Audit of the Payrolland Personnel Cycle Chapter 18
Learning Objective 1 • Identify the accounts and • transactions in the payroll • and personnel cycle.
Accounts 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 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 the Payroll and Personnel Cycle Withheld Income Taxes and Other Deductions Payment Beginning balance Cash in Bank Payment for salaries Payroll withholding Ending balance Payment for payroll taxes Accrued Payroll Tax Expense Payroll Tax Expense Payment Beginning balance Payroll tax expense Ending balance
Accounts in the Payroll 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 • 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
Learning Objective 3 • Understand internal control and • design and perform tests of • controls and substantive tests • of transactions for the payroll • and personnel cycle.
Audit procedures Sample size Items to select Timing Methodology for Designing Controls and Substantive Tests Understand internal control – payroll and personnel 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 • Preparation of payroll tax forms • Timely payment of the payroll taxes withheld and other withholdings
Inventory and FraudulentPayroll Considerations • Relationship between payroll and inventory valuation • Tests for nonexistent employees
Methodology for Designing Testsof Balances for Payroll Liabilities Identify client business risks affecting payroll liability accounts Phase I Set tolerable misstatement and assess inherent risk for payroll liability accounts Phase I Assess control risk for the payroll and personnel cycle Phase I
Methodology for Designing Testsof Balances for Payroll Liabilities Design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle Phase II
Methodology for Designing Testsof Balances for Payroll Liabilities Design and perform analytical procedures for the payroll and personnel cycle Phase III Phase III 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 • Design and perform 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 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 • Design and perform tests of • details of balances for accounts • in the payroll and personnel cycle.
Two Major Balance-relatedAudit 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 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 Balancesfor 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 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 appropriate evidence per GAAS