15 - 1Copyright 2003 Pearson Education Canada Inc.
CHAPTER 15Audit of the Payroll and
Personnel Cycle
15 - 2Copyright 2003 Pearson Education Canada Inc.
What What classes of transactionsclasses of transactions occur occur in the payroll and personnel cycle?in the payroll and personnel cycle?
15 - 3Copyright 2003 Pearson Education Canada Inc.
- receipt of employee services and payment for those services
What What classes of transactionsclasses of transactions occur occur in the payroll and personnel cycle?in the payroll and personnel cycle?
15 - 4Copyright 2003 Pearson Education Canada Inc.
In the audit of payroll andpersonnel, transactions are far
more significant than relatedbalance sheet accounts.
15 - 5Copyright 2003 Pearson Education Canada Inc.
In the audit of payroll andpersonnel, transactions are far
more significant than relatedbalance sheet accounts.
Why?
15 - 6Copyright 2003 Pearson Education Canada Inc.
In the audit of payroll andpersonnel, transactions are far
more significant than relatedbalance sheet accounts.
Related balance sheetaccounts are less signifi-
cant than the volumeof transactions.
15 - 7Copyright 2003 Pearson Education Canada Inc.
What is the What is the sequence of business sequence of business functionsfunctions that occurs in the payroll that occurs in the payroll
and personnel cycle?and personnel cycle?
15 - 8Copyright 2003 Pearson Education Canada Inc.
1. An employee is hired; person- nel records are accumulated.
What is the What is the sequence of business sequence of business functionsfunctions that occurs in the payroll that occurs in the payroll
and personnel cycle?and personnel cycle?
PERSONNE
LFILE
Tom Taylor
15 - 9Copyright 2003 Pearson Education Canada Inc.
1. An employee is hired; person- nel records are accumulated.
Tom TaylorAce Company
Application for EmploymentName: Tom Taylor Employment history:__________________
Education:
15 - 10Copyright 2003 Pearson Education Canada Inc.
1. An employee is hired; person- nel records are accumulated.
Tom TaylorAce Company
Application for EmploymentName: Tom Taylor Employment history:__________________
Education:
Ace CompanyPersonnel Investigation
Employee Candidate: Tom Taylor Comments of References:
15 - 11Copyright 2003 Pearson Education Canada Inc.
1. An employee is hired; person- nel records are accumulated.
Tom TaylorAce Company
Application for EmploymentName: Tom Taylor Employment history:__________________
Education:
Ace CompanyPersonnel Investigation
Employee Candidate: Tom Taylor Comments of References:
Ace CompanyPay Rate Authorization
Employee: Tom Taylor Date: 10/25/04Authorized rate: $7.70/hr Authorization:
15 - 12Copyright 2003 Pearson Education Canada Inc.
1. An employee is hired; person- nel records are accumulated.
Tom TaylorAce Company
Application for EmploymentName: Tom Taylor Employment history:__________________
Education:
Ace CompanyPersonnel Investigation
Employee Candidate: Tom Taylor Comments of References:
Ace CompanyPay Rate Authorization
Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization:
Form TD1Authorization for
Income Tax WithholdingEmployee name:
15 - 13Copyright 2003 Pearson Education Canada Inc.
2. The employee works for the company; labour hours are accumulated.
Possibly throughuse of a time
clock andresulting
time cards
15 - 14Copyright 2003 Pearson Education Canada Inc.
2. The employee works for the company; labour hours are accumulated.
In each department,management may accumulate
labour charged to jobs,processes, activities,
or cost centers.
15 - 15Copyright 2003 Pearson Education Canada Inc.
3. Labour hours are entered into the payroll journal and pay is calculated.
timecards
payroll journal description net payNov.2, 2004Tom Taylor 328.61
15 - 16Copyright 2003 Pearson Education Canada Inc.
payroll master fileemployee _ $$ _Tom Taylor 11/2 net 328.61 y-t-d net 753.12time
cards
payroll journal description net payNov.2, 2004Tom Taylor 328.61
3. Labor hours are entered into the pay-roll journal and pay is calculated. This information is then used to update the payroll master file.
15 - 17Copyright 2003 Pearson Education Canada Inc.
payroll master fileemployee _ $$ _Tom Taylor 11/2 net 328.61 y-t-d net 753.12
timecards
payroll journal description net payNov.2, 2004Tom Taylor 328.61
SummaryPayrollReport
This report sum-marizes payrollfor a period.
3. Labor hours are entered into the payroll journal and pay is calculated. This informa-tion is then used to update the payroll master file. Periodically, a summary payroll report is prepared.
15 - 18Copyright 2003 Pearson Education Canada Inc.
4. The employee is paid through an imprest payroll account. The cheque is signed by the treasurer.
Ace Payroll
Jane Treasurer
Tom Taylor
Bank of Montreal
15 - 19Copyright 2003 Pearson Education Canada Inc.
5. At year-end, payroll accounting prepares T4 slips and T4 summary.
payrollaccounting
T4 slipsT.Taylorearned$21,996.32in 2004.T4 Summary
15 - 20Copyright 2003 Pearson Education Canada Inc.
How does an auditor How does an auditor design tests of design tests of
controls for payroll controls for payroll and personnel?and personnel?
15 - 21Copyright 2003 Pearson Education Canada Inc.
Understand controlsas they relate to pay-
roll and personnelAs discussedin chapter 9
How does an auditor How does an auditor design tests of design tests of
controls for payroll controls for payroll and personnel?and personnel?
15 - 22Copyright 2003 Pearson Education Canada Inc.
Assess the plannedcontrol risk related to payroll and personnelHow does an auditor How does an auditor
design tests of design tests of controls for payroll controls for payroll
and personnel?and personnel?
Understand controlsas they relate to pay-
roll and personnel
15 - 23Copyright 2003 Pearson Education Canada Inc.
In assessing control In assessing control risk, the auditor risk, the auditor should consider:should consider:
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
??
15 - 24Copyright 2003 Pearson Education Canada Inc.
In assessing control In assessing control risk, the auditor risk, the auditor should consider:should consider:
- adequate segregation of duties- proper authorization- adequate documents and records- use of prenumbered documents- use of an imprest payroll account
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
15 - 25Copyright 2003 Pearson Education Canada Inc.
How does an auditor How does an auditor design tests of design tests of
controls for payroll controls for payroll and personnel?and personnel?
Understand controlsas they relate to pay-
roll and personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
Evaluate cost-benefit of test-
ing controls
15 - 26Copyright 2003 Pearson Education Canada Inc.
Will substantivetests be reduced
sufficiently to justify the cost ofperforming tests
of controls?
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
Evaluate cost-benefit of test-
ing controls
15 - 27Copyright 2003 Pearson Education Canada Inc.
How does an auditor How does an auditor design tests of design tests of
controls for payroll controls for payroll and personnel?and personnel?
Evaluate cost-benefit of test-
ing controls
Design tests of controls related to payroll and
personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
15 - 28Copyright 2003 Pearson Education Canada Inc.
In designing In designing payroll and payroll and
personnel tests, personnel tests, the auditor the auditor
should consider:should consider:
Do allemployees
actuallyexist?
Evaluate cost-benefit of test-
ing controls
Design tests of controls related to payroll and
personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
15 - 29Copyright 2003 Pearson Education Canada Inc.
Isrecorded
labouraccurate?
In designing In designing payroll and payroll and
personnel tests, personnel tests, the auditor the auditor
should consider:should consider:Evaluate cost-benefit of test-
ing controls
Design tests of controls related to payroll and
personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
15 - 30Copyright 2003 Pearson Education Canada Inc.
Havepersonnel actions
and wage ratechanges beenauthorized?
In designing In designing payroll and payroll and
personnel tests, personnel tests, the auditor the auditor
should consider:should consider:Evaluate cost-benefit of test-
ing controls
Design tests of controls related to payroll and
personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
15 - 31Copyright 2003 Pearson Education Canada Inc.
Are payrolltransactions
properly includedin the master file
and correctlysummarized?
In designing In designing payroll and payroll and
personnel tests, personnel tests, the auditor the auditor
should consider:should consider:Evaluate cost-benefit of test-
ing controls
Design tests of controls related to payroll and
personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
15 - 32Copyright 2003 Pearson Education Canada Inc.
Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, TD1 forms,deduction authorizations).
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 33Copyright 2003 Pearson Education Canada Inc.
Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, TD1 form,deduction authorizations).
Using the same sample, cross-reference information from personnel to related information in payroll accounting.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 34Copyright 2003 Pearson Education Canada Inc.
Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, TD1 form,deduction authorizations).
Using the same sample, cross-reference information from personnel to related information in payroll accounting.
How does an auditor interpretHow does an auditor interpretthe results of this test?the results of this test?
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 35Copyright 2003 Pearson Education Canada Inc.
Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, TD1 form,deduction authorizations).
Using the same sample, cross-reference information from personnel to related information in payroll accounting.
Employees with activepersonnel files are being paid.
How does an auditor interpretHow does an auditor interpretthe results of this test?the results of this test?
15 - 36Copyright 2003 Pearson Education Canada Inc.
Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, TD1 form,deduction authorizations).
Using the same sample, cross-reference information from personnel to related information in payroll accounting.
Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll cheques.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 37Copyright 2003 Pearson Education Canada Inc.
Ace Payroll
Jane Treasurer
Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll cheques.
when examining cancelled pay- cheques, note signature of treasurer and endorsement of the employee
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Bank of Montreal
15 - 38Copyright 2003 Pearson Education Canada Inc.
Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll cheques.
when examining cancelled pay- cheques, note signature of treasurer and endorsement of the employee
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Ace Payroll
Jane Treasurer
Compare endorsement to employee signature on TD1
Bank of Montreal
15 - 39Copyright 2003 Pearson Education Canada Inc.
Select a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.
payrollaccounting personnel
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 40Copyright 2003 Pearson Education Canada Inc.
Select a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.
payrollaccounting personnel
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
15 - 41Copyright 2003 Pearson Education Canada Inc.
Select a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Employeesbeing paid have
active personnel files.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
15 - 42Copyright 2003 Pearson Education Canada Inc.
This procedure addresses theThis procedure addresses theauditor’s concern regardingauditor’s concern regarding
nonexistent employeesnonexistent employees..
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit ProceduresSelect a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.
15 - 43Copyright 2003 Pearson Education Canada Inc.
Observe employee and management use of time clock and time cards.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 44Copyright 2003 Pearson Education Canada Inc.
Trace a sample of time cards to payrollaccounting records for those employees.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
payrollaccounting
15 - 45Copyright 2003 Pearson Education Canada Inc.
Trace a sample of time cards to payrollaccounting records for those employees.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
payrollaccounting
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 46Copyright 2003 Pearson Education Canada Inc.
Trace a sample of time cards to payrollaccounting records for those employees.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Employees who turnedin a clock card were
paid. Pay was accurate.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
15 - 47Copyright 2003 Pearson Education Canada Inc.
payrollaccounting
Trace a sample of payroll accounting records to employee time cards.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 48Copyright 2003 Pearson Education Canada Inc.
Trace a sample of payroll accounting records to employee time cards.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
payrollaccounting
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 49Copyright 2003 Pearson Education Canada Inc.
Trace a sample of payroll accounting records to employee time cards.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
Recorded paymentswere for work actually
performed by existing employees.
15 - 50Copyright 2003 Pearson Education Canada Inc.
Compare total time card labour to totallabour charged to jobs, processes, activi-ties, cost centres.
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
job cost sheet
labour 43.6 hr
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 51Copyright 2003 Pearson Education Canada Inc.
Compare total time card labour to totallabour charged to jobs, processes, activi-ties, cost centres.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
job cost sheet
labour 43.6 hr
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 52Copyright 2003 Pearson Education Canada Inc.
Compare total time card labour to totallabour charged to jobs, processes, activi-ties, cost centers.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
The hours for whichemployees were paid were
charged to production.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
15 - 53Copyright 2003 Pearson Education Canada Inc.
Perform a surprise payroll payoff, where-by employees must pick up and sign fortheir cheques in the presence of a super-visor and the auditor. Investigate un-claimed cheques.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 54Copyright 2003 Pearson Education Canada Inc.
Perform a surprise payroll payoff, where-by employees must pick up and sign fortheir cheques in the presence of a super-visor and the auditor. Investigate un-claimed cheques.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
15 - 55Copyright 2003 Pearson Education Canada Inc.
Perform a surprise payroll payoff, where-by employees must pick up and sign fortheir cheques in the presence of a super-visor and the auditor. Investigate un-claimed cheques.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Those claiming paycheques arethe appropriate employees.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?