The following scenario relates to questions 16 – 20
North Cake Co, your audit client, is a large unlisted construction company (building houses, offices and hotels) employing a large number of workers on various construction sites.
As part of planning for the audit of the financial statements for the year ended 31 December 20X6, you are reviewing the cash wages systems within the company.
The following information is available concerning the wages systems:
(i) Hours worked are recorded using a clocking in/out system. On arriving for work and at the end of each day’s work, each worker enters their unique employee number on a keypad.
(ii) Workers on each site are controlled by a foreman. The foreman has a record of all employee numbers and can issue temporary numbers for new employees.
(iii) Any overtime is calculated by the computerised wages system and added to the standard pay.
(iv) The two staff in the wages department make amendments to the computerized wages system in respect of employee holidays and illness, as well as setting up and maintaining all employee records.
(v) The computerized wages system calculates deductions from gross pay, such as employee taxes, and net pay. Every month a wages clerk checks the gross pay and deductions for a sample of employees. Finally a list of net cash payments for each employee is produced.
(vi) Cash is delivered to the wages office by secure courier.
(vii) The two staff place cash into wages packets for each employee along with a handwritten note of gross pay, deductions and net pay. The packets are given to the foreman for distribution to the individual employees.
North Cake’s finance director has mentioned to you that an allegation of suspected fraud had been made against a member of the senior management team during the year. This is currently being investigated by the internal audit team and the finance director hopes that the audit may shed further light on the matter.
North Cake has an internal audit department of six staff. The chief internal auditor appoints staff within the internal audit department, although the chief executive officer is responsible for appointing the chief internal auditor. The chief internal auditor reports directly to the finance director. The chief internal auditor decides on the scope of work of the internal audit department. North Cake does not currently have an audit committee.
16. In preparation for the audit planning meeting, the audit junior has identified a number of areas requiring audit focus.
Based on the information regarding the wages system, which TWO of the following are likely to introduce the highest risk of material misstatement?