Part (a) for 15 marks required candidates to identify and explain five deficiencies in the payroll system, recommend controls to address these deficiencies, and a test of control for each of these recommendations that could be used to assess if it was operating effectively if implemented. The first two parts of this questions were answered satisfactorily by candidates, however the tests of controls proved challenging for many.
Candidates were able to comfortably identify five deficiencies from the scenario, although a minority of candidates identified deficiencies which were generic to payroll systems rather than specific to the question, such as references to “clock cards”, which were not a component of the system under review.
Also some candidates identified points which were not valid deficiencies, such as employees being able to complete their own overtime sheets, being allowed a choice between days off or payment of overtime and overtime sheets being entered by payroll clerks.
Although sufficient deficiencies were identified by many candidates, they did not always adequately explain what the deficiency meant to Trombone. For example, candidates identified the deficiency that “the overtime worked reports are not always checked,” however some failed to explain the implication of this in that it could lead to employees taking days off when they had not worked the overtime hours required.
The requirement to provide controls was answered satisfactorily. Most candidates were able to provide good recommendations to address the deficiencies; however in some instances these recommendations were too brief.
Candidates have a tendency to state control objectives rather than valid procedures which can be implemented by the client. In addition some recommendations failed to address the deficiency identified, for example where department heads failed to assign a deputy to authorise overtime whilst on annual leave, many candidates simply recommended that this control already existing control be put in place, rather than addressing how the control should be amended to ensure it was followed at all times.
The requirement for tests of controls was answered unsatisfactorily. Many candidates are still confusing substantive procedures and test of controls. A significant number of candidates suggested substantive procedures such as “recalculating gross and net pay calculations”, rather than a test of control which might be to “review evidence of the recalculation of payroll”.
Candidates need to review their understanding of these different types of audit procedures and ensure that they appreciate that substantive tests focus on the number within the financial statements whereas test of controls are verifying if client procedures are operating.
In many instances candidates focused on re-performing the control rather than testing it had operated.
Observation of a control was commonly suggested by candidates, however in many cases this is not an effective way of testing that a control has operated throughout the year.
Most candidates presented their answers well, adopting a three column approach with deficiency, the control recommendation and the test of control in separate columns. This approach ensured that all elements of the question were addressed and it was easier to see which recommendations and tests related to which deficiencies.