Below is a transcript of a May video conference between Joe Anthony, the partner, and Leslie Nagan, the manager.
JA: Leslie, I just ended a call with Avis. Finally, some good news. Avis said that Hillsburg’s sales have started to recover since the provincial governments have removed some of the COVID-19 restrictions.
LN: That’s great.
JA: I know. However, the company is still forecasting an operating loss this year. The Board asked Avis and its other senior management to look for efficiencies to reduce operating costs.
LN: What is Avis planning to do?
JA: The Board is looking for every department to cut operating costs by 10 to 15 percent. Avis needs to make some tough decisions and layoff some of her staff.
LN: Accounting? Avis already let go some accounting staff during the pandemic. Who else can they afford to layoff?
JA: No, not accounting. Payroll and HR. Avis wants to outsource payroll processing to an outside payroll processing company.
LN: Which one?
JA: She hasn’t decided yet. She is in the process of reviewing proposed pricing submissions from three companies, and said that she will most likely choose the company that offers the lowest price. She said the Board is putting a lot of pressure on everyone to cut costs.
LN: When do you think Hillsburg will switch to the outside payroll processing company?
JA: Next month Hillsburg’s Board is scheduled to meet to review and approve all the cost-cutting proposals, including the payroll outsourcing that Avis is working on.
LN: And the payroll staff?
JA: The payroll supervisor and two payroll clerks will be let go, once the Board approves the outsourcing. The plan is to keep one payroll clerk for an additional month, just in case something goes wrong during the transition.

REQUIRED
1. Explain the impact of Hillsburg’s decision to outsource their payroll processing to an outside payroll company on the control activities of Hillsburg’s human resource and payroll cycle.
2. Explain what adjustments to the audit planning activities will need to be made assuming Hillsburg outsources its payroll prior to year-end.
3. Propose an appropriate risk response to the change in the payroll process.