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key audit objectives

CASE 3.1
THE TROLLEY DODGERS

In 1890, the Brooklyn Trolley Dodgers professional baseball team joined the National League. Over the following years, the Dodgers would have considerable difficulty competing with the other baseball teams in the New York City area. Those teams, principal among them the New York Yankees, were much better financed and generally stocked with players of higher caliber. In 1958, after nearly seven decades of mostly frustration on and off the baseball field, the Dodgers shocked the sports world by moving to Los Angeles. Walter O'Malley, the flamboyant
owner of the Dodgers, saw an opportunity to introduce professional baseball to the rapidly growing population of the West Coast. More important, O'Malley saw an opportunity to make his team more profitable. As an inducement to the Dodgers, Los Angeles County purchased a goat farm located in Chavez Ravine, an area two miles northwest of downtown Los Angeles, and gave the property to O'Malley for the site of his new baseball stadium. Since moving to Los Angeles, the Dodgers have been the envy of the baseball world: "In everything from profit to stadium maintenance . . . the Dodgers are the prototype of how a franchise should be run."1 During the 1980s, the Dodgers reigned as the most profitable franchise in baseball with a pre-tax profit margin approaching 25 percent in many years. In late 1997, Peter O'Malley, Walter O'-
Malley's son and the Dodgers' principal owner, sold the franchise for $350 million to media mogul Rupert Murdoch. A spokesman for Murdoch complimented the O'Malley family for the longstanding success of the Dodgers organization. "The O'Malleys have set a gold standard for franchise ownership. . . . We will do all in our power to live up to that standard."2 During an interview before he sold the Dodgers, Peter O'Malley attributed the success of his organization to the experts he had retained in all functional areas: "I don't have to be an expert on taxes, split-fingered fastballs, or labor relations with our ushers. That talent is all available."3 Edward Campos, a longtime accountant for the Dodgers, was seemingly a perfect example of one of those experts in the Dodgers organization. Campos accepted an entry-level position with the Dodgers as a young man. By 1986, after almost two decades with the club, he had worked his way up the employment hierarchy to become the operations payroll chief.
After taking charge of the Dodgers' payroll department, Campos designed and implemented a new payroll system?a system that reportedly only he fully understood. In fact, Campos controlled the system so completely that he personally filled out the weekly payroll cards for each of the 400 employees of the Dodgers. Campos was known not only for his work ethic but also for his loyalty to the club and its owners: "The Dodgers trusted him, and when he was on vacation, he even came back and did the payroll."4 Unfortunately, the Dodgers' trust in Campos was misplaced. Over a period of several years, Campos embezzled several hundred thousand dollars from his employer. According to court records, Campos padded the Dodgers' payroll by
adding fictitious employees to various departments in the organization. In addition, Campos routinely inflated the number of hours worked by several employees and then split the resulting overpayments fifty-fifty with those individuals. The fraudulent scheme came unraveled when appendicitis struck down Campos, forcing the Dodgers' controller to temporarily assume his responsibilities. While completing the payroll one week, the controller noticed that several employees, including ushers, security guards, and ticket salespeople, were being paid unusually large amounts. In some cases, employees earning $7 an hour received weekly paychecks approaching $2,000. Following a criminal investigation and the filing of charges against Campos and his cohorts, all the individuals involved in the payroll fraud confessed. A state court sentenced Campos to eight years in prison and required him to make restitution of approximately $132,000 to the Dodgers. Another of the conspirators also received a prison sentence. The remaining individuals involved in the payroll scheme made restitution and were placed on probation.

QUESTIONS

1. Identify the key audit objectives for a client's payroll function. Comment on both objectives related to tests of controls and those related to substantive audit procedures.
2. What internal control weaknesses were evident in the Dodgers' payroll system?
3. Identify audit procedures that might have led to the discovery of the fraudulent scheme masterminded by Campos.

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Hi there,
Questions:
1. Identify the key audit objectives for a client's payroll function. Comment on both objectives related to tests of controls and those related to substantive audit procedures.
2. What internal control weaknesses were evident in the Dodgers' payroll system?
3. Identify audit procedures that might have led to the discovery of the fraudulent scheme masterminded by Campos.

Answers:

1. Audit Objectives:

a. Employee masterfile - All employee data in the system is accurate and appropriate to the personal issues of the employee.
Mitigating Control - Personal data is supported with the required documents.
Audit Test: Select a sample of employees from different locations and levels and review that key data are supported by source documents. At least one of these selected employees must be
directly associated with the payroll process.

b. Audit Objective: Confidentiality of personnel data is maintained
Mitigating Control - Physical access to personnel records is restricted to authorized personnel who need such information to discharge their responsibilities.
Audit Test: - Review separation of locations between Payroll office from other HR functions. Review that in the payroll offices appropriate tidy without confidential information in the desks and that when the time work is finished, offices are locked.
- Confirm with IS department (or equivalent) Payroll profiles and review with other non payroll
functions in HR Area their permits to access to payroll data.
- Review that all payroll staff have signed off a clause of confidentiality.

c. Audit Objective - Accountancy Payroll data is completely and accurately accumulated in the underlying financial records and in the proper accounting period
Mitigating Control - Monthly reconciliation between Payroll and Financial records is made
by Accountancy and Payroll departments.
Audit Test:Request a copy of the reconciliation between financial and Payroll records for two
different months, and review the data with the system.
- Reconcile the payroll to the general ledger for the ...

Solution Summary

This problem involves the fundamentals of accounting

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