Broni & Co. have audited the annual financial statements of Bibini Co. Ltd., a public limited liability company, for the year ended 31st December, 2014. The accounting system of the company is partially computerised.
During the audit it was detected that just two members of staff out of one hundred and fifty workers, were entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. The chief accountant only confirms that the amount of the wages and salaries cheque agrees with the total of the net wages column in the payroll, then he signs without any reasonableness check of the amount of the total wages cheque. This situation is a serious deficiency in the control system which can have serious implications. As audit senior you are considering communicating this situation to the management showing the deficiency, implications and recommendations.
Required:
Prepare an appropriate report to management on the deficiency noted in the internal control system for payroll. (10 marks)
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REPORT TO MANAGEMENT
The Directors
Bibini Co. Ltd
10 Wansema Lane, Somewhere City
15th September, 2015.
Dear Sirs,
Following our recent audit of your company, we are writing to advise you of various matters which came to our attention.
We have set below the areas of significant deficiency which we noted, together with our recommendations. These recommendations have already been discussed with the Managing Director and his comments have been included.
As the purpose of the audit is to form an opinion on the company’s financial statements, you will appreciate that our examination cannot necessarily be expected to disclose all shortcomings of the system and for this reason, the matters raised may not be the only ones which exist.
Deficiencies
Preparation of payroll and maintenance of personnel records.
Under your present system, just two members of staff are entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. Furthermore, the only independent check of any nature on the payroll is that the chief accountant confirms that the amount of the wages cheque presented to him for signature agrees with the total of the net wages column in the payroll. This latter check does not involve any consideration of the reasonableness of the amount of the total net wages cheque or the monies being shown as due to individual employees.
Implications
It is a serious deficiency of your present system, that so much responsibility is vested in the hands of just two people. This situation is made worse by the fact that there is no clearly defined division of duties between the two of them. In our opinion, it would be far too easy for fraud to take place in this area (for example, by inserting the names of ghost employees into the personnel records and hence on to the payroll) and/or for clerical errors to go undetected.
Recommendations
i. A person other than the two clerks should be made responsible for maintaining the personnel records and for periodically (but on surprise basis) checking them against the details on the payroll.
ii. The two wages clerks should be allocated specific duties in relation to the preparation of the payroll, with each clerk independently reviewing the work of the other.
iii. When the payroll is presented in support of the cheque for signature to the chief accountant, he should be responsible for assessing the reasonableness of the overall charge for wages that week.
We should appreciate your comments as to how you propose to deal with the matters raised in this letter. If you require any further information or advice, please contact us.
We have prepared this letter for your use only. It should not be disclosed to a third party and we can assume no responsibility to any third party to whom it is disclosed without our written consent.
We would like to take this opportunity to thank you and your staff for your help and co-operation during the course of our audit.
Yours faithfully,
Broni and Co.