Prompt:

You have been assigned to the audit of The Grace Company for the year ended December 31, 2018. The company is a private entity.

The following internal control description has been taken from the standard internal control questionnaire used by your CPA firm for assessing control risk in the payroll and personnel cycle of the Grace Company.

Only employees existing in the computer data files are accepted when they are entered during the processing of payroll for each bi-weekly pay period.

The client has indicated that this is a control to ensure that recorded payroll payments are for work performed by existing employees.

Task:

Per the auditing standards, a brief explanation (or list) of the factors that you will consider when you are evaluating the design of The Grace Companys control over existence and occurrence of compensation expense (as described above).

Detail the auditors responsibilities for communicating the identified deficiencies in internal controls to those charged with governance and management.

Notes:

Your objective is to appropriately communicate to those charged with governance and management any deficiencies in the internal controls over financial reporting that you have identified during the audit and, in your professional judgement, are of sufficient importance to merit their attention.

Your first step is to evaluate the design of the control. You are not exactly sure what circumstances that may be identified as deficiencies, significant deficiencies or material weaknesses are directly related to the DESIGN of the control since you are aware that controls are evaluated on DESIGN and OPERATION.