audit of the payroll and personnel cycle · and personnel cycle. understand internal control and...

Copyright © 2014 Pearson Education

Chapter 21

Audit of the

Payroll and

Personnel Cycle

Copyright © 2014 Pearson Education 21-2

Identify the accounts and transactions in the

payroll and personnel cycle.

Describe the business functions and the

related documents and records in the payroll

and personnel cycle.

Understand internal control and 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.

Design and perform tests of details of

balances for accounts in the payroll and

personnel cycle.


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

21-4

1


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 applicable

accounting standards.


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.

21-8

2


The payroll and personnel cycle….

Begins

Personnel

Hiring

Payments

Ends


Human Resource records

Deduction authorization form

Rate authorization form


Time Record

Job Time Ticket

Payroll Transaction File

Payroll Journal

Timekeeping and Payroll Preparation


A payroll master file is used for

recording payroll transactions for each

employee and maintaining total

employee wages paid for the year to date.


Payroll check

Payroll bank account reconciliation


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.

21-15

3


Understand internal control – payroll and personnel

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

Audit procedures

Sample size

Items to select

Timing


Adequate separation of duties

Proper authorization

Adequate documents and records

Physical control over assets and records

Independent checks on performance


Preparation of payroll tax forms

Timely payment of the payroll taxes

withheld and other withholdings


Relationship between payroll

and inventory valuation

Tests for nonexistent employees


Identify client business

risks affecting

payroll liability accounts

Set performance materiality

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


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

Audit procedures

Phase III Sample size

Items to select

Timing


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

21-23

4


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 procedure Possible misstatement

Compare commission

expense as a % of

sales with previous years

Misstatement of

commission expense

and commission liability

Misstatement of payroll

tax expense and payroll

tax liability

Misstatement of accrued

payroll taxes and expense

Compare payroll tax

expense as a % of salaries

and wages with prior year

Compare accrued payroll

tax accounts with prior year


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

cycle.

21-26

5


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).


Amounts withheld from employees’ pay

Accrued salaries and wages

Accrued commissions

Accrued bonuses

Accrued vacation pay, sick pay, or other benefits

Accrued payroll taxes


Officers’ compensation

Commissions

Payroll tax expense

Total payroll

Contract labor


Required disclosures are not extensive Some complex transactions require footnote disclosure


Cash in Bank

Payroll Liabilities

Direct Labor and Payroll Expenses

Payments Expenses

Audited by TOC, STOT, and AP

Audited by TOC, STOT, and AP

Ending balance

Ending balance

Audited by AP and TDB

TOC + STOT + AP + TDB = Sufficient appropriate evidence


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