SECTION B Answer this compulsory question in the answer booklet Question 1 You are the audit supervisor of Brown & Co and are currently planning the audit of Pillow plc's payroll system, detailed below, in preparation for the year-end audit. Pillow plc operates a chain of hotels across the country and employs in excess of 250 permanent employees and its year end is 30h June 2015. Permanent employees work a standard number of hours per week as specified in their employment contract. However, when the hotels are busy, staff can be requested by management to work additional shifts as overtime. This is paid on a monthly basis and recorded by employees on weekhy overtime sheets which are then sent to the payroll department. The standard hours per employee are automatically set up in the system and the overtime sheets are enteed by clerks into the payroll package, which automatically calculates the gross and net pay along with relevant deductions. Wages are increased by the rate of inflation each year and the clerks are responsible for updating the standing data in the payroll system. Employees are paid on a monthly basis by bank transfer for their contracted weekly hours and for any overtime worked in the previous month. Authorisation is required by department heads of any overtime in excess of 30% of standard hours. The 'overtime worked' report, which details any overtime recorded by employees, is run by the payroll department weekly and emailed to department heads for authorisation. The payroll department asks department heads to only report if there are any errors recorded. Department heads are required to range for overtime sheets to be authorised by an alternative responsible official if they are away on annual leave; however, there are instances where this arrangement has not occurred. The payroll package produces a list of payments per employee; this links into the bank system to produce a list of automatic payments. The finance director reviews a printout of the total list of bank transfers and reviews it for reasonableness, before signing it to authorize the payments. If any issues arise then the automatic bank transfer can be manually changed by the finance director Required (a) Identify FOUR objectives of any payroll system mar (b) As the external auditors of Pillow plc, (i) Identify and explain FOUR weaknesses in the payroll system described above; (ii) Explain the possible effect of each weakness; (iii) Provide a recommendation to alleviate each weakness. (12 marks) (c) Explain FOUR procedures that you could use to collect audit evidence that the payroll system is operating as described above, i.e. compliance testing (8 marks) (d) Evaluate the relevance of a company's control environment to an auditor's assessment of a company's internal control system. (6 marks) SECTION B Answer this compulsory question in the answer booklet Question 1 You are the audit supervisor of Brown & Co and are currently planning the audit of Pillow plc's payroll system, detailed below, in preparation for the year-end audit. Pillow plc operates a chain of hotels across the country and employs in excess of 250 permanent employees and its year end is 30h June 2015. Permanent employees work a standard number of hours per week as specified in their employment contract. However, when the hotels are busy, staff can be requested by management to work additional shifts as overtime. This is paid on a monthly basis and recorded by employees on weekhy overtime sheets which are then sent to the payroll department. The standard hours per employee are automatically set up in the system and the overtime sheets are enteed by clerks into the payroll package, which automatically calculates the gross and net pay along with relevant deductions. Wages are increased by the rate of inflation each year and the clerks are responsible for updating the standing data in the payroll system. Employees are paid on a monthly basis by bank transfer for their contracted weekly hours and for any overtime worked in the previous month. Authorisation is required by department heads of any overtime in excess of 30% of standard hours. The 'overtime worked' report, which details any overtime recorded by employees, is run by the payroll department weekly and emailed to department heads for authorisation. The payroll department asks department heads to only report if there are any errors recorded. Department heads are required to range for overtime sheets to be authorised by an alternative responsible official if they are away on annual leave; however, there are instances where this arrangement has not occurred. The payroll package produces a list of payments per employee; this links into the bank system to produce a list of automatic payments. The finance director reviews a printout of the total list of bank transfers and reviews it for reasonableness, before signing it to authorize the payments. If any issues arise then the automatic bank transfer can be manually changed by the finance director Required (a) Identify FOUR objectives of any payroll system mar (b) As the external auditors of Pillow plc, (i) Identify and explain FOUR weaknesses in the payroll system described above; (ii) Explain the possible effect of each weakness; (iii) Provide a recommendation to alleviate each weakness. (12 marks) (c) Explain FOUR procedures that you could use to collect audit evidence that the payroll system is operating as described above, i.e. compliance testing (8 marks) (d) Evaluate the relevance of a company's control environment to an auditor's assessment of a company's internal control system. (6 marks)