Audit of the Payroll and Personnel Cycle

Chapter 20

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

5-5

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

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

20 - 2

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.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

20 - 3

Ending balance Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance ©2012 Prentice Hall Business Publishing.4 . Arens/Elder/Beasley 20 . Bonuses. and Commissions Payment Beginning balance Direct Labor Earned wages. Auditing 14/e.Accounts in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Payment for payroll taxes Accrued Wages. Salaries. salaries. etc.

©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 20 . Auditing 14/e.5 .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 Describe the business functions and the related documents and records in the payroll and personnel cycle. ©2012 Prentice Hall Business Publishing.6 . Auditing 14/e. Arens/Elder/Beasley 20 .

Auditing 14/e.7 Ends ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley .Business Functions in the Cycle and Related Documents and Records The payroll and personnel cycle…. Begins Personnel Hiring Payments 20 .

Arens/Elder/Beasley 20 . Auditing 14/e.8 .Personnel and Employment  Personnel records  Deduction authorization form  Rate authorization form ©2012 Prentice Hall Business Publishing.

Timekeeping and Payroll Preparation Time Card Job Time Ticket Payroll Transaction File Payroll Journal Timekeeping and Payroll Preparation ©2012 Prentice Hall Business Publishing. Auditing 14/e. Arens/Elder/Beasley 20 .9 .

Auditing 14/e. Arens/Elder/Beasley 20 .10 .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. ©2012 Prentice Hall Business Publishing.

11 . Auditing 14/e.Payment of Payroll  Payroll check  Payroll bank account reconciliation ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 20 .

Arens/Elder/Beasley 20 .Preparation of Payroll Tax Returns and Payment of Taxes  W-2 Form Payroll tax returns ©2012 Prentice Hall Business Publishing.12 . Auditing 14/e.

Auditing 14/e. Arens/Elder/Beasley 20 .13 .Learning Objective 3 Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle. ©2012 Prentice Hall Business Publishing.

Arens/Elder/Beasley 20 .14 . Auditing 14/e.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 Audit procedures substantive tests of transactions Sample size for payroll and personnel to meet Items to select transaction-related audit Timing objectives ©2012 Prentice Hall Business Publishing.

Auditing 14/e. Arens/Elder/Beasley 20 .15 .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 ©2012 Prentice Hall Business Publishing.

Arens/Elder/Beasley 20 .16 . Auditing 14/e.Payroll Tax Forms and Payments  Preparation of payroll tax forms  Timely payment of the payroll taxes withheld and other withholdings ©2012 Prentice Hall Business Publishing.

17 .Inventory and Fraudulent Payroll Considerations  Relationship between payroll and inventory valuation  Tests for nonexistent employees ©2012 Prentice Hall Business Publishing. Auditing 14/e. Arens/Elder/Beasley 20 .

Arens/Elder/Beasley 20 . Auditing 14/e.Methodology for Designing Tests of Balances for Payroll Liabilities Identify client business risks affecting payroll liability accounts Phase I Set tolerable misstatement and assess inherent risk Phase I for payroll liability accounts Assess control risk for the Phase I payroll and personnel cycle ©2012 Prentice Hall Business Publishing.18 .

Arens/Elder/Beasley 20 .Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform tests of controls and substantive tests Phase II of transactions for the payroll and personnel cycle ©2012 Prentice Hall Business Publishing. Auditing 14/e.19 .

Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform analytical procedures Phase III for the payroll and personnel cycle Design tests of Audit procedures details of payroll Sample size accounts balances to satisfy Items to select balance-related Timing audit objectives ©2012 Prentice Hall Business Publishing.20 . Auditing 14/e. Arens/Elder/Beasley Phase III 20 .

©2012 Prentice Hall Business Publishing. Auditing 14/e. Arens/Elder/Beasley 20 .21 .Learning Objective 4 Design and perform analytical procedures for the payroll and personnel cycle.

22 .Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Possible misstatement Compare payroll expense account balances with previous years Compare direct labor as a percentage of sales with previous years Misstatement of payroll expense accounts Misstatement of direct labor and inventory ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 20 . Auditing 14/e.

23 ©2012 Prentice Hall Business Publishing.Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Compare commission expense as a % of sales with previous years Possible misstatement Misstatement of commission expense and commission liability Compare payroll tax expense as a % of salaries and wages with prior year Compare accrued payroll tax accounts with prior year Misstatement of payroll tax expense and payroll tax liability Misstatement of accrued payroll taxes and expense 20 . Auditing 14/e. Arens/Elder/Beasley .

©2012 Prentice Hall Business Publishing.Learning Objective 5 Design and perform tests of details of balances for accounts in the payroll and personnel cycle. Arens/Elder/Beasley 20 . Auditing 14/e.24 .

Arens/Elder/Beasley 20 .Two Major Balance-related Audit Objectives 1. 2. Accruals in the trial balance are stated at the correct amounts (accuracy).25 . ©2012 Prentice Hall Business Publishing. Auditing 14/e. Transactions in the payroll and personnel cycle are recorded in the proper period (cutoff).

or other benefits Accrued payroll taxes ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 20 . Auditing 14/e.26 . sick pay.Tests of Details of Balances for Liability Accounts    Amounts withheld from employees’ pay Accrued salaries and wages Accrued commissions    Accrued bonuses Accrued vacation pay.

Tests of Details of Balances for Expense Accounts   Officers’ compensation Commissions    Payroll tax expense Total payroll Contract labor ©2012 Prentice Hall Business Publishing. Auditing 14/e. Arens/Elder/Beasley 20 .27 .

Presentation and Disclosure Objectives  Required disclosures are not extensive  Some complex transactions require footnote disclosure ©2012 Prentice Hall Business Publishing.28 . Arens/Elder/Beasley 20 . Auditing 14/e.

STOT.29 . and AP Ending balance Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS ©2012 Prentice Hall Business Publishing. STOT.Types of Audit Tests for the Payroll and Personnel Cycle Cash in Bank Payments Audited by TOC. and AP Payroll Liabilities Direct Labor and Payroll Expenses Expenses Audited by TOC. Arens/Elder/Beasley 20 . Auditing 14/e.

Arens/Elder/Beasley 5-5 . Auditing 14/e.End of Chapter 20 ©2012 Prentice Hall Business Publishing.

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