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Group 4

Cranberry Company operates an electric power station with a payroll system for over 250 employees, where production staff are paid weekly in cash and office staff monthly via bank transfer. The document outlines the payroll processes, including employee onboarding, bonus payments, time tracking, and tax deductions, while also highlighting key controls and deficiencies in the system. Additionally, it discusses potential assignments for an internal audit department and substantive procedures for confirming year-end tax accruals.

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9 views3 pages

Group 4

Cranberry Company operates an electric power station with a payroll system for over 250 employees, where production staff are paid weekly in cash and office staff monthly via bank transfer. The document outlines the payroll processes, including employee onboarding, bonus payments, time tracking, and tax deductions, while also highlighting key controls and deficiencies in the system. Additionally, it discusses potential assignments for an internal audit department and substantive procedures for confirming year-end tax accruals.

Uploaded by

omondiv394
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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GROUP 4 ASSIGNMENT

CAC 321- INTRODUCTION TO AUDITING


28TH FEBRUARY 2024

Cranberry Company operates an electric power station, which produces electricity 24


hours a day, seven days a week. The company’s year-end is 30 June 20X8. You are an
audit manager of Strawberry Fruit & Co, the auditor of Cranberry Co. The interim audit
has been completed and you are reviewing the documentation describing Cranberry
Co’s payroll system.
Systems notes – payroll
Cranberry Co employs over 250 people and approximately 70% of the employees
work in production at the power station. There are three shifts every day with
employees working eight hours each. The production employees are paid weekly in
cash. The remaining 30% of employees work at the head office in non-production
roles and are paid monthly by bank transfer.
The company has a human resources (HR) department, responsible for setting up all
new joiners. Pre-printed forms are completed by HR for all new employees and, once
verified, a copy is sent to the payroll department for the employee to be set up for
payment. This form includes the staff member’s employee number and payroll cannot
set up new joiners without this information. To encourage staff to attend work on time
for all shifts, Cranberry Co introduced a discretionary bonus, paid every three months,
for production staff. The production supervisors determine the amounts to be paid and
notify the payroll department. This quarterly bonus is entered into the system by a
clerk and each entry is checked by a senior clerk for input errors prior to processing.
The senior clerk signs the bonus listing as evidence of undertaking this review.

Production employees are issued with clock cards and are required to swipe their cards
at the beginning and end of their shift. This process is supervised by security staff 24
hours a day. Each card identifies the employee number and links into the hours worked
report
produced by the payroll system, which automatically calculates the gross and net pay
along with relevant deductions. These calculations are not checked.
In addition to tax deductions from pay, some employees’ wages are reduced for such
items as repayments of student loans owed to the central government. All employers have
a statutory obligation to remit funds on a timely basis and to maintain accounting records
which reconcile with annual loan statements sent by the government to employers. At
Cranberry Co student loan deduction forms are completed by the relevant employee and

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payments are made directly to the government until the employee notifies HR that the
loan has been repaid in full.
On a quarterly basis, exception reports relating to changes to the payroll standing data
are produced and reviewed by the payroll director. No overtime is worked by employees.
Employees are entitled to take 28 holiday days annually. Holiday request forms are
required to be completed and authorised by relevant line managers, however, this does
not always occur.
On a monthly basis, for employees paid by bank transfer, the senior payroll manager
reviews the list of bank payments and agrees this to the payroll records prior to authorising
the payment. If any errors are noted, the payroll senior manager amends the records.
For production employees paid in cash, the necessary amount of cash is delivered
weekly from the bank by a security company. Two members of the payroll department
produce the pay packets, one is responsible for preparing them and the other checks
the finished pay packets. Both members of staff are required to sign the weekly payroll
listing on completion of this task. The pay packets are then delivered to the production
supervisors, who distribute them to employees at the end of the employees’ shift, as
they know each member of their production team.
Monthly management accounts are produced which detail variances between
budgeted amounts and actual. Revenue and key production costs are detailed,
however, as there are no overtime costs, wages and salaries are not analysed.
Required:
(b) In respect of the payroll system for Cranberry Co:
(i) Identify and explain FIVE key controls which the auditor may seek to place
reliance on; and
(ii) Describe a test of control the auditor should perform to assess if each of these
key controls is operating effectively.
Note: Prepare your answer using two columns headed Key control and Test of
control respectively. (10 marks)

(iii) Identify and explain FIVE deficiencies in Cranberry Co’s payroll system and
provide a recommendation to address each of these deficiencies.
Note: Prepare your answer using two columns headed Control deficiency and
Control recommendation respectively. (10 marks)

The finance director is interested in establishing an internal audit department (IAD). In the
company she previously worked for the IAD carried out inventory counts, however, as this
is not relevant for Cranberry Co, she has asked for guidance on what other assignments
an IAD could be asked to perform.

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Required:
(c) Describe assignments the internal audit department of Cranberry Co could carry
out.(5 marks)
Cranberry Co deducts employment taxes from its employees’ wages on a weekly/monthly
basis and pays these to the local taxation authorities in the following month. At the year
end the financial statements will contain an accrual for income tax payable on
employment income.
Required:
(d) Describe the substantive procedures the auditor should perform to confirm the year-
end accrual for tax payable on employment income ( 5 Marks)

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