You are an audit senior of Scarlet & Co and are in the process of reviewing the systems testing completed on the payroll cycle of Bronze Industries Co (Bronze), as well as preparing the audit programmes for the final audit. Bronze operates several chemical processing factories across the country, it manufactures 24 hours a day, seven days a week and employees work a standard shift of eight hours and are paid for hours worked at an hourly rate. Factory employees are paid weekly, with approximately 80% being paid by bank transfer and 20% in cash; the different payment methods are due to employee preferences and Bronze has no plans to change these methods. The administration and sales teams are paid monthly by bank transfer. Factory staff are each issued a sequentially numbered clock card which details their employee number and name. Employees swipe their cards at the beginning and end of the eight-hour shift and this process is not supervised. During the shift employees are entitled to a 30-minute paid break and employees do not need to clock out to access the dining area. Clock card data links into the payroll system, which automatically calculates gross and net pay along with any statutory deductions. The payroll supervisor for each payment run checks on a sample basis some of these calculations to ensure the system is operating effectively. Bronze has a human resources department which is responsible for setting up new permanent employees and leavers. Appointments of temporary staff are made by factory production supervisors. Occasionally overtime is required of factory staff, usually to fill gaps caused by staff holidays. Overtime reports which detail the amount of overtime worked are sent out quarterly by the payroll department to production supervisors for their review. To encourage staff to attend work on time for all shifts Bronze pays a discretionary bonus every six months to factory staff; the production supervisors determine the amounts to be paid. This is communicated in writing by the production supervisors to the payroll department and the bonus is input by a clerk into the system. For employees paid by bank transfer, the payroll manager reviews the list of the payments and agrees to the payroll records prior to authorising the bank payment. If any changes are required, the payroll manager amends the records. For employees paid in cash, the pay packets are prepared in the payroll department and a clerk distributes them to employees; as she knows most of these individuals, she does not require proof of identity. Required: (a) Identify and explain FIVE internal control STRENGTHS in Bronze Industries Co’s payroll system. (5 marks) No 1 2 3 4 Strength This will ensure/ this will eliminate Factory staff are each issued a sequentially This will ensure that the payroll numbers clock card which details their employee clerk completely updated ALL number and name. employee working hours into the payroll system/ no missing employee working hours in the system/ It will be easier to trace if there is omission on the payroll system. Hence, the wages payment made is only for hours actually worked. Clock card data links into the payroll system, which This will eliminate/prevent the automatically calculates gross and net pay along risk of human error by the with any statutory deductions. payroll clerk during the calculation of net pay so that employee will get the correct amount of pay. Thus, the amount is accurate and no one will receive wrong amount. The payroll supervisor for each payment run This will ensure that if there is checks on a sample basis some of these any error in the payroll system, calculations to endure the system is operating the error can be detected and effectively. corrected on timely basis. Thus, the end calculation is accurate. Bronze has a human resources department which There is separate function of is responsible for setting up new permanent HR and payroll department. employees and leavers. This will avoid the risk of fictitious employee being inserted into the payroll system and caused increase in payroll amount. This will ensure that the payment is made for bona fide employees. 5 Thus, will reduce risk of higher unnecessary expenses. Discretionary bonus is communicated in writing by As it is in writing rather than the production supervisors to the payroll verbal this will avoid the risk of department. payroll department wrongly key Board minute meeting is > writing > verbal 6 in the amount of bonus as there is reference available. Hence risk of error will be reduced. For employees paid by bank transfer the payroll This will ensure that Bronze manager reviews the list of the payment and agrees only make payment to genuine to the payroll records. staff and any fictitious staff in the payroll list can be detected. If there is any error in the list of records/unusual item/amount/duplicate bank account number, it can be detected before making any payment. b) Identify and explain SIX internal control DEFICIENCIES in Bronze Industries Co’s payroll system and provide a RECOMMENDATION to address each of these deficiencies. (12 marks) 1 Deficiencies Recommendation Employees swipe their cards at the The process of clock in and clock beginning and end of the eight-hour shift out must be supervised by the and this process is not supervised. security guards/personnel. When employees are not supervised, there is risk that the employees are swiping cards on behalf of their colleague who is absent. If it is not possible, install a CCTV sat the clock in machine to monitor the staff/to deter the staff from clock in on behalf of others. Thus, Bronze will incur extra cost to pay Install thumb print machine instead for their wages. of using clock in card 2 3 Employees are entitled to a 30-minute Employees should be allocated set paid break and do not need to clock out break times and there should be a to access the dining area. supervisor/head of department present to ensure that employees The risk is that employees could be taking only take the breaks they are excessive breaks. entitled to. Hence, there might be delay in production @ Although employees are not process resulting in a decrease in required to clock out, they still need productivity and increased payroll costs. to be supervised during the break to ensure none of the employees are taking excessive breaks Although there is a human resources Appointments of temporary staff department, appointments of temporary should be made by the factory staff are made by factory production production supervisors supervisors. TOGETHER with the HR manager/director/department. There is risk that the employees appointed by production supervisor is not This is to ensure Bronze only competent/not independent as they may appoint someone who is appoint their friends despite being competent and legal to work at the incompetent for the job/not allowed to company. work due to national legislation Hence, the company could pay wages for poor work by their temporary employee. The supervisor could appoint unsuitable employees and may not carry out all the required procedures for new recruits. 4 This could result in these temporary employees not receiving the correct pay and relevant statutory deductions. Overtime reports which detail the amount of overtime worked are sent out quarterly by payroll department to production supervisor for their review. Any overtime required should be reviewed by the production supervisor MONTHLY, prior to the the payment of salary/wages made. There is the risk that these reports are reviewed after the payment have been OT – production supervisor review made which could result in unauthorised – pass to payroll department on a overtime or amounts being paid monthly basis incorrectly/ unauthorised OT paid/OT claimed for hours not worked Hence, Bronze's payroll cost increase. 5 6 The production supervisor is the one who determine the bonus amount to be paid in encouraging the staffs to attend on time for all shift. The bonus should be determined by a more senior staff which is the production director, not production supervisor. The amount of discretionary bonus decided by the There is risk that the production director should be approved by supervisors might act in their own board of directors interest/bias towards some of the staff such as increasing the discretionary Discretionary bonus must not be bonus to certain employees only. set by PS only. It must be determined by PD and get the Hence increasing the cost of payroll/ this board approval for the might affect staff goodwill/staff discretionary bonus dissatisfaction. PS may determine amount to be There is risk that the bonus is given to the paid but it must be reviewed for worker that do not deserve it based on the reasonableness and approved by work done. Hence increasing the cost of the board of directors payroll The bonus is communicated in writing by Input by the clerk must be the production supervisors to the payroll reviewed by higher level department and the bonus is input by a personnel. This will ensure that clerk into the system. bonus amount in the system matches the agreed amount. There is no indication of anyone reviewing the clerk’s input work. There is A senior staff of payroll department risk that he unintentionally makes should review the clerk’s work mistake by entering wrong amount of the before sending to finance new bonus. department for making payment. 7 8 9 Therefore, if there is any error in the bonus amount, it will not be corrected and staff may get higher or lower bonus than as per agreed. This might cause staff dissatisfaction. After reviewing the work done, the senior staff should sign a relevant document for evidence of reviewing. Payroll manager performs too much task on their own which are: - Reviews the list of payments - Agrees to the payroll records - Authorising the bank payment - If there are any changes required, the payroll manager amends the records. There is no segregation of duties for the payroll manager. DO NOT WRITE “HIRE ANOTHER PERSON’’ The task performed by the payroll manager should be split to few other individuals such as another senior payroll staff. The amendments should be authorised by payroll/HR director before payment. Therefore, this will increase the risk of payroll manager involve in fraudulent @ Authorising the bank payment activities. should be done by personnel in the finance department instead of payroll manager. For employees paid in cash, the pay There should be at least two packets are prepared in payroll persons, a clerk and a senior staff department and a clerk distributes them from other department, during to employees. distribution of pay packets to ensure there is no There is a risk that the clerk responsible theft/misappropriation of cash. to distribute the pay packets misappropriate the cash in the pay The process of wages distribution packet/There is risk of cash theft as she SHOULD BE DONE BY 2 is the only one who distributes the pay PEOPLE FROM THE PAYROLL packets. DEPARTMENT ONLY. Hence, the wages received by employee is insufficient and cause dissatisfaction of employees. As the payroll clerk knows most of these individuals, she does not require proof of identity. One person will ensure the internal controls are carried out by the first person. The payroll clerk needs to ask for proof of identification prior to giving out the pay packet. There is risk that without identity checks wages could be paid to incorrect employees /give out wrong pay packet/accidentally distribute the wages to wrong person/accidentally hand out pay packets twice to the same person. The staff who received the pay packet should sign on control name list. Employee is prohibited to collect the pay packets on behalf of others. If there are absent employees during payday, the uncollected pay packets should be stored in a safe. (c) Describe substantive ANALYTICAL PROCEDURES you should perform to confirm Bronze Industries Co’s payroll expense. (3 marks) 1. Compare payroll amount for current year against prior year and investigate any significant difference 2. Compare payroll amount for the current year against budgeted amount and investigate any significant difference 3. Perform proof in total by comparing expected amount with the actual payroll amount in FS and investigate any significant differences.