2. Computer Auditing

Prodoc Editors Ltd (PEL) is a medium-sized firm specialising in the provision of technical writing services. From their offices in Christchurch, Wellington and Auckland, PEL's specialist writers produce software manuals and other technical documentation for a range of clients across New Zealand. The firm has recently implemented a new computerised payroll system which was developed in-house by their IT department. Consistent with the firm's 'green' image, all output is produced in electronic form.

Employees work a standard eight-hour day. Each employee has a unique ID card which incorporates a built in microchip containing their personal payroll-related details. Hours worked are captured using a 'proximity card reader'. As each employee arrives for work, they hold their card close to the card reader and the reader recognises the information stored on the card's microchip. Next, employees are prompted to place their finger on a biometric fingerprint reader, which helps authenticate the cardholder. If everything is in order the system then records the employee as being 'at work'. When employees start or done for a job, they use the proximity card reader and also punch in the relevant client's code. When the employee leaves work at the end of the day the employee waves their card near the reader, and the system records them as having left work.

Total hours worked and hours to be charged to each client's project are automatically calculated each week by the computer system using the data captured by the card reader. Overtime pay is calculated as any excess over the standard hours worked. Any overtime over 10% of standard hours is sent on a computer-generated report by email to the financial accountant. If necessary, the accountant overrides overtime payments if the hours worked are incorrect.

Payroll deductions, such as PAYE and KiwiSaver, and net pay are also calculated by the computer. Each employee's net pay is paid into their account automatically via a direct credit initiated by the payroll system, but only after the accountant authorises each payment, based on a review of the list of wages to be paid that week. The payroll system communicates directly with the firm's bank via an online banking interface. Deductions are also paid automatically by the system to the various payees via the online banking interface.

Payroll data and application software are regularly backed up to an external hard drive and stored in the IT Manager's desk drawer in the data centre. Management decisions on staffing levels are predominantly based on electronic reports output by the payroll system. In addition to the payroll system, all PEL's other accounting subsystems have also been internally developed and exhibit equivalent levels of automation, sophistication, and management reliance on computer system output.

REQUIRED:

You are a senior auditor in the firm that audits PEL. The audit manager responsible for this audit is aware that you possess some knowledge of information systems auditing, and would like your advice in planning for the forthcoming audit.

(a) Based on the information in the scenario above, classify PEL's use of computers as minor, significant, or dominant, making sure you clearly justify your decision. Indicate what impact your decision would have on your overall audit strategy for auditing payroll.

(b) Irrespective of your classification in (a) above, assume that you have decided to audit through the computer. Illustrate with four (4) examples how generalised audit software, such as IDEA, could be used to provide audit evidence in relation to PEL's payroll system.

(c) Irrespective of your classification in (a) above, assume that you have decided to audit through the computer. Explain how the use of the test data method could help in the audit of PEL's computerised payroll system, and also note any problems with this audit technique.