Professional Payroll Plus: On a single day in May 2007 six businesses filed complaints against Professional Payroll Plus (PPP). The Florida-based payroll provider
filed for bankruptcy. The IRS and the FBI initiated investigations. When PPP processed payroll for its clients it withheld money for federal taxes. But at some point PPP stopped sending the withheld funds to the IRS and instead kept the money for itself. Clients of PPP discovered the problem when they received notices from the IRS regarding unpaid taxes. Many of PPP's clients had to lay off employees or make other cuts to keep their businesses afloat while paying the IRS.
Using an outside payroll service exposes a company to risk that must be considered
by the auditor.
Required:
(a) List specific topics the auditor must address during the financial statement and
ICFR audits when the audit client uses an outside service provider.
(b) List characteristics used to define the role a service organization plays in the user company's
information system? For each characteristic, identify how it impacts whether
the service provider is part of the company's information processing system.
(c) What factors influence an auditor's decision on whether a Type II audit report provides
sufficient evidence about the effectiveness of controls at service organizations?

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The Answer of Professional Payroll Plus: On a single day in May 2007 six businesses filed complaints against Professional Payroll Plus (PPP). The Florida-based payroll provider
filed for bankruptcy. The IRS and the FBI initiated investigations. When PPP processed payroll for its clients it withheld money for federal taxes. But at some point PPP stopped sending the withheld funds to the IRS and instead kept the money for itself. Clients of PPP discovered the problem when they received notices from the IRS regarding unpaid taxes. Many of PPP's clients had to lay off employees or make other cuts to keep their businesses afloat while paying the IRS.
Using an outside payroll service exposes a company to risk that must be considered
by the auditor.
Required:
(a) List specific topics the auditor must address during the financial statement and
ICFR audits when the audit client uses an outside service provider.
(b) List characteristics used to define the role a service organization plays in the user company's
information system? For each characteristic, identify how it impacts whether
the service provider is part of the company's information processing system.
(c) What factors influence an auditor's decision on whether a Type II audit report provides
sufficient evidence about the effectiveness of controls at service organizations?

Professional Payroll Plus: on a Single Day in May 2007