This is from Auditing 11

QUESTION ONE

Jonathon is president of Speedway Motors. Since there is no internal audit department, he had asked the accounting area to evaluate the controls governing the payroll function. He thought that since the payroll department was a subunit of the accounting department, the accounting staff would have the necessary knowledge of operations to provide an independent evaluation. As a result, the assistant controller was assigned the responsibility of conducting an internal audit. The assistant controller did not have any internal audit experience but understood the payroll operation. He had researched internal audit processes and felt that he could conduct an evaluation of the system of controls. He mapped out the processes and identified the controls in payroll. Once the controls were identified, he tested for compliance and reviewed the operations for efficiency. At the conclusion of the work he compiled the results and prepared the audit report.

Jonathon received the report and wanted a second opinion on its contents from a qualified professional. He asked you, a CGA, to provide an opinion on whether this met the objectives of a regular audit report and, if not, what was missing or could have been improved.

The report was as follows:

Background information

The payroll department processes payroll data for all employees and ensures that source deductions are made and remitted to the appropriate government authorities. The department also ensures the timely and secure processing of employee payments that are accurate and complete.

Audit observations

1. Payments made to employees are reviewed and reconciled twice a year. Any adjustments that cannot be resolved are expensed as salary costs. Failure to review payments and reconcile the actual costs against what is expected can result in unnecessary financial loss. Errors in payroll data can additionally result in unintentionally under reporting or over remitting source deductions to the government agencies.

Recommendation:

The payroll department should reconcile actual payments against the expected payments on a weekly basis to reduce errors to an acceptable level.

2. Employee information is not tested for accuracy. Social insurance numbers (SIN) are validated by the system at the time of input; however, there is no further verification to check if the SIN matches employee information on file. In addition, there is no test to verify if SINs in a given payroll run have been processed several times. Failure to verify data can result in payments to employees that do not exist. Proper controls to verify employee information reduce the risk of fraud.

Recommendation:

Payroll must implement information system controls to ensure that employee information is validated and corrected prior to processing payments.

1. There are insufficient human resources available to efficiently manage the payroll function. As a result of this shortfall, many employees of the payroll department must work overtime (the highest amount of overtime in all departments of the company). Failure to properly staff the department results in unnecessary costs and undue stress on employees.

Recommendation:

Additional resources must be added to the payroll department to ensure that all tasks and responsibilities are completed in a timely and cost efficient manner.

Audit conclusion

Based on the results of the audit, I have concluded that the system of controls in place is satisfactory and that minimal corrective action is required to mitigate any risks to the company.

Required

a. Write a memo to the president to address his request.

b. Briefly discuss the appropriateness of the assistant controller conducting the internal audit. In addition, comment on any potential conflicts that may exist in this scenario.