Weakness:

Question

Human error is a possibility because the system depends on the wage clerk verbally communicating wage amounts to the accountant.

Recommendation:

It is recommended that the wage computation and reporting be formalised by creating a report that needs to be acknowledged by the accountant and wage clerk before payment processing can begin. Integrate the payroll software with an electronic approval workflow.
Please include the auditing jargons and IAS's on the above statement

Answer 1

Weakness:

The internal control system currently relies on verbal communication between the wage clerk and the accountant for the reporting of wage amounts, which introduces a significant risk of human error. This poses a material misstatement risk in accordance with International Auditing Standards (IAS), particularly IAS 240—The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, that highlights the importance of identifying and mitigating risks associated with human factors in financial reporting. Additionally, the lack of formal documentation and procedures may lead to non-compliance with IAS 1—Presentation of Financial Statements, emphasizing the need for clear and reliable financial reporting.

Recommendation:

To enhance the integrity of the wage computation and reporting process and mitigate the risk of human error, it is recommended that a formalized reporting system be established. This process should involve the creation of a comprehensive wage report that requires acknowledgment from both the accountant and the wage clerk prior to initiating the payment processing. Implementing this reported approval mechanism will facilitate adherence to IAS 330—The Auditor's Responses to Assessed Risks, by ensuring that management has designed adequate controls to prevent and detect errors.

Furthermore, integrating the payroll software with an electronic approval workflow would streamline the authorization process, enhancing traceability and accountability, which aligns with IAS 10—Events After the Reporting Period, ensuring that all relevant information is considered for accurate financial reporting. This electronic system should also include features for logging changes and approvals, facilitating compliance with IAS 12—Income Taxes, by ensuring that all payroll-related data is accurately accounted for during the reporting period.

In summary, formalizing these processes will not only reduce the risk of material misstatement due to human error but also bolster the overall internal control framework as mandated by International Standards on Auditing (ISA) 315—Identifying and Assessing the Risks of Material Misstatement, thereby fostering a robust and reliable payroll management system.