ISA 400 Risk Assessments and Internal Control deals with internal control objectives and internal controls. ISA 500 Audit Evidence deals with audit objectives and audit procedures. A proper understanding of internal controls is essential to auditors in order that they understand the business and are able to effectively plan and execute tests of controls and an appropriate level of substantive procedures. You are the auditor of a small manufacturing company that pays its staff in cash and by bank transfer and Maintains its payroll on a small stand-alone computer. Required: For the payroll charges and payroll balances (including cash) in the financial statements: (i) Describe the external auditor audit objectives; (4 marks) List the tests of control and substantive procedures that will be applied in order to achieve the audit objectives identified in (i) above

Audit objectives, tests of control and substantive procedures

Objectives Tests of control and substantive procedures
Existence: of assets and liabilities such as cash on hand and in the bank, and of the liability to pay staff and the associated tax and NSSF contributions. Testing controls over the security of cash to ensure that they are operating effectively throughout the period.

Performing cash counts, with reconciliations to the records and observing cash payments to staff, ensuring that appropriate signatures are obtained and that unclaimed cash is promptly re-banked, for example.

Making checks on the physical existence of staff to ensure that the related expenses and liabilities are genuine.

Checking after date payments to staff and for tax and NSSF contributions.

Occurrence: payroll transactions occurred during the relevant accounting period. Performing cut off tests to ensure that payroll costs incurred during the period have been recorded during the period by examining entries in the payroll records just before and just after the period end and checking back to source documentation,

such as timesheets or clock cards

Completeness: there are no unrecorded assets or liabilities such as cash on hand and in the bank or transactions such as payroll payment. Performing starters and leavers tests to ensure that staff are not paid before they join the company and are not paid after they leave. This involves checking the payroll for two separate periods and examining entries relating to starters and leavers in the intervening period.


Manually checking the accuracy of payroll calculations to ensure that correct payments and deductions are being made in accordance with approved pay rates and approved deduction rates for tax and NSSF.


Reviewing evidence of authorisation controls

to ensure that the payroll has already been checked.

Measurement: transactions such as payroll payments are recorded at the correct amounts and are recorded in the correct


Same as for completeness, above, and checking entries relating to hours or time worked    in    the    payroll    to    source


Presentation and disclosure: an item is disclosed and described in accordance with accounting standards and legislation. Reviewing the financial statements with the aid of a disclosure checklist to ensure that disclosure requirements have been met. Reviewing the overall presentation of payroll

transactions and balances.

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