Blake Co. assembles specialist motor vehicles such as freight trucks, buses, and delivery trucks. The company owns four assembly plants where parts are delivered and assembled into the motor vehicles.

The motor vehicles are assembled using a mix of robot and manual production lines. The assembly-line workers normally work a standard eight-hour day, although this is supplemented by overtime on a regular basis as Blake 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 a.m. and “clock in” using an electronic identification card. The card is scanned by the time-recording system and each production shift worker’s 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 because 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 supervisor.

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 day’s quota of vehicles.

The shift supervisor is not required to monitor the extent of any overtime working, although the supervisor does ensure workers are not taking unnecessary or prolonged breaks that 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 employee’s wages records. Staff in the payroll department compare hours worked from the time-recording system with the computerized wages system and enter a code word to confi rm the accuracy of transfer. The code word also acts as authorization to calculate net wages. The code word is the name of a cat belonging to the department head and is therefore generally known around the department.

Each week the computerized wages system calculates:

1. Gross wages, using the standard rate and overtime rates per hour for each employee

2. Statutory deductions from wages

3. Net pay

The list of net pay for each employee is sent over Blake’s internal network to the accounting department. In the accounting department, an accounting clerk ensures that employee bank details are on file.

The clerk then authorizes and makes payment to those employees using Blake’s online banking systems. Every few weeks, the financial accountant reviews the total amount of wages paid to ensure that the management accounts are accurate.

Termination of employees
Occasionally, employees leave Blake. When this happens, the personnel department sends an email to the payroll department detailing the employee’s termination date and any unclaimed holiday pay. The receipt of the email 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.

Required

a. List four control objectives of a payroll system.

b. As the external auditors of Blake Co., write a management letter to the directors regarding the shift workers’ wages recording and payroll systems that:

i. Identifies and explains four weaknesses in that system

ii. Explains the possible effect of each weakness

iii. Provides a recommendation to alleviate each weakness

c. List three substantive analytical procedures you should perform on the shift managers’ salary process. For each procedure, state your expectation of the result of that procedure.

d. Audit evidence can be obtained using various audit procedures, such as inspection. Apart from this procedure, in respect of testing the accuracy of the time-recording system at Blake, explain four procedures used in collecting audit evidence and discuss whether the auditor will benefit from using each procedure.