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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 in the Payroll and Personnel Cycle The overall objective in the audit of the payroll and personnel cycle is to evaluate whether the

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learning objective 1
Learning Objective 1
  • Identify the accounts and
  • transactions in the payroll
  • and personnel cycle.
accounts 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 cycle4
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 cycle5
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 cycle6
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
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

Hiring of personnel

Ends

Payments

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

Timekeeping and

Payroll Preparation

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

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
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 Forms and Payments
  • Preparation of payroll tax forms
  • Timely payment of the payroll taxes

withheld and other withholdings

inventory and fraudulent payroll considerations
Inventory and FraudulentPayroll Considerations
  • Relationship between payroll

and inventory valuation

  • Tests for nonexistent employees
methodology for designing tests of balances for payroll liabilities
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 tests of balances for payroll liabilities20
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 tests of balances for payroll liabilities21
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
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 cycle24
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 cycle.
two major balance related audit objectives
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 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
presentation and disclosure objectives
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
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