Introduction
California Crunch Company has requested an audit focusing on issues related to its payroll. Therefore, performing an audit to address this request, the research article provides a detailed analysis of how to adhere to the AICPA Code of Professional Conduct (AICPA, 2019). This write-up is based on the review of the income statement provided for the financial year 2017 and 2018. From this, we can present possible risk areas, give a proposal for risk areas, and come up with data analysis and communication strategy for the firm.
Income statement analysis
The income statement shows that the net sales experienced a growth of 4%. This suggests that the company needs to gain more regarding net sales. This indicates the possibility of inflated costs and inefficiencies in managing expenses. Further, the cost of goods sold and the operating expenses have both increased, suggesting that there is a need for investigation and analysis. These trends and the client’s specific concerns demand that we prepare a tailored audit program to determine payroll accuracy and assess the internal control associated with employee compensation.
Risk evaluation
The income statement provides a general perspective about the firms; compared to similar firms in the industry, potential risks are likely to inhibit the company’s viability. This arises from possible miscomputation of overtime, inaccurate pay rates, incorrect withholding tax computation, and potentially fraudulent activities (Ezejiofor & Okolocha, 2015).
The inaccuracies resulting from overtime computation can result from the increased demand for production. Therefore, this increases the cost of goods sold and, eventually, the employee wages. On the other hand, inaccurate pay rates due to inconsistent employee classification and incorrect application of the pay scales are also a source of inflated pay rates and general expenses related to the payroll. Also, the inaccurate computation of withholding taxes or deductions will likely create compliance issues and expose the firm to further risks. Lastly, there is a possibility of fraud if the payroll systems are compromised, allowing manipulation and unauthorized access, resulting in misappropriation and embezzlement or, rather, unauthorized payments.
Audit Process
In order to address the risks identified, various audit risk processes will be used. The audit process includes planning, fieldwork, and a final follow-up. The audit planning will include defining the audit objectives and methodology, which involves sending audit notification letters, gathering background information, identifying risks, and creating audit programs (Kend & Nguyen, 2022). The next step involves creating time for an entrance meeting, which includes discussing the planned audit, soliciting inputs, and explaining the timing and resources. After that, I will use the information provided, conduct interviews with the human resource managers, and test the transactions and documents provided.
Testing controls
The reviewing of internal controls over the processing of payrolls is very important in this exercise (Kend & Nguyen, 2022). This includes the evaluations of the effectiveness of controls such as timesheets, approvals, pay rate changes, and the computation of taxes. Further, there is a need to test the payroll security. This will assist in assessing the controls associated with accessing the payroll system, system logs, and organizational backup procedures to prevent the possibility of unauthorized data access and eventual manipulation.
Communication
Communication is one of the primary aspects of any audit procedure. As such, we shall ensure constant communication with California Crunch company. Intermittent communication will keep the owners informed about the potential findings and progress. This will ensure that the client firm’s management always has briefs about the progress and possible findings. After the audit’s completion, a detailed audit report will be prepared and given with a summary of the findings, conclusions, and possible recommendations for possible improvements. This report will be focused on ensuring that there is accessibility and clarity through making sure that both partners are informed about the progress of the audit.
Conclusion
This article provides a detailed audit strategy for investigating the California Crunch Company. The report has been written strictly following the AICPA code of professional Conduct. The audit aims to give detailed and data-backed information about the company’s current payroll situation, improving the owner’s confidence in the available payroll system and internal control systems.
References
AICPA. (2019). Aicpa professional standards volumes 1 and 2. https://doi.org/10.1002/9781119669456
Ezejiofor, R., & Okolocha, C. (2015). Effect of internal audit function on financial performance of commercial banks in Nigeria. International Journal of Advanced Academic Research, 44-56. https://doi.org/10.46654/ij.24889849.s6723
Kend, M., & Nguyen, L. A. (2022). Key audit risks and audit procedures during the initial year of the COVID-19 pandemic: An analysis of audit reports 2019-2020. Managerial Auditing Journal, 37(7), 798-818. https://doi.org/10.1108/maj-07-2021-3225
WEYGANDT, J. J., KIMMEL, P. D., KIESO, D., & Elias, R. Z. (2010). Accounting Principles. Issues in Accounting Education, 25(1), 179-180. https://doi.org/10.2308/iace.2010.25.1.179
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