Case 1

Devon Co assembles specialist motor vehicles such as lorries, buses and trucks. The company owns four assembly plants to which parts are delivered and assembled into the motor vehicles. The motor vehicles are assembled using a mix of robot and manual production lines. The human workers normally work a standard eight-hour day, although this is supplemented by overtime on a regular basis as Devon has a full order book. There is one shift per day; mass production and around the clock working are not possible due to the specialist nature of the motor vehicles being assembled.

Wages system shift workers

Shift-workers arrive for work at about 7.00 am and clock in using an electronic identification card. The card is scanned by the time recording system and each production shift-workers identification number is read from their card by the scanner. The worker is then logged in as being at work. Shift-workers are paid from the time of logging in. The logging in process is not monitored as it is assumed that shift-workers would not work without first logging in on the time recording system. Shift-workers are split into groups of about 25 employees, with each group under the supervision of a shift foreman. Each day, each group of shift workers is allocated a specific vehicle to manufacture. At least 400 vehicles have to be manufactured each day by each work group. If necessary, overtime is worked to complete the days quota of vehicles. The shift foreman is not required to monitor the extent of any overtime working although the foreman does ensure workers are not taking unnecessary or prolonged breaks which would automatically increase the amount of overtime worked. Shift-workers log off at the end of each shift by re-scanning their identification card.

Payment of wages

Details of hours worked each week are sent electronically to the payroll department, where hours worked are allocated by the computerized wages system to each employees wages records. Staff in the payroll department compare hours worked from the time recording system to the computerized wages system, and enter a code word to confirm the accuracy of transfer. The code word also acts as authorization to calculate net wages. The code word is the name of a domestic cat belonging to the department head and is therefore, generally known around the department.

Each week the computerized wages system calculates:

(I) gross wages, using the standard rate and overtime rates per hour for each employee,

(ii) statutory deductions from wages, and

(iii) net pay.

The list of net pay for each employee is sent over Devons internal network to the accounts department. In the accounts department, an accounts clerk ensures that employee bank details are on file. The clerk then authorizes and makes payment to those employees using Devons online banking systems. Every few weeks the financial accountant reviews the total amount of wages made to ensure that the management accounts are accurate.

Termination of employees

Occasionally, employees leave Devon. When this happens, the personnel department sends an e-mail to the payroll department detailing the employees termination date and any unclaimed holiday pay. The receipt of the e-mail by the payroll department is not monitored by the personnel department.

Salaries system shift managers

All shift managers are paid an annual salary; there are no overtime payments. Salaries were increased in July by 3% and an annual bonus of 5% of salary was paid in November.

(a) List seven control objectives of a wages system.

(b) As the external auditors of Devon Co,

(i) Identifies and explains Six weaknesses in that Payroll system.

(ii) Explains the possible effect of each weakness on Devon Company.

(iii) Provides a recommendation to alleviate each weakness. (25 marks)

Question 2

Describe substantive procedures the external auditor should adopt to verify EACH of the following assertions in relation to an entitys property, plant and equipment;

(i) Valuation;

(ii) Completeness; and

(iii) Rights and obligations. (25 marks)

Question 3 (Total 25 marks)

1)Describe substantive procedures the auditor should perform on the year-end trade payables of their client. (5 marks)

2)There are a number of key procedures which auditors should perform if they wish to rely on internal controls and reduce the level of substantive testing they perform. These include:

(I)Documentation of accounting and internal control systems; (3 marks)

(ii) Walk-through tests; (2 marks)

(iii)Audit sampling; (5 marks)

(iv)Testing internal controls; (5 marks)

(v) Dealing with deviations from the application of control procedures. (5 marks)

Required:

Briefly explain each of the procedures listed above.