Owner Of A Small Snack Food And Potato Chip Manufacturer

The owner of a small snack food and potato chip manufacturer, California Crunch

The owner of a small snack food and potato chip manufacturer, California Crunch Company, has asked you to investigate a possible issue with the company's payroll. They have provided you with this year's and last year's income statements and two payroll files. The “HR Master” file gives you important information about each employee, and the “Payroll” file details the company's payroll for the last five pay periods of the year. You will be conducting audit procedures for California Crunch and analyzing the results.

Review the income statements given to you by the owner of California Crunch Company. Based on the AICPA Code of Professional Conduct, prepare a 2-3 page summary of how you plan to proceed to address the owner's concerns and what specific steps you would take to audit this company.

Paper For Above instruction

In addressing the concerns raised by the owner of California Crunch Company regarding potential issues with payroll, it is essential to take a systematic and professional approach grounded in the principles outlined by the AICPA Code of Professional Conduct. The primary objectives are to verify the accuracy and completeness of payroll records, ensure compliance with applicable laws and regulations, and detect any fraudulent or erroneous activities. This process begins with planning and understanding the company's operations, followed by detailed fieldwork, and concludes with reporting findings transparently and ethically.

The first step involves understanding the company's internal controls related to payroll processing. This includes reviewing policies on employee classification, payroll authorization, record keeping, and segregation of duties. Based on the information provided, I would conduct preliminary risk assessments to identify areas susceptible to errors or fraud, such as wage calculations, overtime payments, or unauthorized modifications. A thorough review of the HR Master file is necessary to match employment status, compensation rates, and department allocations with payroll data to identify inconsistencies or anomalies.

Next, I would verify the completeness and accuracy of the payroll data. This involves reconciling the payroll files for the last five pay periods with the company's general ledger and income statements, ensuring that payroll expenses are properly recorded and classified. Sampling methods may be employed to audit a subset of paychecks, cross-checking employee hours, pay rates, and deductions against the HR Master file. Any discrepancies should be investigated further to determine their validity or possible irregularities.

Further, I will perform substantive tests, including recalculations of payroll amounts, validation of pay rates, and verification of deductions such as taxes and benefits. This helps ensure that the payroll calculations align with contractual or statutory requirements. Variances or unusual entries should be flagged for additional review. It is also critical to assess whether all employees included in the payroll are authorized personnel, which I will verify against the HR Master file and potentially conduct interviews with HR personnel.

In line with the AICPA ethical standards, maintaining independence, objectivity, and due professional care throughout the audit is vital. If any irregularities are discovered, I would document them meticulously and evaluate their implications for the financial statements' fairness. Should there be signs of payroll fraud, such as ghost employees or inflated hours, further detailed analysis and possibly forensic procedures are necessary, potentially involving collaboration with legal and internal audit teams.

Finally, I would prepare a comprehensive report summarizing the audit findings, conclusions, and recommendations for internal control improvements. This report would be communicated to the owner with appropriate professional skepticism and transparency, emphasizing compliance with relevant laws and applicable auditing standards. Based on the findings, suggested corrective actions might include enhanced segregation of duties, implementation of automated payroll systems, or regular audits to prevent future issues.

References

• American Institute of CPAs. (2023). Code of Professional Conduct.
• Arens, A. A., Elder, R. J., & Beasley, M. S. (2020). Auditing and Assurance Services. Pearson.
• Brief, R., & Monczka, D. (2019). Internal Controls and Fraud Prevention in Payroll. Journal of Accounting & Finance, 34(2), 45-59.
• Harvey, J., & Knechel, W. R. (2018). Ethical and Professional Standards in Auditing. Journal of Accounting Literature, 41, 27-55.
• Kranacher, M. J., Riley, R. A., & Wells, J. T. (2011). Forensic Accounting and Fraud Examination. Wiley.
• American Institute of CPAs. (2020). Audit and Assurance Standards, AU-C Sections 500–720.
• Public Company Accounting Oversight Board (PCAOB). (2019). Auditing Standard No. 5.
• Moeller, R. (2019). Brink's Modern Internal Auditing. Wiley.
• U.S. Department of Labor. (2022). Wage and Hour Division Compliance Assistance.
• Internal Revenue Service. (2023). Employment Tax Regulations and Guidelines.