01 Jul Test of Controls – Payroll Processing
Mark Company’s audit team is evaluating the controls that Mark has implemented over the automated processing of payroll transactions. During the understanding and assessment stages of the audit, the following processing and output controls have been identified as being important in this processing:
To detect unauthorized access to payroll programs and processing, a system log is generated and reviewed on a weekly basis. This log identifies the programs that have been accessed during the past week, the individual(s) who have accessed those programs, and the time(s) during which the programs have been accessed. This log is reviewed, and any unexpected or unauthorized access is investigated immediately.
Control totals are determined prior to the input of data and compared to computer-generated totals following transaction processing.
Any gross pay calculations in excess of $25,000 per month are identified and written to a rejected transaction file for separate investigation because Mark’s highest paid employee whose salary is processed through the system earns $300,000 per year.
The system generates a report of any errors or unusual situations identified during transaction processing. This report is reviewed, and any items are resolved in a timely manner, and the resolution is documented by notations made on the report.
Any changes to employee master file information since the last payroll period are evaluated to ensure that they have been properly authorized by the appropriate personnel.
The output is reviewed for reasonableness prior to distribution to users.
Consider the four methods of testing the operating effectiveness of controls (inquiry, observation, document examination, and re-performance). For each of the preceding controls, provide an example of how Mark’s audit team might choose to test the operating effectiveness of the control using the four methods of test of controls (e.g., how would the audit team use inquiry, observation, document examination, and re-performance to test control #1, the generation and review of the system log?). [Note: Not all types of tests of controls will be appropriate for testing all the controls.]
Imagine that you will be presenting to your audit partner on how you will conduct the audit of this section of controls. Prepare the following deliverables:
a PowerPoint presentation summarizing your testing methods for each of the controls listed above and high-level advantages or limitations to such tests for that particular control, and
a Word document with your talking points to support the PowerPoint slides.
Your combined documents should be at least 4 pages in length, but no more than 6 pages in length, not including the title page and reference page. Outside academic resources not required, but they would likely assist with your analysis. If they are used, citations must be provided.
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