Question

You are the Auditor-in-Charge assigned to conduct an assurance engagement of the BFF Corp’s payroll process.  This process hasn’t been audited for three years. There have been no significant changes since the previous audit:  there were no system changes, no reorganization of personnel, and no substantive procedural changes.  However, during the latest audit, internal audit identified several observations, some of which were considered significant.  The significant observations were:

1. Information pertaining to employees leaving the company was not communicated to the IT department, resulting in extensive delays before those employee’s system rights were terminated.
2. Hours paid to non-exempt employees were not supported by an approved time sheet.
3. Accounts withheld for employees were not consistent with elections made by employees.
4. The possibility existed that phantom employees could be included in the payroll without detection.

Payroll management implemented actions to address all significant observations, and IA conducted limited follow-up procedures to validate that the planned actions were completed.  This is the first audit since the follow-up procedures were completed.

The following is pertinent information to the payroll audit:

1. BFF employs over 4,400 employees.  Approximately 2,700 of those employees are salaried, the rest are hourly.
2. Employees are paid bi-weekly.
3. Hourly employees earn pay at straight-time for the first 80 hours in bi-weekly pay period, time-and-a-half for the next 20 hours in a pay period and double time for any hours exceeding 20 hours in a pay period.
4. The company utilizes a widely used and market tested payroll package for processing of all payroll transactions.
5. The payroll system interfaces with the general ledger system.
6. BFF has established a separate payroll imprest account for the processing of payroll checks.   Amounts are deposited in this account from the general account to cover any checks presented against the imprest account each day.
7. Certain non-payroll items are deducted from the payroll checks, including the following:
   • Employee loans to cover the cost of extra benefits or product purchases.
   • Contributions to long-term retirement plans.
   • Contributions to charitable organizations.
   • Contributions to Political Action Committees
8. Payroll expenses and related payroll accruals are considered material to the company.

Based on the above information, perform the following steps to conduct the payroll audit:  (please provide your answers directly beloweach section)

I.   Process objectives:

     Determine at least 3 payroll department objectives that would be relevant to this engagement.  

II. Identifying process risks:

Create a list of potential risk scenarios for each objective.  Include a minimum of 8 risks in total.     

Answer 1

Objectives that are important to the engagement of payroll department audit:

1. The procedure is well established and vetted when any personnel leaves the organisation including termination of its system rights.

2. Proper system and checks exist for employees paid on hourly basis.

3. The control to ensure that no phantom employee is paid salary exists in the organisation.

Process risks:

1. The deduction each employee has opted for is deducted from its salary correctly and no extra amount is deducted.

2. Existence of fake employees in the employee's data base.

3. Improper sheet for recording the hourly working of employees.

4. Modification rights exist with employees to alter their working hours.

5. Existence of system rights and password with the employee even after leaving the organisation.

6. Excess amount being paid to employee without deducting the non payroll items.

7. The assets which were allotted to the employee at the time of joining are well in place when in place when the employee leaves the job.

8. No proper punching mechanism exists to identify the quantum of hours n employee is working.