QUESTION 1: Payroll 28 marks
Fruit Packing (Pty) Ltd is a company that helps farmers to harvest and pack fresh fruit.
You are one of a few trainee internal auditors employed in the internal audit activity.
Fruit Packing (Pty) Ltd has recently experienced disputes over the recorded accuracy of
wages paid and hours worked. Management has therefore asked internal audit to
review the process in terms of wage calculation and pay-outs. You have been assigned
to the audit team to carry out this task.
The following information was obtained regarding the payroll system of the packing
department:
Timekeeping and supervision
Packing employees are remunerated hourly: normal hours are eight hours a day,
five days a week. Having to work overtime has become so common that
supervisors no longer specifically approve overtime, and employees work
overtime if they feel it is necessary.
The warehouse has a front entrance where a mechanised clockcard system and
a turnstile are in place. When entering or exiting the warehouse, employees take
their clockcards off a card rack, clock the cards, which activate the turnstile, and
then place the clockcards on a second card rack, once they have passed
through the turnstile.
A security guard, who ensures that each person clocks only one card, is only in
place during the busy periods of the day. The turnstile is locked once all
employees have left the warehouse in the evening. Employees do not have to
produce their identification cards when clocking in or out.
Payroll preparation
Apple Smith and Granny Tree staff the payroll department and report to Berry
Khumalo, the payroll supervisor. Wages are paid every Friday for the week,
which ends on Wednesday. Apple Smith collects the clockcards from the card
racks early on a Thursday morning, before any of the employees arrive. He
checks the number and details on the clockcards collected against the list of
clockcards issued to him by the personnel department.
The personnel department is responsible for making the clockcards available at
the start of a working week. They also issue Apple Smith with a list of all
employees to whom a clockcard has been issued.
From the clock card Apple Smith calculates the total normal and overtime hours
worked by each employee. He then prepares the payroll using the hours
calculated and the authorised lists and schedules of wage rates and deductions.
Berry Khumalo performs random checks on Apple Smith’s calculations, casts
and extensions and compares the net wages total for the current week with the
previous week’s net total wages. If these differ substantially, he asks for an
explanation. Subsequently, he signs the payroll as evidence of these checks.
Apple Smith advises the cashbook clerk telephonically of the exact amount of net
wages and instructs her to issue a cheque payable to “Cash”. The cashbook
clerk takes the cheque to be signed by two authorised signatories and then gives
the cheque to Granny Tree.
Early on Friday morning, Granny Tree cashes the cheque, prepares the pay
packets, and updates the accounting records. Berry Khumalo authorises all
, postings to the general ledger to ensure they are correctly and timeously
entered.
Payment of wages
By 13:00 on Friday, Granny Tree locks the pay packets and a copy of the
department’s wage listing in each supervisor’s office safe. At 15:00 on Friday
afternoons, each supervisor pays wages to the staff in his or her department.
Employees are required to sign the wage listing as evidence of receipt of their
pay packets. Included in the pay packet is a payslip, which provides employees
with an analysis of their net wage. Employees are not required to check their pay
packets in the presence of the supervisor. Instead, all queries must be referred to
the payroll department on Monday morning.
Unclaimed wages are captured in the unclaimed wages register and the
unclaimed wage pay packets are locked in the office safe.
Employees have indicated that they do not want their weekly wages paid into bank
accounts; they prefer cash payments.
The company does not wish to computerise its wage system or to use a wage security
company because it has its own security department.
REQUIRED Marks
1.1 Identify the weaknesses in the above payroll system. (14)
1.2 Recommend the internal controls needed to eliminate the identified (14)
weaknesses.
Structure your answer in the following format:
2.1 Weaknesses 2.2 Controls
QUESTION 2: Acquisition cycle 12 marks
The chief audit executive (CAE) decided that, while you are busy assisting the
procurement department, you may as well perform the assurance audit of the
procurement function originally scheduled for later in the year.
After identifying the risks, you have compiled the following audit objectives to include in
your audit programme.
I. Validity: To ensure that only valid purchases are recorded.
II. Completeness: To ensure that all the goods received from suppliers are recorded
as purchases in the purchase journal.
III. Valuation: To ensure that the liability in respect of credit purchases is recorded at
the correct value.
Fruit Packing (Pty) Ltd is a company that helps farmers to harvest and pack fresh fruit.
You are one of a few trainee internal auditors employed in the internal audit activity.
Fruit Packing (Pty) Ltd has recently experienced disputes over the recorded accuracy of
wages paid and hours worked. Management has therefore asked internal audit to
review the process in terms of wage calculation and pay-outs. You have been assigned
to the audit team to carry out this task.
The following information was obtained regarding the payroll system of the packing
department:
Timekeeping and supervision
Packing employees are remunerated hourly: normal hours are eight hours a day,
five days a week. Having to work overtime has become so common that
supervisors no longer specifically approve overtime, and employees work
overtime if they feel it is necessary.
The warehouse has a front entrance where a mechanised clockcard system and
a turnstile are in place. When entering or exiting the warehouse, employees take
their clockcards off a card rack, clock the cards, which activate the turnstile, and
then place the clockcards on a second card rack, once they have passed
through the turnstile.
A security guard, who ensures that each person clocks only one card, is only in
place during the busy periods of the day. The turnstile is locked once all
employees have left the warehouse in the evening. Employees do not have to
produce their identification cards when clocking in or out.
Payroll preparation
Apple Smith and Granny Tree staff the payroll department and report to Berry
Khumalo, the payroll supervisor. Wages are paid every Friday for the week,
which ends on Wednesday. Apple Smith collects the clockcards from the card
racks early on a Thursday morning, before any of the employees arrive. He
checks the number and details on the clockcards collected against the list of
clockcards issued to him by the personnel department.
The personnel department is responsible for making the clockcards available at
the start of a working week. They also issue Apple Smith with a list of all
employees to whom a clockcard has been issued.
From the clock card Apple Smith calculates the total normal and overtime hours
worked by each employee. He then prepares the payroll using the hours
calculated and the authorised lists and schedules of wage rates and deductions.
Berry Khumalo performs random checks on Apple Smith’s calculations, casts
and extensions and compares the net wages total for the current week with the
previous week’s net total wages. If these differ substantially, he asks for an
explanation. Subsequently, he signs the payroll as evidence of these checks.
Apple Smith advises the cashbook clerk telephonically of the exact amount of net
wages and instructs her to issue a cheque payable to “Cash”. The cashbook
clerk takes the cheque to be signed by two authorised signatories and then gives
the cheque to Granny Tree.
Early on Friday morning, Granny Tree cashes the cheque, prepares the pay
packets, and updates the accounting records. Berry Khumalo authorises all
, postings to the general ledger to ensure they are correctly and timeously
entered.
Payment of wages
By 13:00 on Friday, Granny Tree locks the pay packets and a copy of the
department’s wage listing in each supervisor’s office safe. At 15:00 on Friday
afternoons, each supervisor pays wages to the staff in his or her department.
Employees are required to sign the wage listing as evidence of receipt of their
pay packets. Included in the pay packet is a payslip, which provides employees
with an analysis of their net wage. Employees are not required to check their pay
packets in the presence of the supervisor. Instead, all queries must be referred to
the payroll department on Monday morning.
Unclaimed wages are captured in the unclaimed wages register and the
unclaimed wage pay packets are locked in the office safe.
Employees have indicated that they do not want their weekly wages paid into bank
accounts; they prefer cash payments.
The company does not wish to computerise its wage system or to use a wage security
company because it has its own security department.
REQUIRED Marks
1.1 Identify the weaknesses in the above payroll system. (14)
1.2 Recommend the internal controls needed to eliminate the identified (14)
weaknesses.
Structure your answer in the following format:
2.1 Weaknesses 2.2 Controls
QUESTION 2: Acquisition cycle 12 marks
The chief audit executive (CAE) decided that, while you are busy assisting the
procurement department, you may as well perform the assurance audit of the
procurement function originally scheduled for later in the year.
After identifying the risks, you have compiled the following audit objectives to include in
your audit programme.
I. Validity: To ensure that only valid purchases are recorded.
II. Completeness: To ensure that all the goods received from suppliers are recorded
as purchases in the purchase journal.
III. Valuation: To ensure that the liability in respect of credit purchases is recorded at
the correct value.
