Audit for payroll.ppt

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18 - 1
Audit of the Payroll
and Personnel Cycle
Chapter 18

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

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

Personnel Cycle
Cash in Bank
Payment for
salaries
Payment for
payroll taxes
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
Payroll Tax Expense

Personnel Cycle
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 Hiring of personnel
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

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

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

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

Analytical Procedures for the
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
Analytical procedure
Compare commission expense
as a percentage of sales with
previous years
Misstatement of
commission expense
and commission liability
Compare payroll tax expense
as a percentage of salaries and
wages with previous years
Misstatement of payroll
tax expense and payroll
tax liability
Possible misstatement
Compare accrued payroll tax
accounts with previous years
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
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 18

Audit for payroll.ppt

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