ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment
a) ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and
Its Environment describes the five components of an entity’s internal
Critically explain the relationship between the FIVE components of an entity’s internal control system.
You are an Assistant Audit Manager of Abromovich & Co and are in the process of reviewing the control testing completed on the payroll system of Khelsea Industries Co (Khelsea), as well as preparing the audit programmes for the final audit.
Khelsea operate 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 20% being paid by bank transfer and 80% in cash; the different payment methods are due to employee preferences and Khelsea has no plans to change these methods.
Factory staff are each issued a 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 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. Khelsea 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. The payroll department sends Overtime reports to production supervisors every two to three months. These reports detail the amount of overtime worked/paid over the past few months.
To encourage staff to attend work on time for all shifts Khelsea pays a discretionary bonus every six months to factory staff; the production supervisors determine the amounts to be paid. This is communicated verbally 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 authorizing the bank payment. If any changes are required, the payroll manager amends the records himself.
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 or signature.
2) b) In respect of the payroll system of Khelsea Industries Co, identify and explain SIX Internal Control
deficiencies.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
