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Audit of the Payroll 
and Personnel Cycle 
Chapter 17 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 1
Learning Objective 1 
Identify the accounts and 
transactions in the payroll 
and personnel cycle. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 2
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. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 3
Accounts and Transactions in the 
Payroll and Personnel Cycle 
Accrued Wages, Salaries, 
Bonuses, and Commissions 
Payment Beginning 
balance 
Earned wages, 
salaries, etc. 
Ending balance 
Cash in Bank 
Payment 
for salaries 
Payment for 
payroll taxes 
Direct Labor 
Withheld Income Taxes 
and Other Deductions 
Payment Beginning 
balance 
Payroll withholding 
Ending balance 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 4
Accounts and Transactions in the 
Payroll and Personnel Cycle 
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 
Cash in Bank 
Payment 
for salaries 
Payment for 
payroll taxes 
Payroll Tax Expense 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 5
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. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 6
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. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 7
Learning Objective 2 
Describe the business functions 
and the related documents and 
records in the payroll and 
personnel cycle. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 8
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. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 9
Personnel and Employment 
Personnel records 
Deduction authorization form 
Rate authorization form 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 10
Timekeeping and Payroll 
Preparation 
Time Card 
Job Time Ticket 
Payroll Transaction File 
Payroll Journal 
Payroll Master File 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 11
Payment of Payroll 
Payroll check 
Payroll bank account reconciliation 
P ayc heck for 
Dept. o f Treasurer 
Jo hn Doe 
P aycheck for 
Date 
Dept. of Treasurer 
Jane Doe 
Date 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 12
Preparation of Payroll Tax 
Returns and Payment of Taxes 
W-2 Form 
Payroll Tax Returns 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 13
Learning Objective 3 
Understand internal control and 
design and perform tests of 
controls and substantive tests 
of transactions for the 
payroll and personnel cycle. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 14
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. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 15
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 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 16
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 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 17
Payroll Tax Forms 
and Payments 
Preparation of payroll tax forms 
Payment of the payroll taxes withheld 
and other withholdings on a timely basis 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 18
Inventory and Fraudulent 
Payroll Considerations 
Relationship between payroll 
and inventory valuation 
Tests for nonexistent payroll 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 19
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. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 20
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. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 21
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 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 22
Learning Objective 4 
Design and perform analytical 
procedures for the payroll 
and personnel cycle. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 23
Analytical Procedures for the 
Payroll and Personnel Cycle 
Analytical Procedure Possible Misstatement 
Compare payroll expense Misstatement of payroll 
account balance with expense accounts 
previous years. 
Compare direct labor as a Misstatement of direct 
percentage of sales with labor and inventory 
previous years. 
Compare commission Misstatement of 
expense as a percentage of commission expense and 
sales with previous years. commission liability 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 24
Analytical Procedures for the 
Payroll and Personnel Cycle 
Analytical Procedure Possible Misstatement 
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 Misstatement of accrued 
accounts with previous years. payroll taxes and payroll 
tax expense 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 25
Learning Objective 5 
Design and perform tests 
of details of balances for 
accounts in the payroll 
and personnel cycles. 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 26
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 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 27
Tests of Details of Balances 
for Expense Accounts 
Officers’ compensation 
Commissions 
Payroll tax expense 
Total payroll 
Contract labor 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 28
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 
Ending 
balance 
Audited by 
TOC, STOT, and AP 
Audited by 
AP and TDP 
TOC + STOT + AP + TDP 
Audited by 
AP and TDP 
= Sufficient competent evidence per GAAS 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 29
End of Chapter 17 
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 30

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Audit of the payroll and personnel cycle

  • 1. Audit of the Payroll and Personnel Cycle Chapter 17 ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 1
  • 2. Learning Objective 1 Identify the accounts and transactions in the payroll and personnel cycle. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 2
  • 3. 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 3
  • 4. Accounts and Transactions in the Payroll and Personnel Cycle Accrued Wages, Salaries, Bonuses, and Commissions Payment Beginning balance Earned wages, salaries, etc. Ending balance Cash in Bank Payment for salaries Payment for payroll taxes Direct Labor Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 4
  • 5. Accounts and Transactions in the Payroll and Personnel Cycle 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 Cash in Bank Payment for salaries Payment for payroll taxes Payroll Tax Expense ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 5
  • 6. 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 6
  • 7. 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 7
  • 8. Learning Objective 2 Describe the business functions and the related documents and records in the payroll and personnel cycle. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 8
  • 9. 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 9
  • 10. Personnel and Employment Personnel records Deduction authorization form Rate authorization form ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 10
  • 11. Timekeeping and Payroll Preparation Time Card Job Time Ticket Payroll Transaction File Payroll Journal Payroll Master File ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 11
  • 12. Payment of Payroll Payroll check Payroll bank account reconciliation P ayc heck for Dept. o f Treasurer Jo hn Doe P aycheck for Date Dept. of Treasurer Jane Doe Date ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 12
  • 13. Preparation of Payroll Tax Returns and Payment of Taxes W-2 Form Payroll Tax Returns ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 13
  • 14. Learning Objective 3 Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 14
  • 15. 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 15
  • 16. 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 ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 16
  • 17. 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 ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 17
  • 18. Payroll Tax Forms and Payments Preparation of payroll tax forms Payment of the payroll taxes withheld and other withholdings on a timely basis ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 18
  • 19. Inventory and Fraudulent Payroll Considerations Relationship between payroll and inventory valuation Tests for nonexistent payroll ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 19
  • 20. 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 20
  • 21. 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 21
  • 22. 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 ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 22
  • 23. Learning Objective 4 Design and perform analytical procedures for the payroll and personnel cycle. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 23
  • 24. Analytical Procedures for the Payroll and Personnel Cycle Analytical Procedure Possible Misstatement Compare payroll expense Misstatement of payroll account balance with expense accounts previous years. Compare direct labor as a Misstatement of direct percentage of sales with labor and inventory previous years. Compare commission Misstatement of expense as a percentage of commission expense and sales with previous years. commission liability ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 24
  • 25. Analytical Procedures for the Payroll and Personnel Cycle Analytical Procedure Possible Misstatement 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 Misstatement of accrued accounts with previous years. payroll taxes and payroll tax expense ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 25
  • 26. Learning Objective 5 Design and perform tests of details of balances for accounts in the payroll and personnel cycles. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 26
  • 27. 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 ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 27
  • 28. Tests of Details of Balances for Expense Accounts Officers’ compensation Commissions Payroll tax expense Total payroll Contract labor ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 28
  • 29. 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 Ending balance Audited by TOC, STOT, and AP Audited by AP and TDP TOC + STOT + AP + TDP Audited by AP and TDP = Sufficient competent evidence per GAAS ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 29
  • 30. End of Chapter 17 ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 30