Audit Payroll and Personnel Cycle Identify the accounts

Audit Payroll and Personnel Cycle

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

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 and Transactions in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Payment for payroll taxes Accrued Wages, Salaries, Bonuses, and Commissions Payment Beginning balance Direct Labor Earned wages, salaries, etc. Ending balance Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance

Accounts and Transactions in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Payment for payroll taxes Payroll Tax Expense Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance Accrued Payroll Tax Expense Payment Beginning balance Payroll tax expense Ending balance

Accounts and Transactions in the Payroll and Personnel Cycle Separate operating accounts for payroll also normally include officers’ salaries and bonuses, office salaries, sales salaries and commissions, and indirect manufacturing labor.

Accounts and Transactions in the Payroll and Personnel Cycle These accounts have the same relationship to accrued wages and withheld taxes and other deductions that is shown for direct labor.

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 with the hiring of personnel and ends with payment to the employees for the services performed and to the government and other institutions for the withheld and accrued payroll taxes and benefits.

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 Payroll Master File

Payment of 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 Tests of Balances – Accounts Receivable Understand internal control – payroll and personnel. Assess planned control risk – payroll and personnel. Evaluate cost-benefit of testing controls.

Methodology for Designing Tests of Balances – Accounts Receivable Design tests of details of controls and substantive tests of transactions for payroll and personnel to meet transaction-related audit objectives. Audit procedures Sample size Items to select Timing

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 Payment of the payroll taxes withheld and other withholdings on a timely basis

Inventory and Fraudulent Payroll Considerations Relationship between payroll and inventory valuation Tests for nonexistent payroll

Methodology for Designing Tests of Balances – Accounts Receivable Identify client business risks affecting payroll liability accounts. Set tolerable misstatement and assess inherent risk for payroll liability accounts. Assess control risk for the payroll and personnel cycle.

Methodology for Designing Tests of Balances – Accounts Receivable Design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle. Design and perform analytical procedures for the payroll and personnel cycle.

Methodology for Designing Tests of Balances – Accounts Receivable Design tests of details of payroll accounts balances to satisfy balance-related audit objectives. Audit procedures Sample size Items to select Timing

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 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

Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Possible misstatement 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 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 cycles.

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

Types of Audit Tests for the Payroll and Personnel Cycle Cash in Bank Payroll Liabilities Direct Labor and Payroll Expenses Payments Expenses Audited by TOC, STOT, and AP Ending balance Audited by AP and TDP TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS

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