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CMA Intermediate · Corporate Accounting and Auditing · Audit Risk, Internal Control, Internal Check and Internal Audit

Anand Ltd. has a wages system. The timekeeper records attendance, the wage clerk computes wages from the attendance records, the cashier pays employees, and a separate official reviews the wage sheet before payment. The auditor finds that the wage clerk also keeps the muster roll and can add names to it. What is the most appropriate audit conclusion?

Internal check is weakened because the wage clerk both maintains the muster roll and computes wages, so a ghost employee could be added without independent detection. Having several people involved does not help when one controls the record on which others depend; the auditor should extend wage testing.

  1. AInternal check over wages is fully effective because four persons are involved
  2. BInternal check is weakened because the wage clerk can alter the record that the computation relies on, making a fictitious employee entry possible without independent detectionCorrect
  3. CThe weakness is irrelevant because the cashier pays in cash only
  4. DThe review by the separate official removes the need for any further auditor testing of wages

Explanation

Although duties are split among several people, the wage clerk controls both the input record (muster roll) and the computation, so one person can add a fictitious name. The review may not detect it if it relies on the same muster roll. The auditor should therefore extend substantive tests on wages, not treat the system as fully effective.

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