Carrie Ahwahli is the auditor of Abbolah Ltd., a large manufacturing company with several plants across Canada.
Question:
Carrie Ahwahli is the auditor of Abbolah Ltd., a large manufacturing company with several plants across Canada. All accounting records are automated using a combination of software packages and customized programming.
In prior years Abbolah had never recorded accrued vacation pay in its accounts but instead had recognized the expense when vacations were taken by the employees. This was considered reasonable since employees took their vaca¬ tion throughout the year. For the year ended December 31, 2001, however, the company decided to set up the liability at that date for accrued vacation pay. This coincided with changes in personnel policies requiring employees to take their holidays in specified time periods during the year.
The company employs approximately 2,400 employees, each of whom belongs to one of four unions. Employees' entitlement to vacation pay is based on length of service (calculated from the month of employment) and varies according to the terms of each union contract. Some specific variations in calculations are required based on sick-leave entitlements as well.
Complete personnel information for all employees is maintained on a payroll master file which is updated weekly. An "Employee Status Report" containing all master file details for specified employees is produced on request.
A specially written computer program was prepared to determine the amount of accrued vacation pay, since the standard software packages used by the company could not handle the calculations. This program extracted the relevant data from the payroll master file as at December 31,2001, calculated the amount of accrued vacation pay for each employee, recorded the details in a separate data file, and printed a summarized report showing only the grand total of the accrued vacation pay.
Required
a. How could an audit trail be provided to enable Carrie to perform tests of details of the accrued vacation pay? What practical difficulties may arise?
b. Explain briefly how Carrie could use either test data or generalized audit software to check the accuracy of the computer program.
Step by Step Answer:
Auditing And Other Assurance Services
ISBN: 9780130091246
9th Canadian Edition
Authors: Alvin Arens, James Loebbecke, W Lemon, Ingrid Splettstoesser