You are the senior auditor on the year-end financial statement audit of LRM Construction Co. You are conducting a preliminary review of the audit working papers for the audit of executive payroll, completed by Sophie Chow, a junior auditor on the audit team. You have always found the audit of payroll to be a bitter-sweet part of the job of an auditor. While it is always fun to see everyone’s salary, it is often discouraging to see how much some people get paid for doing so little work.

Upon your review, you are surprised to see that the audit file documents contain a note that LRM’s Controller, James Myers, received a salary plus bonus payments of $10 million this year. his was significantly more than he was paid in the past and also more than was paid to any other executive of the company, including the chief executive officer. Sophie did not mention the reason for this increase in the working papers, but did state that the results of the testing done on the executive payroll concluded that salaries were recorded properly and no further work was required.

You are not comfortable with this and ask Sophie if she knows the reason for the Controller’s significant increase in compensation this year. She tells you that during her discussions with James, he was very frank when she asked him outright why he was being paid so well this year. James hesitated, and then explained that this year LRM had received a huge contract in China to construct a manufacturing facility. his was a great opportunity for the company and the $10 million was not actually part of his salary, but money that was used to pay bribes in China. James said, “his is unfortunately standard business practice in China. We wouldn’t even have landed the contract if we didn’t pay of a few people. Even the building inspectors had to be bribed so we could proceed. To keep it off our books, I volunteered to add it to my salary and make the payments personally. Everything is okay with the tax guys as I have paid taxes on the full amount.”

You start to drat your interim review comments concerning this area of the payroll audit, also identifying any further audit work that will need to be done for this area of the audit. In addition, you have included a note as to further impacts that the Controller’s comments would have on other aspects of the audit process.