Abstracts

Question 1

First Deficiency

1. Chartered accountant  69 years old  age of retire  weak body condition 

die or leave company anytime  company get messy
2. experience accountant  expected high salary  high cost of salary  reduces
net profit

Implication: company may not comply with the rules and regulations  penalty 
delay giving salary  be sued Under Labour Act

Second deficiency

1. Purchasing executive  in charge all orders and purchases  self-interest and

fraud  example: sell lower quality product with higher price  gain profit by
receiving commission

Implication: company purchase and operating cost increase

Third deficiency

1. Payroll system  swipe card recording system  dishonest employees  swipe

timecard for others  late or absent  carry out activities that not related to their
job

Implication: company may overpay salary  company cost of salary increased 

profit affected  unhealthy culture for employees  affect effectiveness and
efficiency company
Question 2

1. Employees handbook shall clearly state the proper procedures  Finance and
Human Resources department  establish proper procedures  signature shall
require by the employees for every transaction  manager and supervisor 
provide proper supervision  install CCTV  monitor by manager or supervisor
 carry out spot check  maintenance regularly
2. Provide training course  Sage UBS payroll certification OR  Chartered
accountant  Human resource and Finance department employees  aware to the
rules and regulations  know more details  prevent errors
3. Set quantum as benchmark  drivers and warehouse assistants  Drivers: set
standard amount of delivery within an hour interval  5 delivery in an hour 
Warehouse assistants: set minimum unit output  pack and label 100 units of
outputs per hour  set policy  only submit claim that approved and verify
Question 3

1. Payroll system risk area

1.1. Perform analytical procedurerequire informationcompare monthly
accountconduct ratio analysisanalyse trendoccurrence and existence
1.2. Perform enquiry or inquiryinterview employeesobtain clearer
informationassess whether comply with laws and regulationshelpful for
physical inspectionaccuracy
1.3. Perform physical inspection of documentation or recordsrequire
documentation and records to obtain audit evidenceverify pay ratechecking
pay rates with workers’ actual working timerecorded in the swipe card
systemcheck amount whether tally or not by tracingcheck pay slips to
provereview GL and FSwhether SOCSO and EPF paid comply with laws and
regulationsvaluation, occurrence, accuracy

2. Swipe card system risk area

2.1. Perform analytical procedureanalyse both financial and non-financial
informationcompare current year SPL over past five yearstrend analysis
indicates upward or abnormal fluctuationsreflects deficiencyanalyse and
estimate workers’ work-timecomparing and analysing actual daily work time and
output of workerscompleteness, occurrence, existence, classification
2.2. Perform observationlooking at actual processconduct spot-check without
informingobserve and access performanceattend packing and labelling process
to observeworkers who fail to perform are required to explainSHSB facing
higher risk on the dishonesty of workerscarried out investigationscheck
delivery recordscompleteness, classification
2.3. Perform physical inspection of documentcheck and rea company corporate
policy and organisation chartunderstand swipe card systemhelpful in further
assessmentabnormal fluctuation due to seasonal factorscheck workers and
drivers’ recordsto confirm accuracy of the salary on actual work timevaluation,
occurrence, cut-off, rights and obligation, presentation and disclosure
Question 4

4.1.1 Perform observation on departmental salaries  swipe-card system clpck in-

clock out time  used to evaluate actual performance  determine whether salary
issued is rightful  compute the estimated result against the actual amount paid 
completeness
4.1.2 Perform recalculation for overall departmental salaries  provided records be
revalued  SOFP tally with estimated salary calculations  amounts should be
computed against results from observation  refer EPF  accuracy
4.1.3 Physical inspection on documentation  Tracing  GL  recheck the hourly basis
and fixed salary calculation  trace bank transaction on payments  completeness
4.1.4 Perform confirmation  salary payment transaction request bank statement 
compute salary transactions against bank statement  request Bank Reconciliation
 completeness, existence and accuracy

4.2.1 Physical stock count  observe inventory count on business routine  obtain stock
count report  existence and accuracy

4.2.2 Perform confirmation  obtain comparable unit cost of the stock in the industrial
price  compare the obtained report  re-evaluate the stock  inspect the closing
balances  tally with amount in GL – Closing Inventory  accuracy of closing inventory
Question1

Deficiency1:

Chartered accountant of SHSB, Ms. Tan, who is 69-year-old, is a well-experienced

accountant in the field with expected high salary. Higher cost of salary would increase
SHSB’s total cost and indirectly reduce the net profit. Besides that, at the age of Ms.
Tan’s retirement, unforeseeable risks such as material misstatements or unexpected
incidents are threatening SHSB’s operation. She might leave SHSB at any time due to
bad body condition. It might lead to chaos in the whole internal control system as it
would face many problems in preparations of financial statement during the period of
acquiring new accountant. The new-hired accountants might probably face problems
in understanding the current accounting records and the recent company status. SHSB
might not able to comply with the laws and regulations since the accountants need
time to familiarize and take over the Ms. Tan’s duty and consequently involve in
penalty. SHSB might sue by employees under Labour Act due to delay in the salary
payment. Delaying in salary payment would not only affect the performance of the
workers, but also lead to huge losses due to workers’ strike.

Deficiency2:

The purchasing executive, Jenny, who oversees the negotiating process and entitle to
authority to approve all the orders or purchases made by SHSB. There is a huge
possibility of self-interest and fraud committed in the purchasing process. For
example, Jenny could have order lower quality products from the suppliers but
reported to SHSB with a higher price to gain profit by receiving commissions from
the suppliers. Jenny’s action on self-interest would deteriorate the SHSB’s purchase
process. Inefficiency in the purchase cycle might result in unnecessary higher
purchase cost and consequently increase the operating cost.
Deficiency3:

SHSB uses records obtain from the swipe card system to make a report on workers’
actual work-time. It enables SHSB to carry out others payroll functions easily and
automatically. SHSB is threatened by employee who access to the system dishonestly.
The payroll systems identify the employee’s individual recognition card to record the
employees’ actual work-time. Since the employees can simply pass their timecards to
others, they could simply help each other to swipe their timecards. It indirectly allows
the workers to be absent or late to work without being noticed and punished by SHSB.
Besides, the employees might misuse the timecard by carrying their own personal
activities after swiping their timecard, but still able to get paid by SHSB. SHSB would
thus overpay the salary for the workers based on records. It would increase total cost
of salary and decrease profit. Unhealthy culture among employees would be
cultivated and lead to negative consequences on the effectiveness and efficiency of
SHSB.
Question2

There are some recommended improvements to address the deficiencies in SHSB’s

internal control system. Firstly, the employee handbooks should clearly state the
proper procedures for clocking in and out and the consequences for falsely entering
payroll information. Finance and Human Resources department should establish
clearer procedures for requesting time off and changes in employee pay rates.
Signatures should be required for all the employees about their transactions such as
the final calculation of their actual working hours and salary. Besides, warehouse
manager or supervisors have responsibility in providing proper supervisions to the
workers to ensure they are performing their job effectively and efficiently and also
prevent the employees from cheating. Moreover, SHSB can install CCTV system
throughout the company, especially the swipe card area which is monitored by
warehouse manager, Muthu. This action can effectively prevent SHSB from employee
dishonesty in helping others to swipe timecard. Furthermore, the CCTV system
enables manager to conduct spot checks on the workers at any time. SHSB should
carry out regular maintenance to ensure the CCTV is under good conditions.

Additionally, training courses on payroll system’s operation such as Sage UBS

Payroll Certification which conducted by Ms. Tan should provide to employees of
Human Resource department and Finance department to ensure they are aware of the
rules and regulations and know better on payroll calculations. This could effectively
reduce the errors in recording employees’ information such as workers’ actual
working hours, EPF, etc. Therefore, it could prevent errors from calculating the
employees’ salary and overpaying or underpaying the salary.

As the warehouse assistants and driver are paid in hourly rate, Muthu can set a
quantum as a benchmark for the warehouse workers and drivers in order to prevent
cheating. For instance, Muthu can set standard amount of delivery, such as requiring
the drivers to complete two deliveries within an hour. Besides, the manager can set a
minimum unit of stationery per hour for the warehouse assistants. For example, the
workers are required to pack and label 100 units of stationery per hour. Therefore, the
manager can ensure that they did not cheat on their working hours by delaying their
working hours to get more salary or doing activities that are not related to their jobs
but still get paid as they are paid based on an hourly basis. (Refer to Appendix I)

Question3

The two main risk areas of Star-Hills Sdn. Bhd are the payroll system and the swipe
card system. To test on the reliability of SHSB’s internal control system, some
essential audit procedures would be conducted by auditor. In this case, payroll system
is the most significant risk area of SHSB.

Analytical Procedure

Firstly, the auditors would require monthly wages and salaries information from the
accountant clerk, Hamidah or the chartered accountant, Ms. Tan. Comparison of total
wages and salaries would be performed by auditors. [CITATION ACC \l 17417 ] For
example, auditors compare the current month wages and salaries account of SHSB
with the previous five comparable months. In this case, auditor would conduct ratio
analysis. The auditors would form ratios between wages and salaries paid and
warehouse workers actual working hours.[ CITATION Typ \l 17417 ] Next, the auditors
would analyse whether the trend of total wages and salaries paid to the warehouse
workers indicates fluctuation or not. If abnormal changes are found in the analysis
during the period, warehouse workers, Hamidah or Ms. Tan are responsible to explain
it. For instance, there is a significant increase in wages and salaries amount which
causes decrease in net profit, although total goods packed and labelled are similar
with the comparable months.

Enquiry or Inquiry

Hence, auditors would enquire or inquire on abnormal changes found in the analytical
procedure. The auditors would interview the warehouse workers, Hamidah or Ms. Tan
to obtain clearer information on the payroll system of SHSB. For example, the
auditors could enquire the warehouse workers for the average working hours which is
essential to pack and label certain units of stationery. For instance, the hours which
are essential to pack and label 100 units of stationery. Besides, the auditors could
inquire for the month which need many workers to work overtime and the bonuses
which paid to them. Furthermore, the auditors would enquire Hamidah or Ms. Tan on
specific questions such as does SHSB transfer employees’ EPF to the correct
warehouse workers’ accounts and pay their SOCSO on time. It enables auditors to
assess whether SHSB comply with the statutory deadline or involve in penalty or not.
It is helpful in the physical inspection of documentation and record.

Physical inspection of documentation or record

After enquiring on the payroll system, the auditors would conduct physical inspection
of documentation and records to obtain audit evidence. Firstly, the auditors would
require documentation and records from Hamidah or Ms. Tan to prove the physical
inspection. Then, the auditors would verify pay rate which recorded clearly in the
payroll system is correct to every employee. [ CITATION ACC \l 17417 ] For example,
RM10 per hour is paid accurately to every worker. Besides, checking pay rates with
actual working time recorded in the swipe card system is essential as Hamidah or Ms.
Tan might have overlooked and cause overtime budgets exceed the payroll budget.
Furthermore, the auditors could verify the amount recorded in the documents to
ensure it is tallied by tracing the source documents to the ledger or journal. For
instance, the auditors check the pay slips provided by both SHSB and the employees
to ensure the amount recorded in the payroll account is same with the pay slips. In
addition, the auditors would review the general ledger or financial statement. For
example, ensure the SOCSO and EPF of warehouse workers are paid on time and
comply with laws and regulations.

The procedures above are done to validate completeness, occurrence, existence,

classification, accuracy and valuation.

Another major risk area is the application of swipe card system. In this case, SHSB
might probably face problem of high operating cost due to employee’s dishonesty.

Analytical Procedure

Firstly, to test the reliability of its internal control system, auditor would conduct
analytical procedure using both financial and non-financial information provided by
the chartered accountant, Ms.Tan and the sales manager, James. It enables auditor to
obtain the salary trend of warehouse workers and drivers by comparing the financial
information such as salaries account and Statement of Profit and Loss (SPL) over the
past five years. If the trend analysis indicates an upward trend or an abnormal
fluctuation in workers’ and drivers’ salary, it directly reflects the deficiency of
internal control system on labor costing and operational management. [CITATION
ACC2 \l 17417 ] Besides, auditor could analyze and estimate the work-time of workers
to pack and label a certain quantity of stationery by comparing and analyzing the
actual daily work time and output of warehouse workers. For instance, if the
estimated time to pack and label 6 boxes of pens is an hour, workers who fail to pack
and label 48 boxes of pens in 8 hours of normal working time but in extra two hours
of overtime working are said to perform ineffectively in their job. Besides that, it is
unreasonable if drivers could deliver 10 units of stationery in 15 hours in previous
year but 20 hours in current year.

Observation

The next step is to obtain audit evidences by looking at the actual process of the
business since the swipe card system does not have proper evaluation. Spot-check
could be conducted by auditor without informing the workers and drivers to observe
and assess their performance. For instance, auditor could attend at the stationery’s
packing and labeling process to check whether the workers are able to perform their
job within estimated time [ CITATION Tea \l 17417 ] . Workers who are found frequently
fail to perform his tasks unreasonably within the time given or performing his task
without following proper procedures and requirement are required to provide
explanation as it reflects that SHSB is probably facing higher risk on the dishonesty of
workers and more detailed investigations should be carried out. Besides,
reasonableness of driver’s actual work-time could be assessed by checking the
delivery records of SHBS. For instance, if the driver is supposed to deliver 16 boxes
stationery daily, but claim fails to do it due to traffic jam and only able to deliver the
stationery in three days, it shows SHSB’s ineffectiveness and inefficiency.

Physical Inspection of document

By checking and reading SHSB corporate policy and organization chart which
provided by the executive directors, John and Jaya, auditor could have a great
understanding of SHSB swipe card system which is helpful in further assessment on
the reliability of SHSB internal control system. In this case, abnormal fluctuation
workers’ and drivers’ salary might due to seasonal sales such as school reopening.
Hence, by checking the sales record and sales analysis report, the auditor must able to
know the proper reason of fluctuation on salaries. Moreover, auditor might check the
workers’ and drivers’ work-time records, delivery records and the warehouse’s
inventory records to confirm the accuracy of the salary on actual work time [ CITATION
Aud1 \l 17417 ].

The procedures above are done to validate completeness, occurrence, existence,

classification, rights and obligation, valuation, and cut-off. [CITATION ACC1 \l 17417 ]

In conclusion, SHSB’s internal control system is said to be weak and not reliable as
there are significant high control risks. A non-reliance strategy should be performed
since the auditor cannot rely on SHSB’s internal control system. Hence, the auditor
needs to increase the volume of substantive testing to obtain and collect sufficient
audit evidence by conducting more detailed checking. For example, increase the
sample size of testing.
Question4

To further inspect the payroll system, auditor should perform observation on the
delivery and warehouse facility. Auditors should mainly focus on these departments
as swipe card system is implied in determining their wages on hourly basis. Special
attention should be given from the time they clock in and clock out. Their routine
could be monitored through CCTV or through direct supervision in the workplace by
appropriate person appointed by the audit team. It would be more effective to obtain a
true and fair result if it is conducted without the employees’ knowledge. This
observation is needed to evaluate the employees’ actual performance and determine
whether the salary issued by client is of the rightful purpose. Drivers can be
monitored by delivery time consumed per delivery, based on the distance covered and
the vehicles’ mileage record. Overall estimation should be derived to compute the
estimated salary expense with the actual amount paid during the period. These
procedures should be taken to ensure the completeness of the accounting records, by
ensuring the client has provided all necessary records.

Furthermore, auditors should perform recalculation for the overall departments on

both sales and marketing and administration. All the records provided should be re-
valued by reviewing the amount incurred for salary under SPL is tally with the
employee working hours, position and designation, wages paid, etc. The results
obtained should be computed against the results obtain from the audit observation
process stated previously, e.g. on the swipe card system. Total salaries paid to the
employees in each department should be re-calculated. For further confirmation,
auditor can randomly pick a sample from each department and perform a complete re-
performance on their salary calculations and payments. Validating and comparing all
the results obtained in the salary calculations which use exact method, with the actual
records of salary calculated and paid. In case of inquiring the complete remuneration
to the employee, the auditor can obtain complete information of payments made by
referring to the Employees Provident Fund. They can obtain full information on salary
paid, including the contribution made by the client to the fund. These procedures need
to be taken to ensure the accuracy of the accounting records.

Besides that, auditors should perform physical of the client’s firm payroll system.
Regarding this inspection, auditor can perform tracing by tracking down the general
ledgers e.g., warehouse salary ledger, to the root of the accounting records. Re-
checking the hourly basis wages and ensure that the amounts recorded are matched.
The bank transaction occurred in the process of the salary payments, should be traced
to ensure the amount transferred matches the amount supposed to be paid or incurred
based on the previous audit evidence obtained. This is conducted to ensure the
completeness of the transactions and disclosures on the salaries paid have been
included in the business financial statements.

Auditors can perform confirmation on the salary transactions by requesting the bank
statements from SHSB liaising banker, e.g. Maybank. Auditor can compute all the
salary transactions recorded in the financial statements provided by the client to the
report from bank. For further verification of the bank statements, the auditor can
request for bank reconciliation statement from the bank. This enable the auditor to
ensure the completeness, existence and accuracy of accounting records of the client.

To obtain audit evidences on the true and fair view of inventory in financial
statements, auditors should perform physical stock count. Auditors observe inventory
counts as they are performed on the daily business basis, test count some of the
inventory themselves. Trace the quantity and amount recorded by SHSB accounting
records, and verify that all inventory counts, code or tag was accounted for. They can
also inspect whether any inventory being misstated or omitted from the financial
statements during the stock receiving process and good deliver to customer. Auditor
can obtain stock count reports from the warehouse and administration department,
which could be used as audit evidence. This enables auditors to ensure the accuracy
and ability to confirm the existence on the year end closing inventory.

Besides that, auditors should perform confirmation by evaluating the inventory

obtained by the client. They can obtain current value or unit cost of the inventory
from the suppliers or from the same industry of field to get the industry price. This
data is then used to check whether the inventory is valued in SHSB records at the net
realizable value or lower of the cost of the stock. The similar industry price list of the
stock could be used as the audit evidence, this validates the closing inventory. From
the results obtained on the both procedures, auditors should recalculate the closing
inventory, by computing the unit cost or value of the stock with the in-stock count
report obtained. The results obtained should be traced back to the total of inventory
count on the general ledger for closing inventory, the results obtained should be
tallied with the total in the general ledger. The recalculated report and the closing
inventory count can be used as audit evidence. This would ensure the accuracy of the
closing inventory, and this validates the closing inventory count.

Finally, if the financial statement have been thoroughly verified and no material
misstatement has been detected in the practice of payroll system and inventory count,
then the auditor can perform reliance strategy by accepting the internal control system
practiced by client by implying system based approach due to low audit risk, which
means there would be less need in detailed checking in the payroll system.
Meanwhile, if the wages paid in the accounting records contradict with the bank
statements, there is a possibility of high audit risk which triggers a need of non-
reliance audit strategy or a substantive strategy. Therefore, the auditors should
conduct further checking in the financial statements.
 References

1. ACCA https://www.accaglobal.com “The audit of wages”.

Retrieve from: https://www.accaglobal.com/in/en/student/exam-support-
resources/fundamentals-exams-study-resources/f8/technical-articles/the-audit-of-
wages.html

2. Unknown author. “Types of Analytical Procedure Audits”.

Retrieve from: https://smallbusiness.chron.com/types-analytical-procedure-
audits-18524.html

3. ACCA https://www.accaglobal.com “Analytical procedures”

Retrieve from: https://www.accaglobal.com/pk/en/student/exam-support-
resources/professional-exams-study-resources/p7/technical-articles/analytical-
procedures.html

4. Team ZipRecruiter. “Warehouse Assistant Job Description Sample Template”

Retrieve from: https://www.ziprecruiter.com/blog/warehouse-assistant-job-
description-sample-template/

5. Unknown author. “Audit Procedures”

Retrieve from: https://accountlearning.com/techniques-of-auditing/

6. ACCA https://www.accaglobal.com “Audit evidence and specific considerations

for certain items”
Retrieve from: https://www.accaglobal.com/my/en/member/discover/cpd-
articles/audit-assurance/specific-considerations.html