Cedars Industries Limited (CIL) is a public company that manufactures and distributes chemical products. It employs over 600 people in 2 plants situated in Hamilton, Ontario and Edmonton, Alberta. Sales, marketing and distribution, and the head office in Toronto, Ontario employ a further 200 people.

 

You are a CPA and the chief internal auditor at CIL. You report to the chair of the audit committee which meets at the end of each quarter. A proposed annual audit plan must be submitted to the audit committee at its November meeting each year. Prior to the meeting, the chair requests that you submit in writing your justification for selecting a given department for audit. The internal audit department (IA) currently employs 4 staff auditors, but it is understaffed and you are actively recruiting to fill 3 open positions.

 

You are currently preparing your audit plan for next year. The selection of units for audit is based on risk assessment, which is a process involving a number of inputs. An important element of information used in risk assessment is knowledge of the operations and transactions that occurred over the entire year. Senior management has also requested that certain areas of head office and the Edmonton plant be subject to audit next year.

 

As a result of your department's audit work this year, several human resource issues have emerged, such as:

• Frequent overtime
• Large number of part-time employees
• Frequent use of consultants
• Evidence, through observation, that employees are not fully occupied
• Difficulties in filling positions
• Unsatisfactory employee performance at various levels

The human resource department (HR) is responsible for the production of the CIL payroll. A separate computerized payroll system is maintained by HR for that purpose. Upon production of each payroll, an electronic data feed is produced and sent to the accounting department, where it is uploaded to the general ledger system. The accounting department then generates and distributes the payroll cheques.

 

The CIL payroll includes weekly pay periods for the plant's unionized employees earning hourly wages, bi-monthly pay periods for the salaried marketing and distribution and head office staff, and monthly pay periods for the sales people who are paid on commission. In addition to the statutory deductions required by the Canada Revenue Agency (CRA), deductions for contributions to the company pension plan, medical and disability premiums, parking charges, union dues, and Canada savings bonds are calculated for each pay period.

 

Each year, employees complain that their statements of earnings (T-4 slips) are never available until the government-imposed filing deadline at the end of February. Among other reasons for the delays, the payroll department has indicated that the reconciliation of the annual payroll is a complicated manual procedure that takes at least 6 weeks to complete.

 

During the current year, IA performed an audit of the pension department and discovered that difficulties exist in the reconciliation of the information related to pension contributions received from the payroll department with information in the general ledger.

 

Based on the information you have obtained, you must now decide if HR will be included in your audit plan for next year.

Required :   

Recommend- memo to the chair of the audit committee providing your rationale for the inclusion of HR in your annual audit plan for next year.