CASE STUDY: SETOI BERHAD

You are an audit manager of Tissa & Co, the auditor of Setoi Berhad which operates an electric power station. The company produces electricity 24 hours a day, seven days a week.

Setoi Berhad employs over 250 people and approximately 70% of the employees work in production at the power station. There are three shifts every day with employees working eight hours each. The production employees are paid weekly in cash. The remaining 30% of employees work at the head office in non-production roles and are paid monthly by bank transfer.

The company has a human resources (HR) department, responsible for setting up all new joiners. Pre-printed forms are completed by HR for all new employees and, once verified, a copy is sent to the payroll department for the employee to be set up for payment. This form includes the staff member's employee number and payroll cannot set up new joiners without this information. To encourage staff to attend work on time for all shifts, Setoi Berhad introduced a discretionary bonus, paid every three months, for production staff. The production supervisors determine the amounts to be paid and notify the payroll department. This quarterly bonus is entered into the system by a clerk and each entry is checked by a senior clerk for input errors prior to processing. The senior clerk signs the bonus listing as evidence of undertaking this review.

Production employees are issued with smart cards and are required to swipe their cards at the beginning and ending of their shift. This process is supervised by security staff 24 hours a day. Each card identifies the employee number and links into the hours worked report produced by the payroll system, which automatically calculates the gross and net pay along with relevant deductions. These calculations are not checked.

On a quarterly basis, exception reports relating to changes to the payroll standing data are produced and reviewed by the payroll director. No overtime is worked by employees. Employees are entitled to take 28-holiday days annually.Holiday request forms are required to be completed and authorised by relevant line managers; however, this does not always occur.

On a monthly basis, for employees paid by bank transfer, the senior payroll manager reviews the list of bank payments and agrees this to the payroll records prior to authorising the payment. If any errors are noted, the payroll senior manager amends the records.

For production employees paid in cash, the necessary amount of cash is delivered weekly from the bank by a security company. Two members of the payroll department produce the pay packets, one is responsible for preparing them and the other checks the finished pay packets. Both members of staff are required to sign the weekly payroll listing on completion of this task. The pay packets are then delivered to the production supervisors, who distribute them to employees at the end of the employees' shift, as they know each member of their production team.

Monthly management accounts are produced that indicate variances between budgeted and actual amounts. Revenue and key production costs are detailed, however, as there are no overtime costs, wages and salaries are not analysed.

REQUIRED:

(a) Identify FIVE (5) key controls of the payroll system, in which the auditor may seek to place reliance on.

(b) Describe a Test of Control for each of the five key controls in (a) above, which the auditor should perform to assess if each of these key controls is operating effectively.

(c) Identify and explain FIVE (5) deficiencies in Setoi Berhad's payroll system and provide a recommendation to address each of these deficiencies.