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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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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 in the payroll and personnel cycle
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
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

accounts in the payroll and personnel cycle6
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.

accounts in the payroll and personnel cycle7
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.

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 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
Personnel and Employment

Personnel records

Deduction authorization form

Rate authorization form

timekeeping and payroll preparation
Timekeeping and

Payroll Preparation

Timekeeping and Payroll Preparation

Time Card

Job Time Ticket

Payroll Transaction File

Payroll Journal

payroll master file
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
Payment of Payroll

Payroll check

Payroll bank account reconciliation

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 controls and substantive tests
Assess planned control

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
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 for payroll liabilities
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.

methodology for designing tests of balances for payroll liabilities21
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
Audit

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.

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 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
Analytical Procedures for the Payroll and Personnel Cycle

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.

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
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 TDB

TOC+STOT+AP+TDB

= Sufficient competent evidence per GAAS

Types of Audit Tests for the Payroll and Personnel Cycle
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