Question

In the Time Card Forgeries case, name 2 significant weaknesses in the Hospital's Internal Control: Are errors in Standing Payroll Data more or less serious than errors in Transaction Payroll Data? Explain your answer. Define Professional Skepticism. Auditing standards require that analytical procedures be used during which phases of an audit?

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Answer 1

• Two Significant weaknesses in the internal control that can lead to Time Card Forgeries are :-
  Data Security - The data should be properly secured and supervised as there is a high probability that workers charge more hours than actually worked for. The traditional methods if used can also lead to more mistakes and errors. Data should be protected with passwords and high supervision should be put in place.
  Segregation of Duties - Only one person should not be allowed to perform all the functions as that makes way for more mistakes and errors and the chances of fraud are also high. Segregating duties among individuals keeps a check on the work of others and less chances of fraud or mistakes.
  
• Impact of the error in a situation is the deciding factor for the error to be serious or not. Standing Payroll data can be referred to as the data which does not change frequently and can be used as reference data which might include among other things the name and address of the employee, the rate to be paid , the bank account details , etc. On the other hand, Transaction payroll data can be referred to as the monthly or weekly payroll transactions that take place and includes a high degree of processing work. Transaction data can be said to include the record of hours worked, leaves taken, overtime if any , calculation of amount paid, bonus etc. High processing work requires high supervision.
  For Example - If the standing information of the employee like the rate of pay or name or the bank account details are by mistake wrongly updated in the software it will have a serious and long term impact as such information need not be reviewed regularly as compared to the regular transactions like amount to be paid , leaves taken which are supervised on a regular basis. Therefore , the impact of error in standing payroll data will be more as compared to transaction payroll data.
  
• Professional Skepticism - is a quality / an attitude / a state of mind where the auditor is being alert to situations , asking questions with respect to a situation which he thinks might involve misstatements due to fraud or error while performing his work. It is basically a detailed analysis of audit evidence in order to eliminate or reduce the possibility of errors and fraud. It involves the thinking that 'the things might not be the way they seem to be'. This is a crucial element for conducting quality audit.
  
• Auditing standards require analytical procedures to be used during the Planning Phase, testing phase and the completion phase. Analytical Procedures are used in the planning phase to identify the risks of the client's business and also to get a clarity and understanding of the business in order to determine the nature, timing and extent of the business for the purpose of audit. Analytical Procedures are used during the testing phase in order to collect the required audit evidence to support the misstatements if any. Analytical Procedures are used during the completion phase to help auditor reach the overall conclusion about the financial statements whether they give a true and fair view or not and are in tune with auditor's understanding of the business.