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Auditing of Employee Compensation

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You are the office manager of a small sales company. There are formally three employees with the company: the owner, the receptionist and you. The company hires part time sales reps who sign a contract stating that they are independent contractors. They are supposed to go door to door and make prepared sales pitches for people to purchase the product. There are required to obtain signatures to contracts and to drop of the contracts with initial deposits at the company's office each Monday. Twice a month they meet at the local Starbucks to discuss sales, new product lines and other issues with the owner and the other sales reps.

You receive a notice from the state Department of Labor, asking to do an audit. They want to determine who is an employee and who is not and whether everyone is being compensated properly. The owner has gone away to whale watch off the New England Coast and has told you not to call him, even in an emergency. You try to call him but you cannot reach him.

How do you handle the issue of the audit and what do you say about the sales reps?

On the same day as the audit is occurring, one of the sales reps calls you on his cell phone to report that he cannot make the weekly sales meeting and to give you his sales figures. As he is doing such, he hits a person crossing the street. Several weeks afterwards, the sales rep tells you that he has the lowest amount of car insurance and wants to know whether or not the company will provide coverage for the accident.

How do you handle all of these issues?

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First and foremost, the audit will occur regardless of the approach taken by the company. Therefore, the office manager should ensure that all documents are available to the Department of Labor and that any requests made by ...

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The solution discusses auditing of employee compensation.

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Payroll Audit Procedures, Computers, and Sampling

9.81 Payroll Audit Procedures, Computers, and Sampling.
You are the senior auditor in charge of the annual audit of Onward Manufacturing Corporation for the year ending December 31. The company is of medium size, having only 300 employees. All 300 employees are union members paid by the hour at rates set forth in a union contract, a copy of which is furnished to you. Job and pay rate classifications are determined by a joint union-management conference, and a formal memorandum is placed in each employee's personnel file. Every week, clock cards prepared and approved in the shop are collected and transmitted to the payroll department. The total of labor hours is summed on an adding machine and entered on each clock card. Batch and hash totals are obtained for the following: (1) labor hours and (2) last four digits of Social Security numbers. These data are keyed into a disk file, batch balanced, and converted to tape storage for batch processing. The clock cards (with cost classification data) are sent to the cost accounting department.
The payroll system is computerized. As each person's payroll record is processed, the
Social Security number is matched to a table (in a separate master file) to obtain job
classification and pay rate data; then the pay rate is multiplied by the number of hours
and the check is printed. (Ignore payroll deductions for the following requirements.)


a. What audit procedures would you recommend to obtain evidence that payroll data are accurately totaled and transformed into machine-readable records? What deviation rate might you expect? What tolerable deviation rate would you set? What "items" would you sample? What factors should be considered in setting the size of your sample?

b. What audit procedures would you recommend to obtain evidence that the pay rates are appropriately assigned and used in figuring gross pay? In what way, if any, would these procedures be different if the gross pay were calculated by hand instead of on a computer?

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