week five team audit memo final

Audit Program 1Week Five Team Assignment

Audit Program II

Rachel Ramos, Renee Williams, Dale Cornn,

Branden Klink, & Gloria Ochoa

Accounting 492

Robert Hinske

August 14, 2006

Audit Program 2Week Five Team Homework

Audit Memo

Kudler Fine FoodsPlanning MemorandumYear Ended December 31, 2003

To: Robert Hinske, Engagement Partner

From: Gloria Ochoa, Rachel Ramos, Dale Cornn, Renee Williams and Branden KlinkThe purpose of this review is to design the attached internal control questionnaire and audit program for the current year’s audit of the financial statements, with respect to the company’s payroll.

Internal Control QuestionnaireThe purpose of the internal control questionnaire is to help assess the level of control surrounding the payroll process. There are not any specific weaknesses that we have documented at this time; however the questionnaire will help reveal weaknesses that are not always available to the naked eye.

Audit Program

The audit program has been designed to test the controls over the payroll function and to provide substantive tests of the account balances. During this audit we will use statistical sampling for testing of controls, substantive tests of account balances and the application of analytical procedures, all of which are addressed in the audit program.

Objectives

We have completed the audit of the payroll cycle for Kudler Fine Foods on behalf of their audit committee and the Board of Directors. Our payroll cycle audit included three main objectives: (1) to determine that payroll disbursements were made for work authorized and performed; (2) to verify that payroll, including withholdings and deductions, is computed using rates and other factors in accordance with federal salary schedules and applicable laws; and (3) to ensure that payroll expense and related liabilities are recorded correctly as to amount, period and adequate disclosure. The period of our test data was from December 31, 2005 through June 30, 2006. Our payroll cycle audit did not constitute a certified audit of any financial statements prepared by Kudler Fine Foods. Therefore, no opinion was given on any financial statements.

Tests of controls

Testing for control is an important tool in an audit. In the onset of an audit, it is important to assess the risks of internal control within the company. We need to inquire what internal controls the company has and inquire as to whether or not those internal control techniques are being followed as prescribed by management. With this in mind, we decided to make inquires on the following areas. The first area for review is the company’s policies and procedures. This will show what approval processes are in place within the payroll department, if payroll

Audit Program 3personnel are knowledgeable, and if the segregation of duties is specified. Another area of testing is reviewing who is authorized to have access to the computer system and their levels of authorization. A third area of review is payroll documents. As an audit team we must be able to trace these source documents starting at time sheets to payroll accounting procedures, to payroll distribution, to cash disbursements, and then back to the original time sheet. In going through these procedures, we are able to make an initial risk assessment, develop strategies, and proceed further into our actual audit testing.

Substantive tests of transactions

Substantive test of transactions are required in order to verify processed payments. The audit team will confirm that transactions made in payroll processing follow the guidelines of the company. The audit team will investigate the employee time cards for accuracy, validity and for proper authorization for duties and hours worked. The time cards will also be used to determine whether payroll disbursements have been properly calculated, including calculation and payment of payroll taxes and deductions. These deductions are significant to both the employer and employee, so these numbers will be verified by sampling pay vouchers using the statistical sampling method as outlined in our sampling outline. This will allow the audit team to determine the allowable risk of the sample failing to detect a material misstatement and the tolerable misstatement. Electronic funds transfers (EFT) will be validated to ensure that vendors, customers, and banks involved in this process have sufficient controls built into their portion of the process. This would include comparison of the payments made from the vendor, banks, etc. with information in the EFT journal.

Analytical procedures

In conducting our audit of risk assessment we chose to investigate the training of the accounting/payroll staff. The client must prove they operate in accordance with all the reporting agencies and requirements, so proper training is a must. There has to be correct comprehensive accounting methods used since the employer and employees are counting on the payroll function to properly account for and pay all of their payroll deductions and taxes. In addition to the abilities of the accounting staff, each employee should be authorized to conduct all of their duties. We will test the payroll with some analytical procedures that we believe will bring to light any weaknesses in their payroll accounting. By conducting both investigations we are looking to see if the accounting/payroll staff of the company is both knowledgeable and certified to conduct their normal workings with the company.

Substantive tests of account balances

In choosing steps to perform substantive tests of account balances, the auditor must consider what substantive tests will produce the most accurate results for dollar errors that could affect the accuracy of the account balances. Although the payroll process for Kudler is seemingly secure, we prefer to rely heavily on substantive tests of detail in which we will select a sample of items from the major payroll related accounts and find hard evidence in support of these items being recorded properly. This process will allow for a higher level of assurance that account balances and underlying classes of transactions do not contain any material misstatements. For Kudler, the audit team has specific areas of concern, which include whether or not salaries, wages and withholdings are properly recorded and supported in the payroll system and whether or not the

Audit Program 4ending balance reported for Accrued Payroll and Benefits is fairly stated. We will be following the full paper trail in order to validate each item sampled, which will entail going back to original pay vouchers and journal entries to get the full picture for each item.

Sampling detail sheet

Audit Program 5

Internal Control Questionnaire

Audit Program 6

Question Yes/No CommentsControl Environment

1. Is a special payroll bank account used?

2. Is the payroll bank account reconciled by someone who does not

prepare, sign or deliver paychecks?

3. Are there adequate segregation of duties in approving time

records, overtime and vacations?

4. Are payroll department personnel rotated in their duties?

5. Are payroll department personnel required to take vacations?

6. Are payroll department personnel bonded?

7. Is there a timekeeping department (function) independent of the

payroll department?

8. Are authorizations for deductions that have been signed by the

employees on file (FICA withholding, medical withholding,

federal and state income tax withholding, health insurance

premium deductions, medical and childcare flexible spending

deductions, and 401(K) deductions, etc.)?

9. Is access of personnel files restricted to specific employees?

10. Are changes made to payroll related information verified by

authorized personnel?

Risk Assessment

1. What training is provided to accounting to accounting staff to

ensure that they have an understanding of the payroll process?

2. What training is provided to accounting staff to insure that they

have an understanding of the accounting for payroll?

Audit Program 7

Question Yes/No CommentsControl Activities

1. Are timesheets being verified by management?

2. Are personnel comparing time records to payroll?

3. Are payroll rates (salary, federal tax rates, state tax rates,

FICA rates, etc) being processed accordingly in the system?

4. Do payroll personnel approve bank wire transfers for

payment of federal taxes, state taxes, FICA rates, etc?

5. Are employees required to sign for receipt of non EFT

payroll checks?

6. Is there a back-up for payroll personnel?

7. Have procedures been established to record the usage of

employees benefit time?

8. Are attendance records reviewed by management, so that

excessive absences are reviewed?

Information Systems and Communications

1. Who has passwords to access the payroll processing system?

2. Is there an audit trail function within the payroll processing

system? Is it kept turned on?

3. Do training policies communicate roles and responsibilities to

the appropriate accounting employees in regards to payroll

processing?

Audit Program 8Question Yes/No Comments

4. Does the payroll system interface with any system other than

the financial system? If yes, is that interface manual or

electronic?

5. Is there a system of verification of allocation of expenses that

relates to payroll?

6. Is there a list of authorized personnel who can call in to Intuit

to process payroll and make payroll changes (salaries, deductions, etc.)?

7. Is there a back-up for all employee files?

Monitoring

1. If there are discrepancies, are the issues handled and resolved

by competent employees?

2. Are payrolls audited periodically by internal auditors?

3. Is the accuracy, as it relates to the payroll company’s

processing, verified upon receipt of the actual payroll?

4. Are quarterly tax reports reviewed for accuracy against the

accounting system data?

5. Are the bank statements reconciled against payroll

documentation from Intuit?

Audit Program 9Audit Program

Audit Program 10

AuditObjectives Audit Procedures for Consideration

PerformedBy

Work PaperIndex

Date Completed

A. To determine that payroll disbursements

were for work authored and performed.

B. To verify that payroll, including

withholdings and deductions, is computed using

rates and other factors in accordance with

Federal salary schedules and applicable laws.

C. To ensure that payroll expense and related

liabilities are recorded correctly as to amount,

period and disclosures are adequate.

Test of Controls

1. Review policies and procedures for payroll

data entry for completeness and usefulness.

2. Inquire of personnel about procedures.

3. Determine which employees are responsible

for input of data, and ensure adequate

segregation of duties.

4. Obtain and review signed confidentiality

statements for all employees who are involved in a payroll process to ensure that an

understanding of confidentiality exists.

5. Verify that only authorized access to system

software programs and data are granted.

5(A). Access to personnel files is restricted.5(B). Access to payroll files is restricted.

Audit Program 11Audit

Objectives Audit Procedures for ConsiderationPerformed

ByWork Paper

IndexDate

Completed

5(C). Access to QuickBooks program is

restricted.

6. Review employee changes to ensure changes

were accurate and made in a timely manner and

approved by supervisors.

7. Obtain and verify all reports are utilized to

help monitor payroll transactions (budget to

actual, error/audit reports).

8. Review payroll registers and summaries to

ensure supervisors have reviewed and approved

prior to pay distribution.

9. Examine cancelled payroll vouchers for

completeness and validity; compare to the

payroll register.

10. Trace vouchers and labor distributions

(coding) to GL and: (a) from/to payroll

subsidiary records, and (b) from/to personnel

records.

11. Verify for authorization for payroll amounts

and for the physical distribution of signed

checks.

12. Verify the consistency and integration of the

payroll procedures with cash audit and accounts



ByWork Paper

IndexDate

Completed

payable audit.

SUBSTANTIVE TEST OF TRANSACTIONS

1. Verify time cards for legitimate work hours.

2. Verify check payments made to each

employee.

3. Verify deduction amounts subtracted from

each employee’s check.

3(A). FICA.

3(B). State tax.

3(C). Health insurance.

3(D). Life insurance.

3(E). Pension.

3(F). Allotments (charity, etc).

4. Verify electronics funds transfers (EFT) are

processed accordingly.

4(A). From the company’s regular check

account to the dedicated payroll checking

account.

4(B). The employee’s financial institutions via

an ACH file.

4(C). Administrating the flexible spending and

401(K) accounts.

4(D). The federal and state taxing authorities.



ByWork Paper

IndexDate

Completed

4(E). Pay voucher printing software

application.

5. Verify ETF transfers were journalized.

ANALYTICAL PROCEDURES

1. Compare the number of employees that work

from each day to the master file of employees to

make sure there are no differences.

2. Perform Analytical procedures to the

relationship of employee’s wages to the hours

that was worked. Investigate if there are less

hours actually worked.

3. Compare employee’s benefits, taxes, etc as a

percentage of sales and wages compared to last

years and this year.

4. Compare direct labor as a percentage of sales

with last year and this year.

5. Compare payroll expense as percentage of

sale with last year and this year.

SUBSTANTIVE TESTS OF ACCOUNT

BALANCES



ByWork Paper

IndexDate

Completed1. Verify that annual salaries and rates are

adequately supported and recorded in the payroll

system.

2. Verify withholdings are adequately

documented, properly authorized and accurately

recorded.3. Review supporting information to determine

whether the ending balance reported for Accrued

Payroll and Benefits are fairly stated.

Audit Program 15Sampling Detail Sheet

Audit Program 16

Sampling Detail Sheet

Define

The objectives:1. Determine that payroll disbursements are made for authorized work (sample of pay vouchers and time records will be examined)2. Verify time records for legitimate work hours (items in the sample will be verified)3. Verify that payroll disbursements were made to actual employees (pay voucher information in sample will be verified)4. Determine that payroll deductions were withheld from employee checks (for each pay voucher in the sample) a. Deductions to be verified: (1) Federal withholding (2) FICA (3) State tax (4) Health insurance (5) Life insurance (6) Pension (7) Allotments (charity, etc.) (8) Childcare flexible spending deductions5. Verify EFT transfers processed according to company procedure/policy a. Determine if items in sample were journalized according to company procedure

The objectives

The population:1. The period of time to be covered for pay vouchers, time records, and EFT transfer statements in the sample will be 12-31-2005 through 12-31-20062. Ensure completeness: a. Account for the numerical sequence of pay vouchers by reviewing pay voucher logs b. Review each time record in the sample to ensure proper supervisory authorization c. Compare EFT transfer to copies of wire transfer sheets in general accounting

The population

Sampling units: a. pay vouchers b. time records c. EFT bank transfer statement d. Personnel records, including wage rates or salary authorizations. e. W-4 and other deduction authorization forms. f. Payroll register. g. Payroll master file. h. Payroll master file changes report. i. Periodic payroll reports j. Various tax reports and forms.

The sampling unit

75% of planning materiality: $725,650 x 75% x .01 = $12,698

Tolerable misstatement (Related to materiality – should not exceed auditor’s preliminary judgment of materiality)

Audit Program 17Determine the Sampling Approach

Statistical Statistical or Non

Determine the Selection Method

Random-numberSystematic, every 30th item Systematic (every nth item)

Other

Determine the sample size

Based on the results of the ICQ, observations, preliminary tests and consideration of the fraud control risk factors, controls appear to be effective and the preliminary assessment of control risk will be low.

Preliminary assessment of control risk

With control risk low and inherent risk at moderate the risk of material misstatement is low-moderate. If the risk of material misstatement is low-moderate and the acceptable level of audit risk is low, then detection risk will be high.

Consider the acceptable level of risk

See above Consider the tolerable misstatementThe expected misstatement is based upon prior year audits, results of other substantive tests, audit judgment and knowledge of changes in accounting and personnel. We do not have information on any of these items on the Kudler Fine Foods internet site.

Consider the expected amount of misstatement

The population size is calculated based on 127 employees that get paid 2 times every month for the time period being audited. This comes out to be 3,048, which is why we will sample every 30th item, for an approximate population size of 102 items.

Consider the population size

Perform the sampling plan

Evaluate the sample results

Reach an overall conclusion

Document the Sampling Procedure

week five team audit memo final

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