Key controls may be performed at both the entity level and the activity level. Entity level controls are the most effective in preventing errors or fraud from occurring and going undetected. For smaller entities, key controls are normally performed by owners, managers or other persons charged with governance at the entity level. Here are some illustrative key and activity-level controls for smaller entities.
1. Owner or manager approves all hires and fires.
2. Owner or manager authorizes wage rates.
3. Payroll checks are distributed by the owner or manager.
4. Owner or manager reviews and signs all payroll tax returns and other related documents.
5. Owner or manager responds to all inquiries by state and federal regulatory bodies.
1. Payroll checks are pre-numbered and prepared and recorded with accounting software or by a service bureau.
2. W-4s. I-9s and other required payroll documents are maintained.
3. Employees time records are maintained and used to calculate paychecks.
4. Payroll checks are distributed by department heads or other supervisors.
5. Hires, fires, wage rates, time off are approved by department heads or supervisors.
1. Owner or manager reviews and approves all disbursements’ supporting documents.
2. When signing checks, owner or manager determines account classifications are proper.
3. Owner or manager investigates any unapproved or unusual disbursements.
4. Owner or manager investigates duplicate payments and inadequate documentation.
1. A detailed chart of accounts is used.
2. Checks are prepared only when appropriate supporting documents have been received.
3. The person recording and summarizing transactions cannot sign checks.
4. The person preparing purchase documents and posting vendor payments cannot sign checks.
5. Vendor invoices are cancelled by the check signer.
Key controls may be tested by auditor inquiries, observations of procedures and inspections of documents. Such tests may be performed to varying degrees while performing system’s walk-through procedures. More extensive and detailed walk-through procedures result in more substantive evidence and greater reductions in tests of balances.
Effective formal or informal tests of controls will reduce the amount of substantive evidence that is required from detailed tests of balances. The effects of substantive evidence from risk assessment and analytical procedures on payroll and expense accounts auditing procedures will be discussed in a future blog.
More information on auditing payroll and operating expenses can be obtained form my Basic Staff Training Series of webcasts. The series can be accessed by clicking the appropriate box on the left side of my home page, www.cpafirmsupport.com.