Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 409

Auditing Automated Controls. You are auditing payroll for Alexander Inc., which uses computerized processing for its payroll transactions; the various steps in Alexander's system follow:
• As employees provide services, they enter the number of hours worked on time sheets that their supervisor approves at the conclusion of the pay period. Time sheets have an identifying field that indicates whether the employee is an hourly (H) or a salaried (S) employee.
• The following data are entered into the input file: (1) employee number, (2) number of hours worked, and (3) employee status (hourly versus salaried).
• For hourly employees, the number of hours worked is multiplied by the wage rate (obtained from the employee master file) to calculate gross pay. For salaried employees, the employee's salary rate is obtained from the employee master file.
• When gross pay has been determined, deductions are automatically calculated using information from the employee master file and standard deduction tables (for federal tax withholdings, FICA withholdings, and Medicare withholdings).
• Net pay is calculated by subtracting deductions from gross pay.
Required:
a. What are the primary sources of error that can occur in the accounting information system just described?
b. How would you examine Alexander's payroll? What key controls would you evaluate?