You are now reviewing the company's payroll process and controls in order to start designing your audit

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Question:

You are now reviewing the company's payroll process and controls in order to start designing your audit programs. The process is mainly automated, but the company has a small workforce of 40 employees who monitor the warehouse and the storage areas. The facility is staffed 24 hours a day, seven days a week. There are also 15 employees who work in the company's administration department. The payroll accounting process includes some automated and some manual procedures. You have documented the description of the warehouse employee payroll process and its internal controls, as follows. The warehouse employees work seven-hour shifts and are paid based on hours worked. There are four shifts per day to allow an overlap of employees during shift changes since the warehouse processes must be monitored at all times.

Employees are assigned an employee number when they are hired and are required to clock in and out by swiping their employee identification cards at the warehouse entrance. The time-clock data are linked to the computerized payroll system, which processes the payroll and produces a weekly report of hours worked. There is no monitoring of employees' clocking in/out process. One of the audit team members observed an employee clocking in with two employee swipe cards. When the employee noticed the auditor watching, he explained that the other employee will be working on the shift"... but he just stopped on the way in to pick up the coffee and doughnuts for our shift change meeting." The payroll system calculates the weekly cash wages to be paid to each employee, based on their hourly rates, by taking the information from the payroll system's hours worked report, multiplying it by the appropriate hourly wage rates, and calculating the appropriate tax deductions. The warehouse employees are paid in cash because the location of the warehouse is remote and there is no bank within hundreds of kilometers. These calculations are not checked by anyone, as they are generated by the payroll system.

Each Friday, the payroll department prepares the pay packets and physically hands these out to the warehouse employees who are on day shifts. Every employee must present their employee identification card to receive the pay packet. For employees on the night shifts, the pay packets are distributed by the night supervisor. If any packets are not claimed, the night supervisor keeps them and returns them to the payroll department on the next business day. During your inquires, the CFO informs you that early in the current year, the government income tax department assessed the tax withholdings of Ajax Inc and determined that too little tax had been deducted. The error occurred because the company had failed to update the system to the current year's tax rates.

Required:

1. Identify three control weaknesses in the payroll system of Ajax Inc. Explain the possible implications of each weakness, and provide a recommendation to address it.

2. Describe the substantive procedures you would perform to verify the valuation and completeness of Ajax's payroll expenses.