Audit project by Auditing Solutions. The purpose of the audit is to provide assurance of payroll financials.

Company Overview

Company: Products: Employees: Gross Sales: Clients:

Nuevo Engineering Reverse Osmosis Filtering Media, Charged Particle Membranes. 75 15 Million United States, South America and Australia.

Nuevo Engineering is a manufacturing company headquartered in USA. Operating in a niche market; providing specialized water filtration and micro nutrient delivery for drip irrigation systems used in tree fruit orchards and vineyards. Products offered are superior technology replacements and supplements to existing filtering media membranes using a proprietary patented CPM (charged particle matrix) technology in reverse osmosis filtering systems. Clients include farming operatives in United States, Australia and Chile. All products are manufactured on premises of their own factory. Company is headed by CEO Michael Nuevo, with operations structured into the following departments: 1) Sales / Marketing, 2) Purchasing / Manufacturing, 3) Accounting / Finance, 4) Human Resources Each department features a dedicated Vice President reporting directly to the CEO. Audit Plan Pre-audit interview with client CEO Michael Nuevo; review prior audits and document discussion. Audit kick off meeting with Management Team and audit staff January 5th 2014. Discussion of Nuevo Engineering prior audited payroll financials for y/e 2012. Timing: Audit Report tentatively scheduled for completion by April 30, 2014. Field work to commence February 1st following required client W-2 filings; field work and interviews to be completed by February 15. Audit Object: Assurance of payroll financials and pension fund reporting y/e 2013. Budget Hours: Allocated 2012 hours + 15% contingency = 500 hours. Initial Risk Assessment(s): Ghost employees, time keeping, misstatement of hours / pay rates, withholding calculations, 401k funds / employee contributions, direct deposits and data security.

Field Work 1) Perform test of controls over payroll transactions for selected pay periods to include following: Compare names and wage / salary rates to records maintained by Human Resources Dept. Compare time shown on payroll to time records to time report approved by Supervisors. Determine basis of deductions and compare with records of deductions authorized by employees. Test extensions and footings on payroll ledger. Compare recorded payroll total of direct payroll deposits from dedicated payroll account. Observe employee use of time clocks / computer terminals protocols for clocking in / out. 2) Perform analytical procedures to test the reasonableness of payroll expense; create an expectation of the amount of payroll expense by sampling single pay period and means test to yearly population. 3) Investigate any extraordinary fluctuations in salaries and wages reported. 4) Test the period end accrual of payroll expense.

Audit Evidence Audit staff performed in-person interviews with Management / Employees and used structured questionnaires to determine payroll operation perspectives and internal controls. Payroll is issued twice monthly on 1st and 15th day for prior work period ending. All employees are required to have direct payroll deposit to a banking or savings accounts as a condition of employment. Payroll hours are collected using a Kronos timekeeping system; workers use dedicated stations throughout building and factory floor, administrative and management use designated computer terminals. Supervisors review and approve hourly employee time records from the prior day for adherence to schedules and budget. Period payroll calculations / reports are prepared by the senior payroll accountant; reviewed and approved by the Vice-President of Finance / Accounting and subject final approval from CEO Michael Nuevo or the Finance / Accounting Vice-President in the CEOs absence.

Audit Summary Findings During this audit, we examined the Nuevo Engineering payroll policies, procedures and practices to determine whether or not adequate controls were in place to prevent fraud, waste or abuse of the companys resources. Although we did not discover any evidence leading us to believe there was material fraud, we found areas where internal controls could be strengthened to reduce the exposure to monetary risk.

Under current payroll processes, the opportunity to create fictitious or ghost employee exists. While no ghost employees were uncovered in our review, the company does expose itself to this risk because of the following: 1) Major Weakness: Inadequate controls over the changing of direct deposit information. We found unsigned and incomplete authorization forms in HR files; forms noting changes per telephone conversation with crossed out deposit account numbers and unsigned by employee. 2) Major Weakness: The Companys recording of electronic time records by Supervisors are subject to potential computer tampering. No written report records found in payroll accounting detail signed by the Supervisors approving the daily and pay period hours. 3) Minor Weakness: The process to ensure that terminated employees are timely removed from the payroll system needs improvement. Audit noted former employees (7) were found in the current master payroll file; however no evidence of former employees receiving payment within past operating year. 4) Major Weakness: We found 10 employees in the Accounting and Human Resources departments that had the ability to unilaterally alter employee paychecks rates to virtually any amount. Further, most of these employees had no need for this level of system access. This finding is considered a major weakness of internal controls. Recommendations

1) Security measures for changing an employees direct deposit information should be increased: Initiate a clean start Require that all employees appear in person to Human Resources Dept with an updated deposit form and attach a copy of a current, legal identification to deposit form and witness signature of employee. Prohibit any future changes to deposit directions without employee appearing in person. 2) Supervisors to provide a written summary of employee hours for the pay period with signature approval to payroll dept. Although the payroll hours input software System is password protected for Supervisors, overall System process is vulnerable as no written verification by responsible Supervisor is maintained as safeguards against tampering of daily hours after Supervisors electronic approval. 3) Company should develop a procedure to ensure that inactive employees are timely removed from the payroll system. Upon interviewing production Supervisors and Human Resources Staff, we discovered that some departments choose to leave information in the system due to the time consuming preemployment input process required for a rehired worker. We recommend the company create a special policy procedure to re-instate seasonal workers instead of simply not removing these employees from the payroll.

4) Company advised to revisit segregation of duties and procedures for Payroll Accounting, Human Resources and Production Supervisors. Limit access to pay rates changes to Payroll Accounting Manager and Clerk through a change order form to be initiated by Human Resources dept with Production Supervisor approval. Document serialized number input into accounting software reference with copy in accounting and original routed back to Human Resources for file storage.