For most companies, payroll is a major cost of operations. An auditor is routinely required to audit the payroll function and to look for fraud. How can SAS 99 be used when looking for fraudulent transactions as it pertains to payroll?

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Irving HeathcoteLv2

29 Sep 2019

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Following are some of the tests of controls and substantivetests of transactions procedures often performed in the payroll andpersonnel cycle. (Each procedure is to be done on a sample basis orusing audit software.)

1. Reconcile the monthly payroll total for direct manufacturinglabor with the labor cost distribution.

2. Examine the time card for the approval of a foreman.

3. Recompute hours on the time card and compare the total withthe total hours for which the employee has been paid.

4. Perform a surprise payroll payoff and observe employeespicking up and signing for their checks.

5. Compare the employee name, date, check number, and amounts oncancelled checks with the payroll journal.

6. Trace the hours from the employee time cards to job ticketsto make sure that the total reconciles, and trace each job ticketto the job-cost record.

7. Use audit software to account for the sequence of payrollchecks in the payroll journal.

Required

a. Identify whether each of the procedures is primarilya test of control or a substantive test oftransactions.

b. Identify the transaction-related audit objective(s)of each of the procedures.

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The Standard is largely aspirational, and is not reasonably practical in audits of small to medium-sized companies. The fact that many of the procedures are recommended, but not required, only adds to this criticism and causes uncertainty as to what procedures are actually necessary. For example, SAS 99 recommends that auditors use surprise tactics such as making unannounced visits to audit inventory. In practice, auditors typically advise clients when they intend to visit inventory locations as a courtesy to avoid unnecessarily inconveniencing their clients. This advance notice invariably limits the auditorsâ efficacy at uncovering inventory fraud; however, many auditors suggest that they can enact adequate safeguards without unreasonably imposing on their clients. What can be said about these criticisms?

Management fraud (e. g., fraudulent financial reporting) is arelatively rare event. However, when it does occur, the frauds (e.g., Enron and WorldCom) can have a significant effect onshareholders, employees, and other parties. AU 240, Considerationof Fraud in a Financial Statement Audit, provides the relevantguidance for auditors.

Required:
a. What is the auditor's responsibility for detecting fraud?
b. Describe the three conditions that are generally present whenfraud occurs?
c. What are the objectives of the " brainstorming" meeting that isheld among the engagement team members?
d. What is the required documentation for identified riskfactors?

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