1) The key audit objectives are:
a. Occurrence and Existence
i. Must record payroll payments for existing employees only and should have separation of duties for each task.
1. Test of controls: examine internal control to see if the payroll payments are for existing work and existing employees
2. Substantive test: test to see if right dollar amount in the payrolls were recorded and paid properly. Test to review large dollar amounts in the journal entries, general ledger, and payroll earnings.
i. Must record all existent payroll transactions
1. Test of controls: test to see if existing payrolls are recorded.
2. Substantive test: compare the book and payroll bank statements. Prove the bank reconciliation and look for unmatched dollar amounts.
i. Must record payroll transactions are for the amount of time actually worked and at the proper pay rates accuracy
1. Test of controls: test to see if the right hours and right rate are recorded and tax withholding are correct.
2. Substantive test: recalculate gross & net pay. Review cancelled check withholdings.
d. Posting & Summarization
i. Recorded payroll transactions properly included in the master file are also properly summarized.
1. Test of controls: When payroll master file totals are compared with general ledger totals, auditors should examine initialed summary total reports indicating that comparison has been made.
2. Substantive test: test clerical accuracy by footing the payroll journal and tracing postings to the journal ledger and the payroll master file
i. Ensure all payroll transaction properly and efficiently
1. Test of controls: review charts of accounts. If account classifications are internally verified, can examine indication of internal verification.
2. Substantive test: review time cards & job ticket, and trace through to labor distribution.
i. Record all payroll transaction immediately, on the correct date and right amount.
1. Test of controls: examine procedure manuals and observe when recording takes place and examine indication of internal verification.
2. Substantive test: Compare dates on checks with date in the payroll journal and compare date on check with date the check cleared the bank.
2) The internal control weaknesses in the Dodgers’ payroll system are from the design of internal control, no independent check and performance, no separation of duties, the weakness of work environment, and required vacation for senior manager.
a. Design of internal control:
i. Campos designed the internal control for payroll by himself, and implemented a new payroll system that can only be fully understood by him. Campos could easily commit fraud, because there are no other people that can understand the design of the internal control.
b. No independent check & performance:
i. Campos controlled the system, in such a way that he personally filled out the weekly payroll card for each employee. He can record any amount he wants, as there is no evidence to show whether the record is reliable or not.
c. No separation of duties:
i. Campos had too much trust from Dodges’. While he was on vacation, he came back and did payroll. There is no separation of the custody of assets from accounting. The person who has custody of an asset should not account for that asset. By having no one else involved with the asset, Campos could easily cover up any theft or fraud.
d. Weakness of work environment:
i. There appears to be collusion between