A good understanding of internal controls is essential to auditors. This helps them to understand the business and allows the auditor to effectively plan and execute tests of controls together with an appropriate level of substantive procedures.

A small manufacturing company, Westfield, pays its staff in cash and bank transfer, and the payroll department consists of a payroll clerk who maintains its payroll on a stand-alone lap top computer. The payroll clerk is supervised by the chief accountant, who in turn reports to the managing director. You are Westfield’s auditor.

Required:

1. For the payroll department at Westfield, describe the internal control objectives that that should be in place
2. Describe the internal control environment and control activities that should be in place to achieve the internal control objectives in (a) above
3. Using your answer above, suggest a control the auditor may seek to rely on when obtaining evidence over occurrence and evidence in relation to payroll, and explain why. State ONE test of control the auditor might carry to test the operating effectiveness of that control.