M.V Kumar Advocates & Solicitors, a legal firm engages Sakinah, Allaffrree and Co., CAs for audit works. Due to the nature of their business, payroll and telephone expenses are the two largest expenses. Since you are the auditor in charge on the engagement responsibility for planning the audit program for payroll and personnel cycle, you are asked to be the leader for the audit engagement by your firm. M.V. Kumar Advocates & Solicitors use a computer service company (Wailey Techno Computer Centre) to prepare payroll cheques, update data for payroll and prepare payroll journal for its 150 employees every month. The owner, Mr. M.V. Kumar on the other hand, maintains all the personnel files, knows every employee extremely well, and is a full time participant in the business. All employees, except the owner, punch-in and punch-out daily using the time clock. Mr. M.V. Kumar's secretary, Ms. Leela Kumari is responsible to give the time cards to the employees daily, observed the clocking-in, collects the cards and immediately returns them to the file. The same process is repeated for the punching-out. At the end of the month, the employees will calculate their own hours' work. Ms. Leela Kumari will recheck the calculation while Mr. M.V. Kumar will approve all the time cards. Every 25" of the month, Ms. Leela Kumari will prepare a payroll input form to be delivered to Wailey Techno Computer Centre. She will file a copy of the form. The form has the following information for each of its employees as follows: Information Source Employee's name Time card Employee's number Employee's list Hourly labour rate * Wage rate list (approved by Mr. M.V. Kumar) Regular hours Time card Overtime hours Time card Special deduction * Special form (prepared by employee) Termination of employment * Mr. M.V. Kumar *included on input form only for new employees, terminations and changes. Wailey Techno Computer Centre will enter the information from the payroll input form into its computer, updates the master files, and print-out the payroll cheques and payroll register. The payroll register has the following headings: Employee's name Income taxes withheld Employee's number Insurance Regular hours Other deduction Overtime hours Overtime payroll (RM) Regular payroll (RM) Net pay Gross payroll Cheque numberA journal is then prepared and totaled. Wailey Techno Computer Centre then prepares the cheques for each employee and delivers them to Ms. Leela Kumari. Upon receiving the checks and the journal, Ms. Leela Kumari will compare the information with her payroll input form and initials the journal. She then gives the cheques to Mr. M.V. Kumar who will then sign the cheques and deliver them personally to the employees. Ms. Leela Kumari will re-calculate the journal and post the totals to the ledger. Mr. M.V. Kumar himself will prepare monthly bank reconciliation. REQUIRED: (a) List any THREE (3) of the forms and documents used in the conventional (manual) payroll system. (3 Marks) (b) Is there any loss of source documentation by outsourcing the service to Wailey Techno Computer Centre? Explain. (2 Marks) (c) Base on the above case, state TWO (2) appropriate audit procedures and the type of audit tests (i.e. tests of controls and substantive tests of transactions) for the following audit objectives. Use the following format for your answer: No. Audit objective Audit procedure Audit test 1. Recorded payroll payments are for i. i. work performed by existing employees (existence) 11. ii. 2. Existing payroll transactions are i. 1. recorded (completeness) 11. 3. Recorded payroll transactions are for | i. 1. the amount of time actually worked and at the proper pay rate; ii. ii. withholdings are properly calculated (accuracy) 4. Payroll transactions are properly i. i. classified (classification) ii. 5. Payroll transactions are recorded on i. i. the correct dates (timing) 11. ii. (15 Marks)
