Audit of the Payroll and Personnel Cycle of the Payroll and Personnel Cycle Chapter 20 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 2 Learning

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5

Audit of the Payroll and Personnel Cycle

Chapter 20


Learning Objective 1

Identify the accounts and transactions in the payroll and personnel cycle.


The overall objective in the audit of the payroll and personnel cycle is to evaluate whether the account balances affected by the cycle are fairly stated in accordance with generally accepted accounting principles.

Accounts in the Payroll and Personnel Cycle



Accrued Wages, Salaries, Bonuses, and Commissions

Payment Beginning balance

Earned wages, salaries, etc.

Ending balance

Direct Labor

Cash in Bank

Payment for salaries

Payment for payroll taxes

Withheld Income Taxes and Other Deductions

Payment Beginning balance Payroll withholding

Ending balance



In most systems the accrued wages and salaries account is used only at the end of an accounting period.



Describe the business functions and the related documents and records in the payroll and personnel cycle.


Business Functions in the Cycle and Related Documents and

Records

The payroll and personnel cycle….

Begins

Personnel Hiring

Ends

Payments


Personnel and Employment

Personnel records Deduction authorization form

Rate authorization form


Timekeeping and Payroll Preparation

Time Card

Job Time Ticket

Payroll Transaction File

Payroll Journal

Timekeeping and Payroll Preparation


Payroll Master File

A payroll master file is used for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date.


Payment of Payroll

Payroll check Payroll bank account reconciliation


Preparation of Payroll Tax Returns and Payment of Taxes

W-2 Form Payroll tax returns



Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle.


Methodology for Designing Controls and Substantive Tests

Understand internal control – payroll and personnel

Audit procedures

Sample size

Items to select

Timing

Assess planned control risk – payroll and personnel

Determine extent of testing controls

Design tests of controls and substantive tests of transactions for payroll and personnel to meet

transaction-related audit objectives


Understand Internal Control –Payroll and Personnel Cycle

Adequate separation of duties

Proper authorization

Adequate documents and records

Physical control over assets and records

Independent checks on performance


Payroll Tax Forms and Payments

Preparation of payroll tax forms Timely payment of the payroll taxes withheld and other withholdings


Inventory and Fraudulent Payroll Considerations

Relationship between payroll and inventory valuation Tests for nonexistent employees


Identify client business risks affecting

payroll liability accounts

Methodology for Designing Tests of Balances for Payroll Liabilities

Set tolerable misstatement and assess inherent risk

for payroll liability accounts

Assess control risk for the payroll and personnel cycle

Phase I

Phase I

Phase I



Design and perform tests of controls and

substantive tests of transactions

for the payroll and personnel cycle

Phase II


Timing

Items to select

Sample size

Audit procedures


Design and perform analytical procedures for the payroll and

personnel cycle

Design tests of details of payroll

accounts balances to satisfy

balance-related audit objectives

Phase III

Phase III



Design and perform analytical procedures for the payroll and personnel cycle.


Analytical Procedures for the Payroll and Personnel Cycle

Compare direct labor as a percentage of sales with previous years

Misstatement of direct labor and inventory

Analytical procedure

Compare payroll expense account balances with previous years

Misstatement of payroll expense accounts

Possible misstatement


Analytical Procedures for the Payroll and Personnel Cycle

Analytical procedure

Compare commission expense as a % of sales with previous years

Misstatement of commission expense and commission liability

Compare payroll tax expense as a % of salaries and wages with prior year

Misstatement of payroll tax expense and payroll tax liability

Possible misstatement

Compare accrued payroll tax accounts with prior year

Misstatement of accrued payroll taxes and expense



Design and perform tests of details of balances for accounts in the payroll and personnel cycle.


Two Major Balance-related Audit Objectives

1. Accruals in the trial balance are stated at the correct amounts (accuracy).

2. Transactions in the payroll and personnel cycle are recorded in the proper period (cutoff).


Tests of Details of Balances for Liability Accounts

Amounts withheld from employees’ pay

Accrued salaries and wages

Accrued commissions

Accrued bonuses

Accrued vacation pay, sick pay, or other benefits

Accrued payroll taxes


Tests of Details of Balances for Expense Accounts

Officers’ compensation

Commissions

Payroll tax expense

Total payroll

Contract labor


Presentation and Disclosure Objectives

Required disclosures are not extensive Some complex transactions require footnote disclosure


Types of Audit Tests for the Payroll and Personnel Cycle

TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS

Cash in Bank

Payroll Liabilities

Direct Labor and Payroll Expenses

Payments Expenses

Audited by TOC, STOT, and AP

Ending balance

Ending balance

Audited by AP and TDB

Audited by TOC, STOT, and AP


End of Chapter 20