Payroll and Personnel

1. Payroll and Personnel There is only one class of transactions Transactions are more significant than balances Internal controls effective because of payroll tax consequences Beginning of cycle is hiring to payment to to employee and government

2. Accounts Cash Accrued wages Direct labor withheld income taxes withheld deductions accrued payroll tax expense

3. Payroll & Personnel Personnel Records Date of employment Investigation Rate of pay Deductions Performance Evaluations Termination Deduction authorizations Rate Authorizations

4. Payroll & Personnel Timekeeping: Time Card Job Time Ticket Payroll Transaction File computer file of all payroll transactions Payroll Journal for each paydate Payroll Master File Year to date records for each employee

5. Payroll & Personnel Payment payroll check- Direct deposit payroll bank account reconciliation impress account Tax returns W-2 Payroll tax returns

6. Methodology for Tests of Controls Payroll service organizations use their auditors reports Test of controls and transactions are more important than balances in the payroll cycle employees complain uniform transactions audit by federal government on payroll tax

7. Understanding Internal Controls Separation of duties human resources vs payroll process vs sign (authorization) Authorization -add, delete employees supervisor signs timesheets Documents and Records time cards, piece rate, incentive

8. Understanding Internal Controls Physical Control over Assets and records unsigned payroll checks distribution of payroll checks by someone independent of payroll Independent checks on performance verify batch totals to summary reports Management review for unusual amounts

9. Understanding Internal Controls Payroll Tax forms auditor review at least one tax form Payment of payroll taxes withheld and other withholding timely taxes, 401(K) and other retirement savings, union dues, insurance etc

10. Understanding Internal Controls Inventory and Fraudulent Payroll transactions Payroll and Inventory Valuation manufacturing and construction companies, payroll effects asset valuation work in process, finished goods, construction in process administrative salaries should not be charged to indirect manufacturing overhead direct labor close cannot be charged to wrong job test hours of employees to job cost records test job cost records to employee summaries

11. Understanding Internal Controls Inventory and Fraudulent Payroll transactions Tests for Non existent Payroll Non-existent employees Employees that are terminated Trace selected transactions to Human resources records to see if they were still employed Test terminated employees for final pay check Surprise payroll payoff Fraudulent hours-hard for auditor to detect

12. Designing Test of Details Client Business Risk bonus and stock option plans deferred compensation renegotiating of union contracts discrimination claims Set Tolerable Misstatement low risk for balance-related objectives existence objective- fraud in cash transactions

13. Designing Test of Details Assess Control Risk and Perform related tests already discussed earlier Analytical Procedures See Table 13-3

14. Design and Perform Test of Details of Balances for Liability and Expense Accounts goals: accruals are accurate, transactions are recorded in proper period (cutoff) Withheld from employee pay compare account balance with the payroll journal, the payroll tax form prepared in the subsequent period and the subsequent period cash disbursements

15. Design and Perform Test of Details of Balances for Liability and Expense Accounts Accrued Salaries and Wages accrued consistent with policy of company Accrued Commissions complex policies, can confirm with employees Accrued bonuses check minutes of Board of Directors Accrued vacation, sick pay, other benefits consistent with company policy

16. Design and Perform Test of Details of Balances for Liability and Expense Accounts Accrued payroll taxes FICA, Medicare, unemployment verify tax forms in subsequent period Expense accounts Officers Compensation - authorized by the Board (included in SEC 10-K) Commissions-sample test some employees and trace to total compensation payments

17. Design and Perform Test of Details of Balances for Liability and Expense Accounts Expense accounts (continued) Payroll tax expense add all tax forms and trace to yearly total in books recalculate tax based on rates times total payroll Total payroll reconcile to total on W-2 forms and to total on payroll tax forms Contract Labor- signed contract agreement vs recorded amount in the books