Detailed Substantive Audit Test Program: Employee Entitlement Analysis

This document presents a substantive audit test program designed by a student, focusing on the audit of employee entitlement for The Warehouse Group. The program addresses key audit assertions such as completeness, cutoff, and occurrence, particularly concerning wages, salaries, and other compensation components like annual leave and performance-based payments. The solution emphasizes the importance of verifying payments to valid employees, given the company's auto-deposit system and potential weaknesses in personnel file management. It outlines detailed audit procedures, including examining time sheets, verifying authorization, tracing payments, and comparing overtime costs to prior periods. The student's program also considers the risk of fraud and recommends sampling employees and checking employment contracts. Furthermore, the program highlights the importance of ensuring accurate measurement of all entitlement components, including wages, salaries, and leave, and rechecking calculations. References to relevant auditing literature and annual reports are included to support the analysis and recommendations within the audit program.

Audit

Table of Contents
Substantive Audit Test Program......................................................................................................3
Audit procedure of employee entitlement.......................................................................................6
References........................................................................................................................................8

SUBSTANTIVE AUDIT TEST PROGRAM
The financial information of company is reviewed by auditor. The main objective of auditor is to
ensure that information present in the financial statement is true and fair. For this, auditor
perform substantive test, which includes the examination of financial statement and additional
document to identify that they are correct.
Table 1 Analysis of financial information
Year 2018
($000)
2017($0
00)
% of
chan
ge in
17 to
18
2016($0
00)
% of
chan
ge in
16 to
17
2015($0
00)
% of
chang
e in
15 to
16
2014($0
00)
% of
chan
ge in
14 to
15
Trade
and
other
receiva
ble
79758 75632 5.46
% 77059
-
1.85
%
72133 6.83
% 72217
-
0.12
%
Retail
Sale
29945
71 2980771 0.46
% 2924682 1.92
% 2770421 5.57
% 2648478 4.60
%
Invento
ry
52384
0 487274 7.50
% 501713
-
2.88
%
510461
-
1.71
%
492109 3.73
%
Purchas
es
20033
96 2008859
-
0.27
%
1966510 2.15
% 1854669 6.03
% 1775338 4.47
%
Trade
and
other
payable
27902
8 267304 4.39
% 271308
-
1.48
%
256499 5.77
% 284319
-
9.78
%
Fixed
Asset
23859
2 252175
-
5.39
%
271043
-
6.96
%
355095
-
23.67
%
336805 5.43
%
(Source – Annual report of The Warehouse Group)

Substantive test for Trade and Other receivable and retail sale
On the basis of above information it is observed that, there are discrepancies in trade and other
receivables in the year 2018 as compared with its previous year, as it has been increased by
5.46%. However, there is no significant change in retail sale of company. The assertions related
with trade and other receivables and revenue are presence and occurrence, completeness,
reliability, valuation, and cut off. Out of all these assertion, it has been observed that presence of
receivables, occurrence of revenue, and valuation of receivable are most significant. Therefore, it
is required by auditor of Warehouse Company to identify that all trade and other receivables
reflected in financial information is present, they are properly value, and revenue occurred. With
this aspect, auditor should review the process of account receivable by company (Knechel, &
Salterio, 2016). For this, it is required to select major accounts from the ledger, and observe the
original information that resulted in the present balance. It is very important as company may
add fake debtors to accelerate its financial reports. In addition to this, for verifying retail sale, it
is required to review the accounting policies followed by company for recognition of revenue.
Substantive test for Inventory, purchases and Trade and other payables
On the basis of above information, it has been seen that there is significant differences in the
inventory as compared with its earlier year. The assertions related to inventory, purchases, and
trade payables are whether inventory and trade payable which is recorded in financial statement
is actually present, whether the company has right on those goods, and it is actually valued
according to accounting standard (Appelbaum, Kogan, & Vasarhelyi, 2018). For this, Auditor
should contact with supplier, whether purchase is actually made by company. In addition to this,
they can also ask with supplier, and match it with amount present in financial statement.

Moreover, by visiting inventory on site, auditor can confirm presence of inventory. They should
also reconcile the purchase account with inventory sold and in hand (Appelbaum, Kogan, &
Vasarhelyi, 2018).
Substantive test for payroll
Performing test for payroll includes ensures that employees of company paid correct amount.
Auditor is required to ensure that transaction of payroll is reflected in financial statement in a
proper manner. With the aspect of payroll, the major assertion for auditor is completeness of
transaction, cut off, and occurrence (Quick, & Henrizi, 2018). At the end of period, company
accrue the payroll liability, therefore, it is required that transaction should be complete and
recorded in the actual period. For this, auditor should understand the payroll cycle of company
and observe that payment is made at the end of cycle. In addition to this, auditor should ensure
that no terminated employee is being paid. For this, it is required to take sample of terminated
employee and check them back to register of payroll. Similarly, auditor should also choose
sample of new employee and ensures that documentation is take place according to human
resource policy of company.
Substantive test for fixed asset
There is risk that fixed asset that are recorded in financial statement may not actually exist. For
addressing this, auditor should perform physical observation or join physical observation
conducted by entity. Another assertion is that whether all fixed asset is completely recorded in
financial statement, as if it is not recorded that it assist in understatement of financial accounts.
Valuation of fixed asset is major assertion for auditor, because there may be possibility that

company include ore exclude cost of capitalization by charging it to profit and loss accounts or
vice versa. For this, it is required to properly review or read the financial statement for
verification of disclosures and classification. By this, conformity with accounting standard can
also be determined. For valuation, auditor should check invoice, examine lease agreement, and
determine appropriate treatment of accounting, check repair and maintenance account, and
depreciation account. Further, they should also perform analytical procedure, examine fixed
asset, and observe subsidiary notes, so that completeness can be checked.
AUDIT PROCEDURE OF EMPLOYEE ENTITLEMENT
In the given case, employee entitlement consists of wages, salaries, compensation based on
performance, annual and sick leave, and long service lease entitlement. Wages are directly auto
deposited in the bank account of company. Further, there is no comparison made among the
record of employee and this system of payment. In this system, there is risk that whether the
payment transactions are made to valid employees. Further, auditor should identify whether there
is proper internal control system or authorization procedure when dealing with employee
entitlement transaction. It is required to ensure that updating of file of employees and time sheets
should be conducted by proper authorized authority (Rezaee, Sharbatoghlie, Elam, & McMickle,
2018). For testing of authorization, auditor should choose sample of employees, examine time
sheets, inspecting that appropriate level of authority approves working hours for which employee
is provided salary or performance based entitlement. Further, auditor should check back to
employee file and ensures that payments are made to the person whose name is mentioned in
employee register. Moreover, for checking whether the transactions are accurate and it does not
contain any mistake or error, it is required to trace the amount paid and classification of account.

In addition to this, year-end transaction contain more risk, because for reflecting more positive
position of financial statement, company may move accounting activities from one period to
another. Therefore, auditor should obtain reasonable assurance whether company recorded all its
liability as and when due (Maksymov, Nelson, & Kinney 2018). In addition to the above aspect,
auditor should also consider the risk due to fraud when planning to apply test for audit of
employee entitlement. Since even if company has robust internal control system, then also there
is possibility of fraud. For ensuring that employee should be paid only for actual working hours
done, auditor should select sample of employee from the register and reconcile it with agrees
hours paid to personal clock card. There is also possibility that payment is made to fake
employee, for this auditor should select sample of employees and check it with employment
contract in human resource department. Several times wages are also paid to employee for
overtime work required by company, for examining accurate overtime cost auditor should
compare the overtime cost with prior period year and can identify any major differences. In
addition to this, wages should be paid at correct rate; auditor should check records of HR and
compared it with wages rate of employee. Moreover, it is essential that amount of ages, salary,
leave entitlement, performance based payment should be accurately measures, for this auditor
should select sample of employee and recheck calculations. In the given case, it has been seen
that salary is directly credited to employee’s account and there is no comparison of payment
system and record of employee, therefore auditor is required to perform all above procedures to
ensure that payment is accurately recorded and made to valid employees.

REFERENCES
Books and Journals
Appelbaum, D. A., Kogan, A., & Vasarhelyi, M. A. (2018). Analytical procedures in external
auditing: A comprehensive literature survey and framework for external audit
analytics. Journal of Accounting Literature, 40, 83-101.
Appelbaum, D., Kogan, A., & Vasarhelyi, M. A. (2017). Big Data and analytics in the modern
audit engagement: Research needs. Auditing: A Journal of Practice & Theory, 36(4), 1-27.
Glover, S. M., Taylor, M. H., & Wu, Y. J. (2016). Current practices and challenges in auditing
fair value measurements and complex estimates: Implications for auditing standards and the
academy. Auditing: A Journal of Practice & Theory, 36(1), 63-84.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Maksymov, E., Nelson, M. W., & Kinney Jr, W. R. (2018). Budgeting Audit Time: Effects of
Procedure Frame and Perceived Procedure Verifiability. Behavioral Research in
Accounting, 30(1).
Quick, R., & Henrizi, P. (2018). Experimental evidence on external auditor reliance on the
internal audit. Review of Managerial Science, 1-34.
Rezaee, Z., Sharbatoghlie, A., Elam, R., & McMickle, P. L. (2018). Continuous Auditing:
Building Automated Auditing Capability. In Continuous Auditing: Theory and
Application (pp. 169-190). Emerald Publishing Limited.

Online
The Warehouse Group, 2015. Retrieved from < 2015-Annual-Report.pdf >
The Warehouse Group, 2016. Retrieved from <_TheWarehouseGroupAnnualReport2.pdf >
The Warehouse Group, 2017. Retrieved from <TheWarehousegroupAnnualReport2.pdf>
The Warehouse Group, 2018. Retrieved from <TheWarehouseGroupAnnualReport2.pdf >