Problem 8C-21

Payroll Audit procedures, computers, and sampling

You are the senior auditor in charge of the annual audit of Onward manufacturing Corp. for the year ending December 31. The company is of medium size with only 300 employees. All 300 employees are union members paid by the hour at rates set forth in a union conference, a copy of which is furnished to you. Job and pay rate classifications are determined by a Join union management conference and a formal memorandum is placed in each employees personal file.

Ever week clock cards prepared and approved in the shop are collected and transmitted to the payroll department. The total of labor hours is summed on a calculator and entered on each clock card. Batch and hash totals are obtained for the following: 1. Labor hours 2. Last four digits of Social Security number. These data are not into a disk fie, batch balanced, and batch processed. The clock cards (with cost classification data) are sent to the cost accounting department. The payroll system is computerized. As each person payroll record is process, the social security number is matched to a table(in a separate master fike to obtained job classification and pay rate data, then the pay rate is multiplied by the number of hours, and the check is printed(ignore payroll deductions for the following requirement).

Required

a. What audit procedures would you recommend to obtained evidence that payroll data are accurately totaled and transformed into machine-readable records? What deviations rate you expected? What tolerable deviation rate would you set? What factors should you consider in setting the size of your sample?

b. What audit procedure would you recommend to obtained evidence that pay rates are appropriately assign and used in figuring gross pay? In what way, if any, would thes procedures be different if the gross pay were calculated by hand instead of on a computer?