Chap 8: Employee cost

Calculating wages and salaries

- Risk
+ The company may pay employees too much money
+ The company may pay employees who have left
- Control objectives
+ Employees are only paid for work that they have done
+ Gross pay has been calculated correctly and authorised
+ Net pay has been calculated correctly
- Controls
+ Staffing and seggregation of duties
+ Maintenance of personnel records and regular checking wages and salaries to personnel records
+ Authorisation of: engagement and discharge of employees, change pay rates, overtime, non-statutory
deductions, advances of pay
+ Recording of changes in personnel and pay rates
+ Recording of hourse worked by timesheets, clocking
+ Review of hours worked
+ Recording of advances of pay
+ Holiday pay
+ Answering queries
+ Review of wages against budget
- Test of controls
+ Check wages and salary summary is approved
+ Confirm procedures for authorising changes in rates of pay, overtime, holiday pay
+ Obtain evidence that staff only being paid when they join the company, and removed from payroll when
they leave the company
+ Check that engagement of new employees and discharge of former employees have been confirmed in
writing
+ Check that the calculations are being checked
+ For wages, check calculation of gross pay with: authorised rates of pay, production records, clock cards,
timesheets
+ For salaries, verify that gross salaries and bonuses are in accordance with personnel records, contracts of
employeement, increased in pay have been authorised

Recording of wages and salaries and deductions

Risk Control objectives

The various elements of pay might not be recorded Gross and net pay and deductions are accurately
correctly in the payroll recorded on the payroll
All deductions have been calculated correctly and are
authorised
Amounts paid to employees might not be reflected in Wages and salaries paid are recorded correctly in cash
the cash at bank account records
Pay might not be recorded correctly in the nominal Wages and salaries are correctly recorded in the
ledger nominal ledger
The correct amounts are paid to HMRC
- Controls
+ Suitable person for preparation of payroll
+ Extent of responsibility for preparing wages and salaries should be clearly defined
+ May use automatic wage accounting systems
+ Bases for compilation of payroll
+ Arrangements for preparation, checking and approval of payroll
+ Procedrues for eadling with non-routine matters
 + Maintenance of employees’ personnel records
+ Checking payroll details to personnel records
+ Reconciliation of total pay and deductions between one payday and the next
+ Comparision of actual pay totals with budget or standard costs. Investigate any differences.
+ Agreement of gross earnings and total tax deducted with tax returns.
- Test of controls
+ Checking reconciliation of wages and salaries
+ For wages, reconciliation with:
 Previous week’s payroll
 Clockcards/timesheets/job cards
 Costing analyses, production budget

+ For salaries, reconciliation with:

 Previous week/month payroll

 Standard payroll

+ Checking calculations for wages

 Additions of payroll
 Totals of payrol detail selected to summary of pauroll
 Additions and cross-casts of summary
 Postings of summary to nominal ledger
 Net cash column to the cash at bank account

+ Checking calculation for salaries

 Additions of payroll
 Totals of salaries details to summary
 Additions and cross-casts of summary
 Postings of summary to nominal ledger
 Net cash column to the cash at bank account

+ Checking calculations of taxation and non-statutory deductions

 Check nominal ledger accounts to see appropriate deductions have been made
 Check payments to HMRC are correct

Payment of wages and salaries

- Risk: people who are not employees are paid and those that are employees are not paid
- Control objective: correct employees are paid
- Controls
+ Payment of wages
 Segregation of duties: preparing payroll, filling of pay packets, ditribution of wages
 Authorisation of wage cheque cashed
 Custody of cash
 Verification of identity
 Recording of distributions

+ Payment of salaries

 Preparation and authorisation of cheques and bank transfer lists

 Comparison of cheques and bank transfer list with payroll
 Maintenance and reconciliation of wages and salaries nominal ledger account
- Test of controls
+ For wages pay in cash
 Arrange to attend the pay-out
 Compare payroll with wage packets
 Examine receipts given by employees, check unclaimed wages
 Check that no employees receives more than one wage packet
 Check entries in the unclaimed wages book with entries in payroll
 Check that unclaimed wages are banked regularly
 Check that unclaimed wages books show reasons
 Check pattern of unclimed wages

+ For salaries

 Check comparision between each month’s payroll net pay summary and examined paid cheques or a
certified copy of bank list
 Chap 9: Internal audit

Internal audit

- Is a function which include examining, evaluating and monitoring the adequacy and effetiveness of internal
control
- Assist management in achieving corporate objectives
- Ensuring good corporate governance
- Help maintain good systems of internal control
- Play a key role in assessing and monitoring internal control

Other responsibility

- Acting as auditors for board reports not audited by the external auditors
- Assisting in implementation of new standards
- Liasing with external auditors to reduce time and cost of external audit
- Check that external auditors are reporting back to the board everything they are required to under auditing
standards.

Internal audit External audit

Reason Add value and improve organisation’s Express opinion on FSs
operation
Reporting to Board of directors, audit commitee Shareholders
Relating to Operations of the organisation Financial statements
Relationship with Often employees of organisation Independent with company, appointed by
the company the shareholders.
Activity of internal audit

- Monitoring internal controls

- Examining financial and operating information
- Reviewing economy, effectiveness and efficiency (3Es) of operation
- Reviewing compliance with law, regulations
- Conduct special investifation
- Identify and evaluate significant exposures to risks, improve risk management and control systems
- Assess the governance process among those charged with governance, external and internal auditors and
management

Role of internal audit relating to risk:

- Monitoring company’s overall risk management policy to ensure it operates effectively

- Monitoring the strategies implemented to ensure that they continue to operate effectively

Role of internal audit relating to internal controls:

- Monitoring overall process

- Providing assurance that systems designed meet objectives and operate effectively
- Also known as operational audits
- Review policies of particular department by reading and discussing with members of department
- Assess the adequacy of policy, advise
- Testing the internal controls to examine the effectiveness of controls

Operational audit:

- Ensure policies are adequate

- Ensure policies work effectively

With other functions, internal audit needs to maintain its objectivity and not become involve in operational activities
of the company.
 Chap 10: Documentation

Purpose

- Assist the audit team to plan and perform the audit

- Assist direct and supervise work
- Enable team to be accountable for its work
- Record of matters of continuing significance to future audits
- Enable qualify control reviews
- Enable conduct external inspections in accorance with legal, regulatory

Form and content of working papers

- Documentation need to be sufficient to enable an experienced auditor, having no previous connection with
the audit to understand the nature, extent and timing of audit procedures performed, the results of audit
procedures, the conclusions reached and significant professional judgements made (in short, can be
reperformed)
- Form and content of WPs is affected by:
+ Size and complexity of entity
+ Nature of audit procedures performed
+ Identified RoMM
+ Significance of the audit evidence obtained
+ Nature and extent of exception identified
+ The need to doument a conclusion or basis for a conclusion not readily determinable
+ Audit methodology and tools used

Working papers should shows:

- Client name
- Reporting date
- File reference
- Name of prepareer, date of preparation
- Subject of working papers
- Name of reviewer, date of review
- Objective of work done
- Source of information
- How samples was selected
- Sample size determined
- Work done
- Key to any audit ticks or symboles
- Appropriate cross-referencing
- Results obtained
- Analysis of errors
- Other significant observations
- The conclusion drawn
- Key point highlighted

Automated and electronic working papers

- Automated working paper is automatically cross referenced, adjusted and balanced by the computer
- Electronic working papers do not involve any automatic calculations
- Advantages of automated working papers
+ Risk of errors is reduced
+ Working papaers are neater and easier to review
+ Time saved as adjustments can be made easily to all working paper

Filling working papers

 - Permanent audit files: contain information relevant to many years’ audit
+ Engagement letters
+ New client questionaire
+ Memorandum and articles of association
+ Other legal documents
+ Detail of history of client’s business
+ Board minutes of continuing relevance
+ Previous years’ signed accounts and analytic procedures
+ Accouting systems note, previous years’ control questionaires
- Current audit files: contain information relevant to current year’s audit
+ FSs
+ Accounts checklists
+ Management accounts details
+ Reconciliation of management accounts and FSs
+ Summary of unadjusted errors
+ Report to partner including details of significant events and errors
+ Review notes
+ Audit planning memorandum
+ Time budgets and summaries
+ Written representations from management
+ Notes of board minutes
+ Communication with 3rd parties
+ For each audit areas (sections)
 Lead schedule
 Problem encountered and conclusion drawn
 Audit plans
 Risk assessments
 Sampling plans
 Analytical procedures
 Details of TOD and TOC

Safe custody and retention of documentation

- ICAEW requirement: keep at least six years from the end of accounting period to which they relate
- Paper documents must be kept securely, in locked premises. Electronic documents should be protected by
electronic controls

Ownership and right of access to documentation

- Working papaers belong to the assurance providers

- The report, once issued, belongs to client
- Assurance providers must keep working papers confidential
- They may show working papers to the client at their discretion
- They should obtain client permission before showing working papers to 3 rd parties.