The key audit objectives for the Dodgers' payroll function are occurrence, completeness, accuracy, posting and summarization, classification, and timing. Internal control weaknesses included the payroll system being designed and controlled solely by one employee, a lack of independent checks, no separation of duties, and collusion between employees. Audit procedures that could have discovered the fraudulent scheme included understanding the payroll process, interviewing employees, testing for nonexistent employees, testing hours paid versus hours worked, comparing pay rates to other teams, and examining large payroll checks.
1. CASE STUDY: THE TROLLEY DODGERS
1. Identify the key audit objectives for a client’s payroll function. Comment on both
objectives related to tests of control and those related to tests of control s and those
related to substantive audit procedure.
The key audit objectives for client’s payroll function in this Trolley Dodgers Case are:
i. Occurrence
ii. Completeness
iii. Accuracy
iv. Posting & Summarization
v. Classification
vi. Timing
i. Key Audit Objective : Occurrence
Dodgers must recorded payroll payments for existing employees only and should have
separation of duties for each task.
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Test of Control: Examine internal control to see if the payroll payments are for exiting
work and existing employees. The test could be examining all the workers time cards,
The Trolley Dodger’s Case
2. personnel files and review organization chart. They also can discuss with employees and
observe duties being performed. The tests would examine printouts of transactions
rejected by the computer as having nonexistent employee numbers.
Substantive Test of Transactions: The test to see if the right dollar amount in the
payrolls were recorded and paid properly. They also test to review large dollar amount in
the journal entries, general ledger and payroll earnings. Examine cancelled checks for
proper endorsement could be compare with a personnel record.
ii. Key Audit Objective : Completeness
Dodgers must record all existent payroll transactions.
Test of Control: The test is to see if the existing payrolls are recorded. If employees do
not get any payment, so they can directly report to the employer. They also test to review
the renumbered payroll check to find the missing one.
Substantive Test of Transaction: They can compare the book and payroll bank
statement. Therefore, they will prove the bank reconciliation and can look for unmatched
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dollars amount.
iii. Key Audit Objective : Accuracy
The Trolley Dodger’s Case
3. Dodgers recorded payroll transactions are for the amount of time actually worked and at
the proper pay rates accuracy.
Test of Control: The test is to see if the right hours and right rate are recorded and tax
withholding is correct. Batch totals are compared with computer summary reports.
Auditors could examine authorization in payroll records and personnel files.
Substantive Tests of Transaction: To test for exact dollar amount, auditors could
recalculate gross and net pay. They also can compare pay rate with the industry, review
cancel check withholdings by referring to tax tables and authorization forms in personnel
file.
iv. Key Audit Objective: Posting and Summarization.
Dodgers recorded payroll transaction properly included in the master file also properly
summarized.
Test of Control: When payroll master file totals are compared with general ledger totals,
auditors should examine initialed summary total reports indicating that comparison has
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been made. They also must examine indication of internal verification.
Substantive Test of Transaction: Test clerical accuracy by footing the payroll journal
and tracing postings to the journal ledger and the payroll master files.
The Trolley Dodger’s Case
4. v. Key Audit Objective : Classification
Dodgers classify all payroll transaction properly and efficiently.
Test of Control: They should review charts of accounts. If the account classifications are
internally verified, then they can examine indication of internal verification.
Substantive Test of Transaction: They can review time cards and job ticket, and trace
through to labor distribution. They should compare classification with chart of accounts or
procedures manual.
vi. Key Audit Objective : Timing
Dodger must record all payroll transaction immediately, on the correct date and right
amount.
Test of Control: Auditors should examine procedures manual and observe when
recording takes place and examine indication of internal verification.
Substantive Test of Transaction: The auditor compare date on checks with date in the
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payroll journal and compare date on check with date the check cleared the bank.
The Trolley Dodger’s Case
5. April 11, 2011
2. What internal control weaknesses were evident in the Dodgers’ payroll system?
The Trolley Dodger’s Case
6. Internal control is a process, affected by an entity’s board of director, management and
other personnel, designed to provide reasonable assurance regarding the achievement of
objectives in reliability of financial reporting, effectiveness and efficiency of operations
and compliance with laws and regulations.
Internal control weakness in the Dodgers’ Payroll System are from the design of internal
control, no independent check and performance, no separation of duties, the weakness of
work environment, and required vacation for senior manager.
i. Design of internal control
Campos, the operations payroll chief have designed the internal control by
himself and implemented a new payroll system that only can be fully understand
by him. As we know, the purpose of design the internal control is to prevent or
detect material misstatement in the financial statement. Due to this case, Campos
can easily commit fraud because there are no other people that can understand the
design of the internal control.
ii. No independent check and performance
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Campos controlled the system so completely that he personally filled out the
weekly payroll card for each of the four hundred employees. He can record any
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7. fraudulent statement because there is no evidence that shows whether the record is
reliable or not.
iii. No separation of duties
Campos took advantage of his authorization because he was the trusted employee
who got trusted too much from Dodges’. When he was on vacation, he came back
and did the payroll. There is no separation of the custody of assets from
accounting. A person who has temporary or permanent custody of an asset should
not account for that asset. This is because by allowing one person to perform both
function increases the risk of that person disposing of the asset for personal gain
and adjusting the records to cover up the theft. As we can see in this case, Campos
was the only one who responsible for every task.
iv. Weakness of the work environment
There is collusion between employees and management. This showed that both
Campos and his cohort have low work ethic. Campos routinely inflated the
number of hours worked by several employees and then split the resulting over
payment fifty-fifty with those individuals. In addition to this, Campos also
embezzle several hundred thousand dollars from his employer.
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The Trolley Dodger’s Case
8. 3. Identify audit procedure that might have led to the discovery of the fraudulent
scheme mastermind by Campos.
Audit procedure is the detailed instruction for the collection of a type of audit evidence
that is to be obtained at some time during the audit.
i. The auditor must understand clearly the flow chart
Auditor should go through the Dodger’s payroll flow chart. The auditor must
understand clearly the flow chart. From that, the auditor can trace how the payroll
system is going on actually. Then, the auditor would see there are no independent
checks that have been done by Campos. The payroll department also does not
have segregation of duties and all that work is done by Campos only.
ii. The auditor can interview employees in payroll department.
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The auditor can interview employees in payroll department. The auditor can ask
whatever question that they think it’s very important and need to know. Like, how
much Campos pay for daily operations works for every level of staff, and how
The Trolley Dodger’s Case
9. Campos manage the time card. The auditor will know more detailed about the
payroll process.
iii. The auditor test for nonexistent employees
For make sure the all transaction that have recorded by Campos and
payroll department is really exist and they make payment to the non fictitious
employees, the auditor compare names on cancelled checks with the time card
have created. The auditor can scan the endorsement on cancelled checks.
Furthermore, auditor also can make comparison on personal files of employees
with time card that created.
Other than that, the auditor can run test of control by selected transaction
in the payroll with Human Resources department. The auditor can select a week
check transaction and examine the first fifty checks, select the fifty checks with
the largest amounts, select the checks randomly or select those checks the auditor
thinks are most likely to be in error or a combination of this method could be
used.
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Besides that, the auditor request surprise payroll payoff from payroll
department. When the auditor requests for payroll payoff suddenly, for sure the
payroll department do not chance and do not have enough time to make correction
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10. on their system. So, Auditor will see the real transaction that have make by that
department. Finally, the auditor can trace the misstatement, fraud and error easily.
iv. The auditor tests for fraudulent hours
Other than that, the auditor also can reconcile the total hours paid in the payroll
records with and independent record of hours worked. Auditor would see, if payroll
record transaction is true based on the time card or not. The auditor can trace if the record
keeping employees have intention to do that fraud.
v. The auditor compare pay rates with the same positions in other baseball team in
the league.
The auditor also should understand business nature and make comparison with
another similar business nature. From that result, the auditor will know how much is
exactly pay rates usually paid to the professional baseball. After done that activity, the
auditor is able to identify the pay rates that put by Campos to the every level worker is it
relevance or not.
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vi. The auditor examines the large payroll checks.
Last steps, that auditor use to discover the fraud is by examine the largest payroll
checks out. The auditor reconciles the checks between the payroll record, time card, and
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11. all relevance data. Auditor would see which one fictitious transaction that has been made
by Campos.
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The Trolley Dodger’s Case