Prepared by:

Alex Almodiel, CPA, MBA

AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
Payroll Cycle A
General
AP Process
Ledger
Time Cards B

Review & AP
Timekeeping Payroll Disbursement
Approval of Voucher
process process Process
Time Cards Process

A
Distribution of
Banks &
Employees Payment to Vendors B
Employees
AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
 Transaction Type & Ledger Accounts Affected
by the Purchasing & Disbursement Process
Type of Transactions Account Affected
Payroll transaction • Cash
• Inventory
• Direct and indirect labor expense
accounts
• Various payroll-related liability and
expense accounts
Accrued payroll liability • Cash
• Various accruals (e.g. payroll taxes and
pension costs)

AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
 Documents and Records
Employee records Payroll register
Salary rate or salary Employee payroll record
authorizations or personnel Payroll master file
action form
Payroll master file changes
Deduction authorization forms report
Payroll check / direct deposit Periodic payroll reports
records
Various tax reports and forms

AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
 Functions in the Payroll Process
Major Function Details
Personnel Authorization of hiring, terminating, wage-rate and salary adjustments,
and payroll deductions.
Supervision Review and approval of employees’ attendance and time information,
monitoring of employee scheduling, productivity, and payroll cost
variances.
Timekeeping Processing of employees’ attendance and time information and coding
of account distribution.
Payroll processing Computation of gross pay, deductions, and net pay; recording and
summarization of payments and verification of account distribution.
Distribution Payment of employees’ compensation and benefits
General Ledger Proper accumulation, classification, and summarization of payroll in the
general ledger.

AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
 Key Segregation of Duties in the Payroll Cycle
and Possible Errors & Fraud
Segregation of Duties Possible Errors or Fraud Resulting from Conflict of Duties
The supervision function should be If one individual is responsible for the supervision,
segregated from the personnel records personnel records, fictitious employees can appear on the
and payroll-processing functions payroll records or unauthorized payments can be made.
This can result in unauthorized payments to existing
employees or payments to fictitious employees.
The disbursement function should be If one individual is responsible for the disbursement
segregated from the personnel records, function and also has the authority to hire and fire
supervision, and payroll-processing employees, approve time reports, or prepare payroll
functions checks, unauthorized payroll checks can be issued.
The payroll-processing function should If one individual is responsible for processing payroll
be segregated from the general ledger transactions and also for the general ledger, that individual
function. can conceal any defalcation that would normally be
detected by independent review of accounting entries
made to the general ledger.
AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
Recommended Segregation of Duties for Payroll Functions by Department
Operating or Time-
Payroll Functions HR Payroll IT Treasurer
Supporting keeping
Initiation of wage or salary changes X
Initiation of employee hiring and firing X
Approval o wage or salary changes X
Updating of personnel records X
Updating of payroll records X
Approval of time cards & job classification X
Review of time data and payroll distribution X
Preparation of payroll X X
Preparation and signing of payroll checks X
Distribution of payroll checks X
Updating general ledger for payroll activity X
Comparison of monthly departmental payroll
X
expense to budget
Calculation and recording of payroll taxes AuditofBusinessProcess/PayrollCycle/AlexAlmodiel X
Inherent Risk Assessment

Economic conditions on payroll cost

Supply of skilled workers
Frequency of employee turnover
Labor contracts and legislation

AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
 Control Risk Assessment
Components of Example of Specific Situations or Circumstances Risk
Internal Control that may Influence Control Risk Assessment Assessment
Control Environment Existence of human resource policies and practices. Low
Entity’s Risk Training payroll clerk for new payroll tax pronouncements and Low
Assessment Process regulations issued by the government.
Control Procedures Performance reviews of employee and review and approval of time Low
cards done by employees’ supervisor or manager.
Information Systems Detailed process manual for timecard preparation, its review and Low
& Communication approval and payroll processing is being followed by every
personnel.
Monitoring Controls Internal audit done routinely on payroll process. Low

AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
 Examples of Assertions, Possible Misstatements, Internal Control & Audit Procedure

Assertion Possible Misstatement Control Procedure Audit Procedure

Occurrence Payments made to fictitious Segregation of duties Observe and evaluate proper
employees segregation of duties
Completeness Employee services rendered Pre-numbered Check numerical sequence of
but not recorded timecards accounted timecards.
for by client personnel
Obligations Paid SSS premium payable Stamped AP vouchers Examine relevant AP Vouchers to
remains outstanding. as “Paid”. verify if paid or not yet paid.
Accuracy Employee compensation and Review of payroll Recalculate sample employees’
payroll deduction computed register for unusual compensation and payroll
incorrectly. amounts. deduction and match it with client’s
own computation.
Presentation Misclassification of bonus Chart of accounts Review payroll transaction entries
& Disclosure payable as salary payable. and verify purpose of such payroll.

AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
AuditofBusinessProcess/PayrollCycle/AlexAlmodiel
References
Primary Reference
• Philippine Standards on Auditing
• Auditing & Assurance Services 4th Edition by Messier/Glover/Prawitt

AuditofBusinessProcess/PayrollCycle/AlexAlmodiel