The Audit of Wages Global

Question: Discuss about The Audit of Wages for Global. Answer: Case 1 The auditor are expected to test the authenticity of the transactions that haven been booked in the accounts book. They are likely to use their judgment and carry out necessary tests to determine the reliability of the transactions. If while carrying out the audit procedure, they came across with some suspicion, they are expected to extend their audit procedure and are expected to carry out necessary substantive tests in this regards. In the given case, the auditor Robert Smith determined that few of the company accounts are having low risk of material misstatement. He has conducted necessary tests and noticed that the controls placed by the company are reliable. However, the auditor of the company decided to carry out certain audit test procedure to develop some additional sense of reliability on these accounts. Wages and Salaries: The wages and salaries section of the company takes over the major section of the expenses within the company. While carrying our audit of this section, the auditor needs to be very cautious. In this section, the role of internal controls that has been placed within the company plays a vital role. The auditor in this case should first select two random months and obtain salaries and wages register from the payroll department. He is likely to tally the salaries expenses that have been booked in the payroll expenses account with that to the payroll register. He should further ask the management to prepare necessary reconciliation to identify the gap if there is any, in the payroll register and the amount that has been booked in the expenses. He should test check the wages of the employees who are been paid for their hourly services from the clock records and ensure that the same has been correctly calculated. Every employee that is working within the company has a w ritten agreement with the company. The auditor can cross check the terms of the agreement for sample employees and ensure that the payment that has been made to them is as per the agreement. The gross pay that has been paid to the employees tie back to the agreement and only statutory dues if nay should be deducted from the same. Further, it is important for the company to deposit the statutory dues collection that they have made from the employees within the time frame provided to them by the authorities. The auditors in this case should obtain necessary documentary proofs from the management on which they can rely for timely deposition of the dues from the management. Electricity: This is again being regarded as one of the major heads of the expenses. The auditor s in this case is likely to obtain necessary documentary evidences in the form of electricity bills from the management for the sample months and can cross check the amount paid in the books from these evidences. They can further cross check the units reflecting in the electricity bills from the internal units register being maintained by the factory foreman of the company. For yearend purposes, the provision for electricity booked needs to be thoroughly analyzed to ensure the basis which has been used by the management is correct or not. Repair and maintenance: This is the one of the heads in the profit and loss account in which there is high probability of making errors from the part of the management. The auditors in this case tends to be very cautious and test down the expense to ensure that only revenue expenses are charges of in the profit and loss account and only capital expenditure are capitalized and they will be eligible for deprecation. The auditor is further likely to extend their audit procedure to the completeness of the expenses head. He can select the top 5-10 line items of the expenses head and obtain necessary documentary evidences and obtain necessary reasons from the top management specifying as to why the expense changed to profit and loss account should not be capitalized. The auditor can further compare the Repairs and maintenance expense head for the current year with the last year and should ask the management to provide adequate replies for the material differences, if any. This will help th em in understanding the basis reason for the increase or decrease in the expense head. Case 2 Part 1 From the perspective of auditor materiality is a very important concept. The auditor needs to be cautious enough to test the materiality of the transactions and determine the areas where they need to be carry out their audit procedures and which area if found error, irrespective to the fact that the same is material or not needs to be reported. This material level is determined based on the planning materiality which is being determined by the company at the very beginning of the audit in order to note down the accounts that needs to be audited. Further based on the planning materiality, the auditor determines the threshold limit which provides a judgment call to the auditor. The threshold limit to determine by the auditor depends on the reliance which he has on the accounts of the company. If the company has better controls in place, then the auditor can prefer keeping a higher threshold else wise a lower one is preferable. In the give case, the auditor was carrying out the test for sales transactions. For audit purposes, the auditor has kept the tolerable limit close to 5%. He witnessed 3 errors during the course of the sales audit which neither individually nor in aggregate crossed the 5% limit mark. Being the same was below the acceptable limit the auditor decided to leave that apart and stated that the controls placed within the company were reliable. In this case, the auditor based on his past experience with the client has make out that the tolerable limit of 5% would be adequate for the company. This has been done with an intention to ensure that it is not possible for the auditor to report each and every error which they have noticed during the course of audit. The materiality aspect is very important. They are numerous errors which are very small in nature and if they are being corrected, it will not have any impact on the decision making of the shareholders. Thus, in that case materiality plays a vital role. The errors which has been noticed by the auditors of individually or in aggregate exceeds the tolerable limit which has been determined by the auditor in the very beginning of the audit, necessary adjustment needs to be made in the books. In that case, the same cannot be left unattended. In the given case, the errors noted are less than the tolerable error, thus rather than adjusting the same in the books they are left u nattended and it has been concluded that the controls has been placed within the company are adequate. Part 2 In the give case, the auditor was carrying out the test for Accounts payable. The total population for the same stands close to $5 million, out of which the sample which they have selected covers nearly 50% of the entire population. The tolerable limit that has been set up by the company in this case is 4%. During the course of audit, the auditor noticed that one of the invoices amounting to $102,500 for which goods have not been received till year end has been booked in the accounts payable. The auditor stating that the error noticed was less than the materiality limit set up by them, left the same unattended and concluded that the controls has been placed within the company are adequate. In the give case, although the error that has been identified during the course of audit is less than the tolerable limit but still the same cannot be left unattended. This error will not only have its impact in the current year but also in the coming years. Thus, in that although the same is less than the materiality limit, still the auditors needs to post some adjustment entry in the books in this regards. The auditor in this case should ensure that the inventory balance which has been overstated by this error would be reduced and brought down at the correct figure and the inventory in the corrected invoice should be booked as goods in transit in the books and the company should make adequate disclosure in the notes in this regards. In case of accounts, the substance rules over the legal form of the transactions. From the auditor presective, they are supposed to leave the errors unattended if the same are less than the tolerable error but evidently if it is logic allay incorrect the same needs to be adjusted in the books. References ACCA Global, The audit of wages, Viewed on 28nd May 2016, https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles/the-audit-of-wages.html