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Audit of the Payroll and Personnel Cycle Chapter 18 Learning Objective 1 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

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Audit of the payroll and personnel cycle l.jpg

Audit of the Payrolland Personnel Cycle

Chapter 18


Learning objective 1 l.jpg
Learning Objective 1

Identify the accounts and

transactions in the payroll

and personnel cycle.


Accounts and transactions in the payroll and personnel cycle l.jpg
Accounts and Transactions in thePayroll 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 l.jpg

Accrued Wages, Salaries,

Bonuses, and Commissions

Direct

Labor

Payment

Beginning

balance

Cash in Bank

Payment for

salaries

Earned wages,

salaries, etc.

Payment for

payroll taxes

Ending balance

Withheld Income Taxes

and Other Deductions

Payment

Beginning

balance

Payroll

withholding

Ending balance

Accounts in thePayroll and Personnel Cycle


Accounts in the payroll and personnel cycle5 l.jpg

Cash in Bank

Payment for

salaries

Payment for

payroll taxes

Accounts in thePayroll and Personnel Cycle

Withheld Income Taxes

and Other Deductions

Payment

Beginning

balance

Payroll

withholding

Ending balance

Accrued Payroll

Tax Expense

Payroll Tax Expense

Payment

Beginning

balance

Payroll

tax expense

Ending balance


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Accounts in thePayroll 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.


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Accounts in thePayroll and Personnel Cycle

In most systems the accrued

wages and salaries account

is used only at the end of

an accounting period.


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Learning Objective 2

Describe the business functions

and the related documents and

records in the payroll and

personnel cycle.


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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.


Personnel and employment l.jpg
Personnel and Employment Records

Personnel records

Deduction authorization form

Rate authorization form


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Timekeeping and Records

Payroll Preparation

Timekeeping and Payroll Preparation

Time Card

Job Time Ticket

Payroll Transaction File

Payroll Journal


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Payroll Master File Records

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.


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Payment of Payroll Records

Payroll check

Payroll bank account reconciliation


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Preparation of Payroll Tax Returns and Payment of Taxes Records

W-2 Form

Payroll tax returns


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Learning Objective 3 Records

Understand internal control and

design and perform tests of

controls and substantive tests

of transactions for the

payroll and personnel cycle.


Methodology for designing controls and substantive tests l.jpg

Assess planned control Records

risk – payroll

and personnel.

Evaluate cost-benefit of testing controls.

Design tests of controls and

substantive tests of

transactions for payroll and

personnel to meet transaction-

related audit objectives.

Audit

procedures

Items

to select

Sample

size

Timing

Methodology for Designing Controls and Substantive Tests

Understand internal

control – payroll

and personnel.


Understand internal control payroll and personnel cycle l.jpg
Understand Internal Control –Payroll and Personnel Cycle Records

  • Adequate separation of duties

  • Proper authorization

  • Adequate documents and records

  • Physical control over assets and records

  • Independent checks on performance


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Payroll Tax Forms Recordsand Payments

Preparation of payroll tax forms

Payment of the payroll taxes withheld

and other withholdings on a timely basis


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Inventory and Fraudulent RecordsPayroll Considerations

Relationship between payroll

and inventory valuation

Tests for nonexistent payroll


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Methodology for Designing Tests of Balances for Payroll Liabilities

Phase I

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.


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Methodology for Designing Tests of Balances for Payroll Liabilities

Phase II

Design and perform tests of controls

and substantive tests of transactions

for the payroll and personnel cycle.


Methodology for designing tests of balances for payroll liabilities22 l.jpg

Audit Liabilities

procedures

Sample

size

Items to

select

Timing

Methodology for Designing Tests of Balances for Payroll Liabilities

Phase III

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.


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Learning Objective 4 Liabilities

Design and perform analytical

procedures for the payroll

and personnel cycle.


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Analytical Procedures for the Payroll and Personnel Cycle Liabilities

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 cycle25 l.jpg
Analytical Procedures for the Payroll and Personnel Cycle Liabilities

Analytical procedure

Possible misstatement

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.

Compare accrued payroll tax

accounts with previous years.

Misstatement of accrued

payroll taxes and expense.


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Learning Objective 5 Liabilities

Design and perform tests

of details of balances for

accounts in the payroll

and personnel cycles.


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Tests of Details of Balances Liabilitiesfor 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


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Tests of Details of Balances Liabilitiesfor Expense Accounts

  • Officers’ compensation

  • Commissions

  • Payroll tax expense

  • Total payroll

  • Contract labor


Types of audit tests for the payroll and personnel cycle l.jpg

Cash in Liabilities

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 competent evidence per GAAS

Types of Audit Tests for the Payroll and Personnel Cycle


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End of Chapter 18 Liabilities


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