Audit of the Payroll and Personnel Cycle

1. Audit of the Payrolland Personnel Cycle Chapter 20

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. Accounts in the Payroll and Personnel Cycle Direct Labor Accrued Wages, Salaries, Bonuses, and Commissions 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

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.

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

7. Business Functions in the Cycle and Related Documents and Records The payroll and personnel cycle…. Begins Personnel Hiring Payments Ends

8. Personnel and Employment • Personnel records • Deduction authorization form • Rate authorization form

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

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.

11. Payment of Payroll • Payroll check • Payroll bank account reconciliation

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

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.

14. Audit procedures Sample size Items to select Timing 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 substantive tests of transactions for payroll and personnel to meet transaction-related audit objectives

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

16. Payroll Tax Forms and Payments • Preparation of payroll tax forms • Timely payment of the payroll taxes withheld and other withholdings

17. Inventory and FraudulentPayroll Considerations • Relationship between payroll and inventory valuation • Tests for nonexistent employees

18. Methodology for Designing Testsof Balances for Payroll Liabilities Identify client business risks affecting payroll liability accounts Phase I Set tolerable misstatement and assess inherent risk for payroll liability accounts Phase I Assess control risk for the payroll and personnel cycle Phase I

19. Methodology for Designing Testsof Balances for Payroll Liabilities Design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle Phase II

20. Methodology for Designing Testsof Balances for Payroll Liabilities Design and perform analytical procedures for the payroll and personnel cycle Phase III Design tests of details of payroll accounts balances to satisfy balance-related audit objectives Audit procedures Phase III Sample size Items to select Timing

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 Misstatement of payroll expense accounts Compare direct labor as a percentage of sales with previous years Misstatement of direct labor and inventory

23. Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Possible misstatement Compare commission expense as a % of sales with previous years Misstatement of commission expense and commission liability Compare payroll tax expense as a % of salaries and wages with prior year Misstatement of payroll tax expense and payroll tax liability Compare accrued payroll tax accounts with prior year Misstatement of accrued payroll taxes and expense

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

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

26. 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

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

28. Presentation and Disclosure Objectives • Required disclosures are not extensive • Some complex transactions require footnote disclosure

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

30. End of Chapter 20