Auditing Payroll Expenses – Risks – Assertions,

And Procedures
Types of Audit

Overview

There are numerous different expenses that are incurred by the company over the course of

the year. It is important to ensure that all these expenses are properly accounted for in

order to arrive at the correct figure for the profit for the particular year. Even during the

year-end audit, it is important for auditors to ensure that they are able to conduct a proper

audit for all the expenses involved, so that there is reasonable evidence gathered based on

which they are able to comment on the overall accuracy with which the financial statements

have been prepared.

Payroll Expenses are considered to be one of the most significant operating expenses on the

financial statements of any organization. Since they comprise a major operating expense,

they need to be audited properly.

Payroll comprises mainly comprise of expenses that are paid in order to settle the dues of

the human capital of the organization. In this regard, it must be taken into consideration

that payroll in itself comprises numerous different human payroll expenses and salaries.

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Therefore, auditing payroll expenses tends to be an increasingly important factor from the

perspective of accountants, since it directly tends to impact the overall profitability of the

company.

Risk Associated With Auditing Payroll Expenses

Payroll expenses tend to be one of the major expenses incurred by a company. Therefore,

there are a number of variables that need to be considered when auditing payroll expenses.

The overall element of risk involved with payroll expenses is considerably high, and hence,

needs to be investigated in a rigorous manner.

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Classifying the overall risks involved with auditing payroll expenses, it can be seen that

these risks are mainly twofold: Risks of Material Misstatement, and Detection Risk.

Subsequent explanation for these risks is given below:

Risk of Material Misstatement: As far as the Risk of Material Misstatement is

concerned, it involves the risk of the payroll associated figures being materially

misstated. It is mainly triggered by a lesser level of internal control within the

organization, which mainly results in payroll amounts being disbursed abruptly.

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 Generally speaking, this particular risk is higher in organizations, primarily because of

the relative ability with which these numbers can be tweaked in order to reflect the

existing position of the company.

Detection Risk: Detection Risk refers to the inability of the auditors to point out the

relevant inconsistencies in the financial statement when in reality, they have been

materially misstated. In other words, this particular risk mainly implies that the audit

procedures and processes are subsequently unable to detect any inconsistency or

material misstatement in the payroll figures that have been disclosed in the financial

statements. Typically, this risk is also high in organizations.

Therefore, it can be seen that payroll expenses are usually high-risk, because it is an

internal matter of the organization, and therefore, this particular expense can be inflated in

order to suit the preference of the organization that is being audited.

Audit Assertions When Auditing Payroll Expenses

Since payroll audit tends to be a high-risk element within organizations, it is important to

consider the fact that it needs to factor in a couple of various audit assertions in order to

gather reasonable evidence that the amount for payroll expenses has not been materially

misstated. These assertions are given below:

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Subsequent explanation of these audit assertions are provided below:

Existence: The audit assertion of existence states that the payroll expenses that have

been declared by the organizations should actually have been paid (or incurred) by

the organization in the current year. They should not be figures that are made out of

thin air in order to accommodate these expenses for the relevant year.

Occurrence: The audit assertion of occurrence implies that organizations should only

record payroll expenses that have actually been occurred. They should not report

expenses that would have occurred if they had undergone a certain project. Only

concrete and verifiable human resource amounts should be recorded in the financial

statements.

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 Cut-Off: This particular audit assertion states that only those payroll expenses

should be recorded in the financial year that is specifically relevant to the year for

which the financial statements are being prepared for.

Presentation and Disclosure: Since payroll expenses are expansive in nature, the

disclosure to the payroll expenses should include descriptions for all the payroll

expenses, including basic salaries, bonuses, and other relevant disbursements that

have been made by the organization in line with payroll expenses.  

Accuracy: All payroll expenses should be calculated properly in order to ensure that

the final figure of payroll expense is not materially misstated.

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Audit Procedures Associated With Auditing Payroll Expenses

Given the fact that there are numerous different assertions that need to be accounted for by

organizations, it is important to realize the fact that audit procedures should be designed in

order to rigorously test these assertions against the disclosures made by the organization.

Therefore, audit procedures can be broadly clubbed into two broader categories:

Analytical Procedures: Analytical Procedures mainly involve tests of details, including

tests of details to assess the level of internal control within the company. A higher

internal control would imply that the audit assertions mentioned in the earlier part of

the article are fully applied. Internal Control is a measure of the extent to which the

organization has checks and balances in place in order to mitigate the risk associated

with fraud, or cash embezzlement within the organization. The efficacy of internal

control is mainly gauged by checking the authorization protocols, as well as the

structure of the Human Resource Department, and the extent to which it functions in

an independent manner.

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However, observations and analytical procedures are not solely sufficient in order to

comment on the reasonableness of the disclosed payroll expenses. Organizations still need

to ensure that they inculcate substantive audit testing against all the assertions to gather

further concrete evidence.

Substantive Audit Procedures: Substantive Audit Procedures are created in order to

test the assertions using tests that are specifically designed to address the particular

assertions. They are summarized in the following table:

Audit
Substantive Testing
Assertion

In order to test the assertion of occurrence, the following substantive tests

are carried out: Checking for payroll slips, and bank accounts in order to

reconcile the payout made to employees. A random sampling of monthly

Existence 
paychecks, further verified by bank accounts. Questionnaires and

Interviews with the staff, at random, to ensure that they have received the

particular amount.

This is mainly checked by the auditor calculating the payroll expense, as

per his knowledge, and then comparing it with the disclosed figure. In the
Occurrence
case where there is a material discrepancy, further investigation needs to

be carried out to determine the reason for the differential.

This assertion is mainly tested by checking if the previous year’s payroll

records were settled, and the current outstanding dues. Additionally, the
Cut-Off
amount paid in payroll is used in order to gauge the payroll expense for

the year.

Presentation Since payroll constitutes various different expenses, it is important to

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and ensure that all the relevant disclosures have been made in the financial

Disclosure statements that might help the end-user of the financial statement in the

decision-making process.  

This is tested by rechecking and recalculating the figures that were

disclosed by the organization as payroll expenses. The auditor needs to

Accuracy design a procedure to ensure that there have been no mathematical or

totaling-related errors involved in calculating the total figure for payroll

for the subsequent year.

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