Audit of the Payroll and Personnel Cycle

1. Audit of the Payrolland Personnel Cycle Chapter 18

2. Learning Objective 1 • Identify the accounts and • transactions in the payroll • and personnel cycle.

3. 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.

4. 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

5. 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

6. 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.

7. Learning Objective 2 • Describe the business functions • and the related documents and • records in the payroll and • personnel cycle.

8. 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.

9. Personnel and Employment Personnel records Deduction authorization form Rate authorization form

10. Timekeeping and Payroll Preparation Timekeeping and Payroll Preparation Time Card Job Time Ticket Payroll Transaction File Payroll Journal

11. 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.

12. Payment of Payroll Payroll check Payroll bank account reconciliation

13. Preparation of Payroll Tax Returns and Payment of Taxes W-2 Form Payroll tax returns

14. Learning Objective 3 • Understand internal control and • design and perform tests of • controls and substantive tests • of transactions for the payroll • and personnel cycle.

15. 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. Audit procedures Items to select Sample size Timing Methodology for Designing Controls and Substantive Tests

16. 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

17. Payroll Tax Forms and Payments Preparation of payroll tax forms Payment of the payroll taxes withheld and other withholdings on a timely basis

18. Inventory and FraudulentPayroll Considerations Relationship between payroll and inventory valuation Tests for nonexistent payroll

19. 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.

20. 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.

21. Design tests of details of payroll accounts balances to satisfy balance-related audit objectives. 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.

22. Learning Objective 4 • Design and perform analytical • procedures for the payroll • and personnel cycle.

23. 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

24. 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. 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.

25. Learning Objective 5 • Design and perform tests of • details of balances for accounts • in the payroll and personnel cycle.

26. Accruals in the trial balance are stated at the correct amounts (accuracy). 1 Transactions in the payroll and personnel cycle are recorded in the proper period (cutoff). 2 Two Major Balance-relatedAudit Objectives

27. 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

28. Tests of Details of Balancesfor Expense Accounts • Officers’ compensation • Commissions • Payroll tax expense • Total payroll • Contract labor

29. 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 APand TDB TOC + STOT + AP + TDB = Sufficient competent evidence per GAAS Types of Audit Tests for the Payroll and Personnel Cycle

30. End of Chapter 18