Audit of the Payroll and Personnel Cycle Chapter

Learning Objective 1 Identify the accounts and transactions in the payroll and personnel cycle.

Accounts in the Payroll and Personnel Cycle The overall objective in the audit of

Accounts in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Accrued

Accounts in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Withheld

Accounts in the Payroll and Personnel Cycle In most systems the accrued wages and

Learning Objective 2 Describe the business functions and the related documents and records in

Business Functions in the Cycle and Related Documents and Records The payroll and personnel

Personnel and Employment Ø Personnel records Ø Deduction authorization form Ø Rate authorization form

Timekeeping and Payroll Preparation Time Card Job Time Ticket Payroll Transaction File Payroll Journal

Payroll Master File A payroll master file is used for recording each payroll transaction

Payment of Payroll Ø Payroll check Ø Payroll bank account reconciliation © 2010 Prentice

Preparation of Payroll Tax Returns and Payment of Taxes Ø W-2 Form Ø Payroll

Learning Objective 3 Understand internal control and design and perform tests of controls and

Methodology for Designing Controls and Substantive Tests Understand internal control – payroll and personnel

Understand Internal Control – Payroll and Personnel Cycle Ø Adequate separation of duties Ø

Payroll Tax Forms and Payments Ø Preparation of payroll tax forms Ø Timely payment

Inventory and Fraudulent Payroll Considerations Ø Relationship between payroll and inventory valuation Ø Tests

Methodology for Designing Tests of Balances for Payroll Liabilities Identify client business risks affecting

Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform tests of

Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform analytical procedures

Learning Objective 4 Design and perform analytical procedures for the payroll and personnel cycle.

Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Possible misstatement Compare payroll

Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Possible misstatement Compare commission

Learning Objective 5 Design and perform tests of details of balances for accounts in

Two Major Balance-related Audit Objectives 1. Accruals in the trial balance are stated at

Tests of Details of Balances for Liability Accounts Ø Amounts withheld from employees’ pay

Tests of Details of Balances for Expense Accounts Ø Officers’ compensation Commissions Ø Payroll

Presentation and Disclosure Objectives Ø Required disclosures are not extensive Ø Some complex transactions

Types of Audit Tests for the Payroll and Personnel Cycle Payroll Liabilities Cash in

End of Chapter 20 © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20

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Accounts 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. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 3

Accounts in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Accrued Wages, Salaries, Bonuses, and Commissions Payment Beginning balance Direct Labor Earned wages, salaries, etc. Ending balance Payment for payroll taxes Withheld Income Taxes and Other Deductions Payment Beginning balance © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Payroll withholding Ending balance 20 - 4

Accounts in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance Payment for payroll taxes Payroll Tax Expense Accrued Payroll Tax Expense Payment Beginning balance © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Payroll tax expense Ending balance 20 - 5

Accounts in the Payroll and Personnel Cycle In most systems the accrued wages and salaries account is used only at the end of an accounting period. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 6

Learning Objective 2 Describe the business functions and the related documents and records in the payroll and personnel cycle. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 7

Business Functions in the Cycle and Related Documents and Records The payroll and personnel cycle…. Begins Hiring of personnel Ends Payments © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 8

Timekeeping and Payroll Preparation Time Card Job Time Ticket Payroll Transaction File Payroll Journal Timekeeping and Payroll Preparation © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 10

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. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 11

Learning Objective 3 Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 14

Methodology for Designing Controls and Substantive Tests Understand internal control – payroll and personnel Assess planned control risk – payroll and personnel Determine extent of testing controls Audit procedures Design tests of controls and Sample size substantive tests of transactions for payroll and personnel to meet Items to select transaction-related audit objectives Timing © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 15

Understand Internal Control – Payroll and Personnel Cycle Ø Adequate separation of duties Ø Proper authorization Adequate documents and records Physical control over assets and records Independent checks on performance Ø Ø Ø © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 16

Payroll Tax Forms and Payments Ø Preparation of payroll tax forms Ø Timely payment of the payroll taxes withheld and other withholdings © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 17

Inventory and Fraudulent Payroll Considerations Ø Relationship between payroll and inventory valuation Ø Tests for nonexistent employees © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 18

Methodology for Designing Tests of Balances for Payroll Liabilities Identify client business risks affecting payroll liability accounts Phase I Set tolerable misstatement and assess inherent risk Phase I for payroll liability accounts Assess control risk for the Phase I payroll and personnel cycle © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 19

Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform tests of controls and substantive tests Phase II of transactions for the payroll and personnel cycle © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 20

Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform analytical procedures Phase III for the payroll and personnel cycle Design tests of Audit procedures details of payroll Sample size accounts balances to satisfy Items to select balance-related Timing audit objectives © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Phase III 20 - 21

Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Possible misstatement Compare payroll expense account balances with previous years Misstatement of payroll expense accounts Compare direct labor as a percentage of sales with previous years Misstatement of direct labor and inventory © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 23

Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Possible misstatement Compare commission expense Misstatement of as a percentage of sales with commission expense previous years and commission liability Compare payroll tax expense Misstatement of payroll as a percentage of salaries and tax expense and payroll wages with previous years tax liability Compare accrued payroll tax accounts with previous years Misstatement of accrued payroll taxes and expense © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 24

Learning Objective 5 Design and perform tests of details of balances for accounts in the payroll and personnel cycle. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 25

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). © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 26

Tests of Details of Balances for Liability Accounts Ø Amounts withheld from employees’ pay Accrued salaries and wages Ø Accrued commissions Ø Accrued bonuses Ø Accrued vacation pay, sick pay, or other benefits Ø Accrued payroll taxes Ø © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 27

Tests of Details of Balances for Expense Accounts Ø Officers’ compensation Commissions Ø Payroll tax expense Ø Total payroll Ø Contract labor Ø © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 28

Presentation and Disclosure Objectives Ø Required disclosures are not extensive Ø Some complex transactions require footnote disclosure © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 29

Types of Audit Tests for the Payroll and Personnel Cycle Payroll Liabilities Cash in Bank Direct Labor and Payroll Expenses Payments Expenses Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 20 - 30