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AUD390 AUDITING DIA

AUD390 AUDITING DIA
AUDIT OF PAYROLL
AND PERSONNEL CYCLE
OVERVIEW OF
PAYROLL &
PERSONNEL CYCLE
KEY CONTROL
ACTIVITIES
TYPES OF AUDIT
TESTS PERFORMED
 Objective to audit:
› To evaluate whether the account affected by
the cycle are fairly presented in accordance
with generally accepted accounting principles
 Differences between this cycle and the other
cycles:
› There is only 1 class of transactions for payroll
› Transactions are far more significant than related
balance sheet accounts
› Internal control over payroll are effective for
almost all companies

AUD390 AUDITING DIA
AUD390 AUDITING DIA
CLASSES OF
TRANSACTIONS
ACCOUNTS BUSINESS
FUNCTIONS
DOCUMENTS &
RECORDS
Payroll Payroll cash
All payroll expense
accounts
All payroll withholding
accounts
All payroll accrual
accounts

1. Personnel &
employment



2. Timekeeping &
payroll preparation





3. Payment of payroll



4. Preparation of
payroll tax returns
& payment of
taxes
Personnel records
Deduction authorization
form
Rate authorization form

Time card
Job time card
Payroll transaction
listing
Payroll journal or listing
Payroll master file

Payroll cheque
Payroll bank account
reconciliation

W-2 form
Payroll tax return
1. Adequate separation of duties
2. Proper authorization
3. Adequate documents & records
4. Physical control over assets and records
5. Independent check on performance
6. Preparation of Payroll Tax Forms
7. Payment of the Payroll Taxes Withheld and Other
Withholdings on a timely basis
AUD390 AUDITING DIA
AUD390 AUDITING DIA
 Purpose:
› To prevent overpayments and payments to
nonexistent employees
› Therefore, Human Resource Department should
be independent of the payroll function
 E.g.
› Payroll processing (include authorizing for
addition and termination of employees,
changes in pay rates & deductions) should be
separate from the custody of signed payroll
cheque
AUD390 AUDITING DIA
 Purpose:
› To ensure that the payroll payment are for
authorized purposes
 E.g.
› The hours worked by each employee,
especially overtime, should be authorized by
the employee’s supervisor
› Evidence of approval maybe noted on all time
cards
AUD390 AUDITING DIA
 Purpose:
› To ensure adequate number of documents &
records represent the transactions
 E.g.
› The existence of time card or punch card to
verify the attendance of employee to work

AUD390 AUDITING DIA
 Purpose:
› To ensure payroll cheques are being used for
authorized transactions only
 E.g.
› Access to unsigned cheques should be
restricted
› Cheque should be signed by an independent
person
AUD390 AUDITING DIA
 E.g.
› Payroll cheque should be distributed by
someone independent of the payroll and
timekeeping functions
› Any unclaimed cheques should be returned for
redeposit
› Access to the cheque signed-machine should
be restricted
AUD390 AUDITING DIA
 Purpose: To ensure payroll transaction are
monitored accordingly by responsible person
 E.g.
› Payroll computations should be independently
verified, including comparison of batch totals to
summary report
AUD390 AUDITING DIA
 Purpose:
› To prevent a potential liability for unpaid taxes,
penalty and interest if the client fails to prepare
the tax forms properly
 E.g.
› Perform detailed reconciliation of the
information on the tax forms and the payroll
records
AUD390 AUDITING DIA
› Indication of potential misstatements:
 The payment of penalties and interest in the
past for improper payments
 New personnel in the department responsible
for the preparation of returns
 Lack of internal verification of the information
 The existence of serious cash flow problems
for the client
AUD390 AUDITING DIA
 Purpose:
› To ensure the payment of the payroll taxes
withheld & other withholdings on a timely basis
 E.g.
› Determine the client’s requirements for
submitting the payments by referring to sources
such as laws, union contracts & agreements
with employees