Reference no: EM132489578
Diamond Construction is an owner-managed entity with contracting revenues of $20 million in 2020. As construction is a labour-intensive industry, one of Diamond's largest expense accounts is labour and wages. You are a first-year auditor at Klein and Partners. You have been given the following information regarding the entity's payroll process for hourly employees at Diamond Construction:
Point 1. The owner-manager is the only person who can authorize the hiring of a new employee.
Point 2. When a new employee is hired, the payroll clerk prepares a new employee package that includes:
(a) safety orientation
(b) tax forms
(c) benefits plan enrolment
Point 3. Only the payroll manager has the ability to update the employee master list. This can only be done once the tax forms, a void cheque with direct deposit information, and the owner's approval have been received. All forms need to be returned before the payroll manager will update the payroll master list and add any new employees.
Point 4. Hourly employees are paid biweekly.
Point 5. Hours worked are tracked on time cards. Supervisors fill in the time cards for each individual day, noting the hours worked.
Point 6. At the end of the pay period, time cards are provided to the payroll clerk, who compiles the total hours worked and codes the hours to the appropriate job number. Once compiled, the payroll clerk enters the hours worked per person in the payroll system.
Point 7. The accounting system prepares the direct deposit information based on the rates of pay maintained in the payroll master list (listing of all authorized staff and approved wage rates). It also calculates the withholding taxes.
Point 8. This is transferred to the bank and a record of the transmission is printed and attached to the front of the payroll run.
Point 9. The payroll module is integrated with the general ledger. The payroll clerk prepares and posts the journal entry to the payroll expense accounts.
Point 10. Remittance advices are given to the supervisors for distribution.
Point 11. If an employee is terminated, Diamond just stops paying them as they no longer have time cards submitted.
Point 12. When an employee has been promoted or their job classification has changed, the supervisor will verbally communicate this to the payroll manager, who will then update the payroll master file. Therefore, source documentation in employee files will only relate to an employee's original job classification. The rationale for this was that most job classification changes would only result in an additional dollar or two per hour paid to the employee.
Question 1: What are control strengths with the payroll process?
Question 2: What tests of controls should be performed for Diamond Construction?