Audit of Payroll Function and System in Hangout Restaurant Company

This memorandum discusses the findings from the audit of payroll function in the Hangout Restaurant Company. The focus is to find the area of weaknesses in the payroll system maintained in the restaurant chain to improve the system as well as to unearth any error or fraud that have taken place in the payroll function within the company in the period of audit.

Running head: AUDITING PRACTICE
Auditing Practice
Name of the Student:
Name of the University:
Authors Note:

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AUDITING PRACTICE
Memorandum
: 30th May, 2019
To: Audit partner, Maxwell Smart
From: (Name of the student)
Ref.: Audit of payroll function and system in Hangout Restaurant Company.
This memorandum shall discuss the findings from the audit of payroll function in the Hangout
Restaurant Company. The focus is to find the area of weaknesses in the payroll system
maintained in the restaurant chain to improve the system as well as to unearth any error or fraud
that have taken place in the payroll function within the company in the period of audit.
In Australia, the professional responsibilities and competencies of an Auditor is governed by the
professional code of conduct applicable in the country. As per the professional code of conduct
an Auditor is required to carry necessary analytical and substantive procedures to corroborate
substantial audit evidence to express an appropriate opinion on the financial statements or a
particular function which is being audited. Auditing in the country is subjected to the auditing
and assurance standards formulated and issued by the Australian Auditing and Assurance
Standards Board (Armitage, 2008).
Auditing of payroll function and system within an organization is quite different compared to the
audit of financial statements of an organization. Thus, the process and procedures to be used by
an auditor to conduct an effective payroll audit are also different from the processes and
procedures required for audit of financial statements. In case of payroll auditing of the Hangout

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Restaurant Company the audit procedures shall be carried out by keeping in mind the following
audit objectives:
Accuracy and occurrence:
Ensuring that the payroll system shows all the relevant information related to the payroll
department. Accuracy of these information and actual occurrence of the transactions as shown in
the payroll system are to be tested and verified in the audit (Carcello, 2008).
Completeness, posting and summarization:
A report shall be prepared to verify the completeness of records in the payroll system. The
correctness of positing the records and summarization shall also be verified by the auditor.
Occurrence of payment:
A report shall be made on the employees’ payments in excess of $3000 per fortnight in respect of
any employee. Thus, in case any employee / employees have been paid in excess of $3000 in a
fortnight then the report shall contain necessary details of such employees including payment
details (Carcello, 2008).
Assurance of accuracy and completeness:
Incomplete and inaccurate information will increase the chances of fraud in a payroll system of
an organization. Thus, obtaining audit assurance as to the completeness and accuracy of
information is essential to determine whether payroll system is prone to fraud or not.
Finding inaccurate and fraud entries in the payroll system:
Any inaccurate or fraud records of employees shall be identified by conducting necessary
substantive procedures is essential to the successful completion of the audit.

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Specific circumstances in respect of payroll audit of the restaurant:
ASA 315 has mentioned the importance to understand an entity and its operations properly to
plan an audit effectively. The guidelines to be followed by an auditor to understand and entity
properly are given in the standard.
In this case the restaurant has 30 employees across five different restaurants. The managers of
each restaurant keep record of the respective employees and send these records to Susan
Kweskia who is responsible to maintain the payroll and employee records of the company. The
managers of five restaurants have their respective secure passwords to send the respective data of
employees to Susan (Dobija, 2018).
Apparent weaknesses in the system identified from the payroll system and function in the
restaurants:
The employee and payroll records are maintained and calculated by Susan Kweskia. No
professional qualifications of Susan has been mentioned except the fact that she is married
Aaron. Thus, it is clear that Susan does not hold any professional qualification to warrant the
responsibility of maintaining and calculating payroll function of Hangout Restaurant Company.
Thus, an expert or professional in the field of payroll management should have been given this
crucial responsibility of maintenance and calculation of payroll and employee records of the
company (Dempsey, 2018).
The threat and risk of manipulation of employee records by the managers:
The managers at each restaurant are responsible to record the number of hours employees are
working with maximum of 80 hours per fortnight and send the details to Susan. The opportunity
of manipulation of records by the manager before sending the details to Susan is significant as

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there is no standard system in place to verify the information shared by the managers with Susan
in respect of employee hours.
Taking into consideration these blatant weaknesses in the system of recording and maintaining
payroll function of the company lets, get into specific analysis with respect to the payroll system
of the company to assess the possibility of errors and fraud in the payroll records.
Firstly, let’s have the payroll master file on which the audit is to be conducted. An in-depth
verification of the payroll master file along with information about the number of employees and
other records shall provide a primary assessment about the genuineness of employee and payroll
records (Govindaraj, 2011).
Payroll master file of Hangout Restaurant Company is provided below in the table.
EMP
NO
NAME DEPT JOB HRLY_
RATE
HRS_PE
R_FNT
PAY_PER_
PERIOD
10 Aaron
KWESKIA
A00 CEO 54.95 80.00 4395.83
11 Susan KWESKIA A00 MANAGER 50.00 80.00 4000.00
110 Marie MULLEN A00 Area Manager,
West Coast
43.10 80.00 3447.92
120 Susan
KENWARD
A00 Clerk 25.71 80.00 2056.67
130 Michelle A00 Clerk 25.71 80.00 2056.67

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GARCIA
140 Roman BHATTI A00 IT ANALYST 29.60 80.00 2368.33
150 Philip
BERNAND
A00 IT ANALYST 29.60 80.00 2368.33
200 Jonathon
HARMAN
B01 KITCHEN
ASSISTANT
16.56 80.00 1325.00
201 John
BREATNACH
B01 MANAGER 39.84 80.00 3187.50
210 Mary Maquire B01 KITCHEN
ASSISTANT
16.56 80.00 1325.00
220 Pter SMYTHE B01 SERVER 19.73 80.00 1578.33
270 Nancy DIXON B01 CHEF 37.97 80.00 3037.50
280 Janelle ADAMS B01 SERVER 19.73 80.00 1578.33
290 Angela EXELBY B01 HEAD
WAITER
29.96 80.00 2396.67
310 Gerard
QUINLAN
C01 MANAGER 39.84 80.00 3187.50
320 Mario MATOGA C01 CHEF 37.97 80.00 3037.50
330 Simone BARTER C01 HEAD 29.96 80.00 2396.67

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WAITER
340 Kevin CORAM C01 KITCHEN
ASSISTANT
16.56 80.00 1325.00
350 Mitchell
COOPER
C01 KITCHEN
ASSISTANT
16.56 80.00 1325.00
360 Martha BRIGHT C01 SERVER 19.73 80.00 1578.33
370 Narelle PATEL C01 SERVER 19.73 80.00 1578.33
410 Patricia Elder D01 CHEF 37.97 80.00 3037.50
420 Alison BILLING D01 HEAD
WAITER
29.96 80.00 2396.67
430 Norma
DOWNING
D01 KITCHEN
ASSISTANT
16.56 80.00 1325.00
440 Jacob SHAILER D01 KITCHEN
ASSISTANT
16.56 80.00 1325.00
450 Jason MURPHY D01 MANAGER 39.84 80.00 3187.50
460 Alley BEASLEY D01 SERVER 19.73 80.00 1578.33
470 Nicole
CANNING
D01 SERVER 19.73 80.00 1578.33
480 Shelby Smith D01 TRAINEE 6.25 80.00 500.00

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SERVER
510 Martin MADAN E01 MANAGER 39.84 80.00 3187.50
520 James
MEDNIKOW
E01 SERVER 19.73 80.00 1578.33
530 Pierre MELONI E01 KITCHEN
ASSISTANT
16.56 80.00 1325.00
540 Lynda ROSALES E01 SERVER 19.73 80.00 1578.33
550 Peter
JACOBSON
E01 CHEF 37.97 80.00 3037.50
560 Maureen LAUER E01 HEAD
WAITER
29.96 80.00 2396.67
570 Otto
WOLFSOHN
E01 KITCHEN
ASSISTANT
16.56 80.00 1325.00
2030 Simon BOWEN A00 Area Manager,
East Coast
43.10 80.00 3447.92
Total payment as per employee payroll master file 82354.99
The payroll master file contains seven columns with first column denoting employee number
followed by employee name in the second column. In third and fourth columns name of
department and positions of the employees are given respectively. Hourly rate and number of

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hours worked in the fortnight are provided in fifth and sixth columns respectively with seventh
column containing the total pay in the fortnight in respect of each employees of the company. As
per the master payroll file the total amount of salaries due to the employees for the fortnight
ending on 15th September is $82,354.99 as can be seen from the above master file (Liu, Luo and
Yue, 2016).
The second file in the payroll system contains the information about the payment made to the
employees in the fortnight. As can be seen in the payroll file below that the cheque no. issued
along with cheque amount in respective of different employees have been mentioned in the file
along with employee no. name, department and pay date.
EMPNO NAME DEPT PAY_DATE PAY_AM
T
CHQ_NO
10 Aaron KWESKIA A00 09/15/2017 4395.83 12348
11 Susan KWESKIA A00 09/15/2017 4000.00 12349
108 Gordon Billing D01 09/15/2017 2179.17 12353
109 Catherine Billing D01 09/15/2017 2179.17 12354
110 Marie MULLEN A00 09/15/2017 3447.92 12347
120 Susan KENWARD A00 09/15/2017 2056.67 12355
130 Michelle GARCIA A00 09/15/2017 2056.67 12356
140 Roman BHATTI A00 09/15/2017 2368.33 12361
150 Philip BERNAND A00 09/15/2017 2368.33 12362

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200 Jonathon
HARMAN
B01 09/15/2017 1325.00 12363
201 John
BREATNACH
B01 09/15/2017 3187.50 12364
220 Pter SMYTHE B01 09/15/2017 1578.33 12365
270 Nancy DIXON B01 09/15/2017 3037.50 12349
280 Janelle ADAMS B01 09/15/2017 1578.33 12350
290 Angela EXELBY B01 09/15/2017 2396.67 12357
310 Gerard QUINLAN C01 09/15/2017 3187.50 12358
320 Mario MATOGA C01 09/15/2017 3037.50 12350
330 Simone BARTER C01 09/15/2017 2396.67 12358
340 Kevin CORAM C01 09/15/2017 1325.00 12359
350 Mitchell COOPER C01 09/15/2017 1325.00 12360
360 Martha BRIGHT C01 09/15/2017 1578.33 12361
370 Narelle PATEL C01 09/15/2017 1578.33 12362
410 Patricia Elder D01 09/15/2017 3037.50 12351
420 Alison BILLING D01 09/15/2017 2396.67 12359

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430 Norma DOWNING D01 09/15/2017 1325.00 12360
440 Jacob SHAILER D01 09/15/2017 1325.00 12361
450 Jason MURPHY D01 09/15/2017 3187.50 12362
460 Alley BEASLEY D01 09/15/2017 1578.33 12363
470 Nicole CANNING D01 09/15/2017 1578.33 12364
510 Martin MADAN E01 09/15/2017 3187.50 12365
520 James
MEDNIKOW
E01 09/15/2017 1578.33 12366
530 Pierre MELONI E01 09/15/2017 1325.00 12367
540 Lynda ROSALES E01 09/15/2017 1578.33 12368
550 Peter JACOBSON E01 09/15/2017 3037.50 12352
560 Maureen LAUER E01 09/15/2017 2396.67 12360
570 Otto WOLFSOHN E01 09/15/2017 1325.00 12361
2030 Simon BOWEN A00 09/15/2017 3447.92 12346
Total Payment made to the employees 84888.33
As per the payroll details the total amount of salaries paid to the employees of the company for
the fortnight ending on 15th September is $84,888.33. This shows there is certainly an error if not
fraud in the payroll system of the company. Thus, after identification of the blatant error in the

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payroll records of the company it is essential to conduct necessary audit procedures such as
substantive and analytic procedures to identify the reason for such mismatch between amounts
due to the employees in the fortnight as per master payroll record and the actual amount paid to
the employees as per payroll (Marsh, 2011).
In order to find out the reason for the difference between the amount of due and the amount paid
to the employees for the fortnight ending on September 15 each and every employee number,
name, hours worked, hourly rate, amount due for the fortnight as per employee master file and
the actual payment made to them in cheque as per the payroll file is thoroughly verified and
checked. After through checking a huge discrepancy in the payroll master file and payment made
to the employee as per the payroll file has been identified. The following discrepancies in
employee and payroll records as per payroll master file and payment details have been identified
from the substantive procedures (Naser, Karbhari and Zulkifli Mokhtar, 2004).
EMPNO NAME Pay due as
per
master file
Payment
made as
per
payroll
Difference
(Excess
payment)
108 Gordon Billing NA 2179.17
109 Catherine
Billing
NA 2179.17
210 Mary Maquire 1325.00 NA
480 Shelby Smith 500.00 NA

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Difference 1825.00 4358.34 (2533.34)
Using the substantive procedure to test the employee and payroll records of the company, it can
be seen that there is huge discrepancy between the employee records of payments due for the
fortnight ending on 15th September as per the EMPMAST and the actual payment made to the
employees for the fortnight as per the payroll file (Pankova, 2016).
Discrepancies:
As per the EMPMAST employee number 210, Mary Maquire and employee number 480,
Shellby Smith who have worked as following have not been paid their dues as per the payroll
file.
210 Mary Maquire B01 KITCHEN
ASSISTANT
16.56 80.00 1325.00 1325
480 Shelby Smith D01 TRAINEE
SERVER
6.25 80.00 500.00 500
On the other hand as pert the payroll file there were two payments against certain employees
who were not in the EMPMAST file. This is a huge cause of concern for the company as this
cannot be a mere error rather a fraud that has been perpetrated by someone within the company

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involved in maintenance of employee payroll function or payment to the employees. As per the
payroll file Gordon Billing with employee number 108 and Catherine Billing with employee
number 109 have been issued with cheque number 12353 and 12354 respectively of $2,179.17
each. Both of these name and employee numbers were not part of EMPMAST file. This raises a
serious question about the payroll records and payments within the company.
As a result the company has as per the EMPMAST have not paid to two of its employees due for
the services rendered by them whereas it has paid two fictitious employees payment of $2,179.17
each. The seriousness of the fraud can be assessed from the fact that the employees are issued
cheque signed by the highest authority within the company thus, the employee payroll system
within the company is not effective and strong. In total the company has paid $84,888.33 as
salaries and wages of the employees for the fortnight under audit against the due of $82,354.99
as per the EMPMAST file. Thus, in total the company has paid $2,533.34 in excess of the actual
dues despite not paying two employees their dues of $1,325 and $500 respectively (Turner and
Weickgenannt, 2013).
Recommendations:
It is clear from the above that the employee payroll system within the company is not effective
and strong. The weaknesses in the system has resulted in the company making payment of
$4,358.34 to two fictitious employees who are not the employee payroll master file of the
company. The following weaknesses in the system shall be dealt with by taking recommended
steps to improve the employee payroll system within the company.
Appointing a professional to maintain and calculate payroll records and functions:

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Instead of Susan, a professional within the company shall be given the responsibility of
maintaining and managing the employee payroll records. Calculation of employee benefits is a
very complex job should be done by an expert only.
A register shall be maintained in each of the restaurant:
The restaurants of the company do not maintain proper registers to record the time of arrival and
departure of different employees along with their signatures. Each restaurant shall maintain a
proper registry to record the date, time and name of the employees along with their other details.
The payroll manager shall collect information from managers as well as verify the records
himself from the registers before entering these in the EMPMAST:
The payroll manager shall verify the information provided by the managers about the employees
and their duties with the employee registers maintained at each of the restaurant. This will reduce
the opportunity to the manager to manipulate employee records.
Cross verification before issue of cheque:
Before issuing cheque cross verification of employee records in EMPMAST shall be carried out
to ensure correct amount is paid to the employees’ after all necessary deductions.
All amount paid to the employees shall be verified properly:
The decision of maintaining separate records for employees with fortnightly payment in excess
of $3,000 is not correct as the manager should cross verify all the employee records since the
total number of employees are quite less.
The EMPMAST file contains 37 employees:

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Initially it has been mentioned that the company has 30 employees in total in 5 restaurants
however, the EMPMAST file shows there are 37 employees in the company. Thus, it is
important to check whether the 7 additional employees are from the company head office or not.
Accordingly, it is important to verify the records properly and communicate the matters to those
charge with governance of the company (Govindaraj, 2011).
Date: 30th May, 2019.
Place: Australia.

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