Big Ben’s Toy (BBT) Company has recently outsourced its payroll operation to Mary’s Payroll Service (MPS). MPS receives the changes to the payroll database (hirings, firings, rate increases, etc.) and the number of hours worked for all hourly employees. MPS calculates the payroll and sends BBT printed payroll checks and a payroll register. BBT then transfers an appropriate amount into its payroll bank account and distributes the checks. MPS also provides a list of payments to be made to third parties (IRS, insurance, pension plan, etc.). Accounts payable uses the list of third-party payments to make appropriate payments.
You have been hired to perform an audit of BBT Company. During your opening meeting with BBT management, you state that your audit plan includes inquiries of MPS and a review of the AT 801 report on internal controls at MPS. BBT’s management is confused and states that BBT should not have to pay you to review controls at another organization.
Prepare a brief explanation for BBT’s management as to why it is necessary to review the controls at MPS and the importance of this review to BBT Company.
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