% (QA)

In respect of the payroll system for ABC Co identify and explain FIVE KEY CONTROLS which the auditor may seek to place reliance on 1 The control environment This refers to the overall tone set by mana... View the full answer