audit 1

Ap

ril

11

, 2

01

1

CASE STUDY: THE TROLLEY DODGERS

1. Identify the key audit objectives for a client’s payroll function. Comment on both

objectives related to tests of control and those related to tests of control s and those

related to substantive audit procedure.

The key audit objectives for client’s payroll function in this Trolley Dodgers Case are:

i.Occurrence

ii.Completeness

iii.Accuracy

iv.Posting & Summarization

v.Classification

vi.Timing

i. Key Audit Objective : Occurrence

Dodgers must recorded payroll payments for existing employees only and should have

separation of duties for each task.

Test of Control: Examine internal control to see if the payroll payments are for exiting

work and existing employees. The test could be examining all the workers time cards,

personnel files and review organization chart. They also can discuss with employees and

observe duties being performed. The tests would examine printouts of transactions

rejected by the computer as having nonexistent employee numbers.

The Trolley Dodger’s Case

Ap

ril

11

, 2

01

1

Substantive Test of Transactions: The test to see if the right dollar amount in the

payrolls were recorded and paid properly. They also test to review large dollar amount in

the journal entries, general ledger and payroll earnings. Examine cancelled checks for

proper endorsement could be compare with a personnel record.

ii. Key Audit Objective : Completeness

Dodgers must record all existent payroll transactions.

Test of Control: The test is to see if the existing payrolls are recorded. If employees do

not get any payment, so they can directly report to the employer. They also test to review

the renumbered payroll check to find the missing one.

Substantive Test of Transaction: They can compare the book and payroll bank

statement. Therefore, they will prove the bank reconciliation and can look for unmatched

dollars amount.

iii. Key Audit Objective : Accuracy

Dodgers recorded payroll transactions are for the amount of time actually worked and at

the proper pay rates accuracy.

Test of Control: The test is to see if the right hours and right rate are recorded and tax

withholding is correct. Batch totals are compared with computer summary reports.

Auditors could examine authorization in payroll records and personnel files.


Ap

ril

11

, 2

01

1

Substantive Tests of Transaction: To test for exact dollar amount, auditors could

recalculate gross and net pay. They also can compare pay rate with the industry, review

cancel check withholdings by referring to tax tables and authorization forms in personnel

file.

iv. Key Audit Objective: Posting and Summarization.

Dodgers recorded payroll transaction properly included in the master file also properly

summarized.

Test of Control: When payroll master file totals are compared with general ledger totals,

auditors should examine initialed summary total reports indicating that comparison has

been made. They also must examine indication of internal verification.

Substantive Test of Transaction: Test clerical accuracy by footing the payroll journal

and tracing postings to the journal ledger and the payroll master files.

v. Key Audit Objective : Classification

Dodgers classify all payroll transaction properly and efficiently.

Test of Control: They should review charts of accounts. If the account classifications are

internally verified, then they can examine indication of internal verification.

Substantive Test of Transaction: They can review time cards and job ticket, and trace

through to labor distribution. They should compare classification with chart of accounts or

procedures manual.


Ap

ril

11

, 2

01

1

vi.Key Audit Objective : Timing

Dodger must record all payroll transaction immediately, on the correct date and right

amount.

Test of Control: Auditors should examine procedures manual and observe when

recording takes place and examine indication of internal verification.

Substantive Test of Transaction: The auditor compare date on checks with date in the

payroll journal and compare date on check with date the check cleared the bank.


Ap

ril

11

, 2

01

1

2. What internal control weaknesses were evident in the Dodgers’ payroll system?

Internal control is a process, affected by an entity’s board of director, management and

other personnel, designed to provide reasonable assurance regarding the achievement of

objectives in reliability of financial reporting, effectiveness and efficiency of operations

and compliance with laws and regulations.

Internal control weakness 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.

i. Design of internal control

Campos, the operations payroll chief have designed the internal control by

himself and implemented a new payroll system that only can be fully understand

by him. As we know, the purpose of design the internal control is to prevent or

detect material misstatement in the financial statement. Due to this case, Campos

can easily commit fraud because there are no other people that can understand the

design of the internal control.

ii. No independent check and performance

Campos controlled the system so completely that he personally filled out the

weekly payroll card for each of the four hundred employees. He can record any

fraudulent statement because there is no evidence that shows whether the record is

reliable or not.


Ap

ril

11

, 2

01

1

iii. No separation of duties

Campos took advantage of his authorization because he was the trusted employee

who got trusted too much from Dodges’. When he was on vacation, he came back

and did the payroll. There is no separation of the custody of assets from

accounting. A person who has temporary or permanent custody of an asset should

not account for that asset. This is because by allowing one person to perform both

function increases the risk of that person disposing of the asset for personal gain

and adjusting the records to cover up the theft. As we can see in this case, Campos

was the only one who responsible for every task.

iv. Weakness of the work environment

There is collusion between employees and management. This showed that both

Campos and his cohort have low work ethic. Campos routinely inflated the

number of hours worked by several employees and then split the resulting over

payment fifty-fifty with those individuals. In addition to this, Campos also

embezzle several hundred thousand dollars from his employer.


Ap

ril

11

, 2

01

1

3. Identify audit procedure that might have led to the discovery of the fraudulent

scheme mastermind by Campos.

Audit procedure is the detailed instruction for the collection of a type of audit evidence

that is to be obtained at some time during the audit.

i. The auditor must understand clearly the flow chart

Auditor should go through the Dodger’s payroll flow chart. The auditor must

understand clearly the flow chart. From that, the auditor can trace how the payroll

system is going on actually. Then, the auditor would see there are no independent

checks that have been done by Campos. The payroll department also does not

have segregation of duties and all that work is done by Campos only.

ii. The auditor can interview employees in payroll department.

The auditor can interview employees in payroll department. The auditor can ask

whatever question that they think it’s very important and need to know. Like, how

much Campos pay for daily operations works for every level of staff, and how

Campos manage the time card. The auditor will know more detailed about the

payroll process.


Ap

ril

11

, 2

01

1

iii. The auditor test for nonexistent employees

For make sure the all transaction that have recorded by Campos and

payroll department is really exist and they make payment to the non fictitious

employees, the auditor compare names on cancelled checks with the time card

have created. The auditor can scan the endorsement on cancelled checks.

Furthermore, auditor also can make comparison on personal files of employees

with time card that created.

Other than that, the auditor can run test of control by selected transaction

in the payroll with Human Resources department. The auditor can select a week

check transaction and examine the first fifty checks, select the fifty checks with

the largest amounts, select the checks randomly or select those checks the auditor

thinks are most likely to be in error or a combination of this method could be

used.

Besides that, the auditor request surprise payroll payoff from payroll

department. When the auditor requests for payroll payoff suddenly, for sure the

payroll department do not chance and do not have enough time to make correction

on their system. So, Auditor will see the real transaction that have make by that

department. Finally, the auditor can trace the misstatement, fraud and error easily.


Ap

ril

11

, 2

01

1

iv. The auditor tests for fraudulent hours

Other than that, the auditor also can reconcile the total hours paid in the payroll

records with and independent record of hours worked. Auditor would see, if payroll

record transaction is true based on the time card or not. The auditor can trace if the record

keeping employees have intention to do that fraud.

v. The auditor compare pay rates with the same positions in other baseball team in the league.

The auditor also should understand business nature and make comparison with

another similar business nature. From that result, the auditor will know how much is

exactly pay rates usually paid to the professional baseball. After done that activity, the

auditor is able to identify the pay rates that put by Campos to the every level worker is it

relevance or not.

vi. The auditor examines the large payroll checks.

Last steps, that auditor use to discover the fraud is by examine the largest payroll

checks out. The auditor reconciles the checks between the payroll record, time card, and

all relevance data. Auditor would see which one fictitious transaction that has been made

by Campos.


audit 1

Documents