a) i )

Positive Effects

In view of the tremendous savings being achieved as a result of the removal of ghost names, it is believed that outsourcing government payroll will inure to the benefit of the government. Additionally, the government can achieve the following:

• Reduction in the cost of preparing the payroll as there will not be the need to engage more people and sophisticated software programs to work on the payroll.
• Payroll will be prepared by specialists, which will not have been the case with the staff of government departments.
• The service company may provide the government a comfort zone by giving indemnity in the event of problems arising.
• It will help the government to focus on its core services of offering social services to the public.
• It may reduce payroll fraud.

Negative Effects

• Staff may be laid off as not all the employees may be maintained. This may result in redundancy, which may cost the government.
• Ghost names may still persist as dismissals and terminations may not be advised promptly.
• If the government fails, it may have to pay redundancy costs for dismissals, and workers may go to court.

a) ii) 

The user auditor must do the following:

• Understand the transaction by examining all the contracts and identify potential risks.
• Evaluate all the controls at the user entity that relate to the service organization and determine whether that gives the auditor sufficient understanding to provide a basis for assessing risks of material misstatement from the side of the government. If the auditor concludes that this is insufficient, he must carry out one of the following activities:
  • Obtain Type 1 or Type 2 report from the service organization (if available).
  • Contact the service organization to get specific information (with permission).
  • Visit the service organization and perform procedures to obtain information (with permission).
  • Use another auditor to perform procedures at the service organization (with permission).