Audit of the payroll and personnel cycle
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Audit of the Payroll and Personnel Cycle. Chapter 17. 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

Audit of the Payrolland Personnel Cycle

Chapter 17


Learning objective 1

Learning Objective 1

Identify the accounts and

transactions in the payroll

and personnel cycle.


Accounts and transactions in the payroll and personnel cycle

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 and transactions in the payroll and personnel cycle1

Accounts and Transactions in thePayroll and Personnel Cycle

Accrued Wages, Salaries,

Bonuses, and Commissions

PaymentBeginning

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

PaymentBeginning

balance

Payroll withholding

Ending balance


Accounts and transactions in the payroll and personnel cycle2

Accounts and Transactions in thePayroll and Personnel Cycle

Withheld Income Taxes

and Other Deductions

PaymentBeginning

balance

Payroll withholding

Ending balance

Cash in Bank

Payment

for salaries

Payment for

payroll taxes

Accrued Payroll Tax Expense

PaymentBeginning balance

Payroll tax expense

Ending balance

Payroll Tax Expense


Accounts and transactions in the payroll and personnel cycle3

Accounts and Transactions 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.


Accounts and transactions in the payroll and personnel cycle4

Accounts and Transactions in thePayroll and Personnel Cycle

These accounts have the same relationship

to accrued wages and withheld taxes and

other deductions that is shown for direct labor.


Learning objective 2

Learning Objective 2

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

Business Functions in the Cycle andRelated 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

Personnel and Employment

Personnel records

Deduction authorization form

Rate authorization form


Timekeeping and payroll preparation

Timekeeping and Payroll Preparation

Time Card

Job Time Ticket

Payroll Transaction File

Payroll Journal

Payroll Master File


Payment of payroll

Payment of Payroll

Payroll check

Payroll bank account reconciliation


Preparation of payroll tax returns and payment of taxes

Preparation of Payroll Tax Returns and Payment of Taxes

W-2 Form

Payroll Tax Returns


Learning objective 3

Learning Objective 3

Understand internal control and

design and perform tests of

controls and substantive tests

of transactions for the

payroll and personnel cycle.


Methodology for designing tests of balances accounts receivable

Methodology for Designing Tests ofBalances – Accounts Receivable

Understand internal control –

payroll and personnel.

Assess planned control risk –

payroll and personnel.

Evaluate cost-benefit

of testing controls.


Methodology for designing tests of balances accounts receivable1

Methodology for Designing Tests ofBalances – 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


Understand internal control payroll and personnel cycle

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

Payroll Tax Formsand Payments

Preparation of payroll tax forms

Payment of the payroll taxes withheld

and other withholdings on a timely basis


Inventory and fraudulent payroll considerations

Inventory and FraudulentPayroll Considerations

Relationship between payroll

and inventory valuation

Tests for nonexistent payroll


Methodology for designing tests of balances accounts receivable2

Methodology for Designing Tests ofBalances – 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.


Methodology for designing tests of balances accounts receivable3

Methodology for Designing Tests ofBalances – 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.


Methodology for designing tests of balances accounts receivable4

Methodology for Designing Tests ofBalances – Accounts Receivable

Design tests of details of

payroll accounts balances

to satisfy balance-related

audit objectives.

Audit procedures

Sample size

Items to select

Timing


Learning objective 4

Learning Objective 4

Design and perform analytical

procedures for the payroll

and personnel cycle.


Analytical procedures for the payroll and personnel cycle

Analytical Procedures for the Payroll and Personnel Cycle

Analytical ProcedurePossible Misstatement

Compare payroll expenseMisstatement of payroll

account balance with expense accounts

previous years.

Compare direct labor as aMisstatement of direct

percentage of sales withlabor and inventory

previous years.

Compare commissionMisstatement of

expense as a percentage of commission expense and

sales with previous years.commission liability


Analytical procedures for the payroll and personnel cycle1

Analytical Procedures for the Payroll and Personnel Cycle

Analytical ProcedurePossible Misstatement

Compare payroll tax expenseMisstatement of payroll

as a percentage of salaries andtax expense and payroll

wages with previous years.tax liability

Compare accrued payroll taxMisstatement of accrued

accounts with previous years.payroll taxes and payroll

tax expense


Learning objective 5

Learning Objective 5

Design and perform tests

of details of balances for

accounts in the payroll

and personnel cycles.


Tests of details of balances for liability accounts

Tests of Details of Balancesfor 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

Tests of Details of Balancesfor Expense Accounts

Officers’ compensation

Commissions

Payroll tax expense

Total payroll

Contract labor


Types of audit tests for the payroll and personnel cycle

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

Audited by

TOC, STOT, and AP

Ending

balance

Ending

balance

Audited by

AP and TDP

Audited by

AP and TDP

TOC+STOT+AP+TDP

= Sufficient competent evidence per GAAS


End of chapter 17

End of Chapter 17


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