Roost and Briley, CPAs, are doing the audit of Leggert Lumber Co., an international wholesale lumber broker. Because of the nature of their business, payroll is the largest expense.
You are the in-charge auditor on the engagement responsible for developing the
audit program for the payroll and personnel cycle. Leggert Lumber uses a computer service company to prepare weekly payroll checks, update earnings records, and prepare the
CASE
698Part 4 / APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES
weekly payroll journal for its 30 employees. The president maintains all human resource files, knows every employee extremely well, and is a full-time participant in the business.
All employees, except the president, check into the company building daily using a
time clock. The president’s secretary, Mary Clark, hands out the time cards daily, observes employees clocking in, collects the cards, and immediately returns them to the file. She goes through the same process when employees clock out on their way home.
At the end of each week, employees calculate their own hours. Clark rechecks those
hours, and the president approves all time cards. Each Tuesday, Clark submits payroll
input to the computer service center. She files a copy of the input data, which includes the following information for each employee:
Information Source
Employee name Time card
Social Security number Employee list
Hourly labor rate* Wage rate list (approved by president)
Regular hours Time card
Overtime hours Time card
Special deductions* Special form (prepared by employee)
W-4 information* W-4 form
Termination of employment* President
The service center uses the payroll data to update master files and print out payroll
checks and a payroll register. The payroll register has the following headings:
Employee Name Overtime Payroll Dollars State Taxes Withheld
Social Security number Gross payroll Other deductions
Regular hours FICA taxes withheld Net pay
Overtime hours Medicare withheld Check number
Regular payroll dollars Federal taxes withheld
A line is prepared for each employee and the journal is totaled.
Payroll checks and the journal are delivered to Clark, who compares the information
on the journal with her payroll input and initials the journal. She gives the checks to the president, who signs them and personally delivers them to employees.
Clark re-adds the journal and posts the totals to the ledger. Bank statements with
copies of cancelled checks are mailed to the president, and he prepares a monthly bank reconciliation.
a. Is there any loss of documentation because of the computer service center? Explain.
b. For each transaction-related audit objective for the payroll and personnel cycle, write appropriate tests of controls and substantive tests of transactions audit procedures.
Consider both controls and deficiencies in writing your program. Label each proce-
dure as either a test of control or a substantive test of transactions.
c. Rearrange your design format audit program in requirement b. into a performance
format audit program.
d. Prepare a sampling data sheet using either nonstatistical or statistical sampling for
attributes, such as the ones shown in Chapter 15, for the audit program in part b. Set
ARO and other factors required for sampling as you consider appropriate. Do not as-
sume that you actually performed any tests.
