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©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18 - 1

Audit of the Payroll

and Personnel Cycle

Chapter 18


Learning Objective 1

Identify the accounts and

transactions 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.

Accounts in the Payroll and

Personnel Cycle



Personnel CycleAccrued Wages, Salaries,

Bonuses, and Commissions

Payment Beginningbalance

Earned wages,salaries, etc.

Ending balance

DirectLabor

Cash in Bank

Payment forsalaries

Payment forpayroll taxes

Withheld Income Taxesand Other Deductions


Payrollwithholding

Ending balance



Personnel Cycle

Cash in Bank

Payment forsalaries

Payment forpayroll taxes

Withheld Income Taxesand Other Deductions


Payrollwithholding

Ending balance

Accrued PayrollTax Expense


Payrolltax expense

Ending balance

Payroll Tax Expense



Personnel Cycle

In most systems the accrued wages and

salaries account is used only at the

end of an accounting period.



Describe the business functions

and the related documents and

records in the payroll and

personnel cycle.


Business Functions in the

Cycle and Related Documents

and Records

The payroll and personnel cycle….

Begins Hiring of personnel

Ends Payments


Personnel and Employment

Personnel records

Deduction authorization form

Rate authorization form


Timekeeping and Payroll

Preparation

Time Card

Job Time Ticket

Payroll Transaction File

Payroll Journal

Timekeeping and

Payroll Preparation


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.


Payment of Payroll

Payroll check

Payroll bank account reconciliation


Preparation of Payroll Tax Returns

and Payment of Taxes

W-2 Form

Payroll tax returns



Understand internal control and

design and perform tests of

controls and substantive tests

of transactions for the payroll



Methodology for Designing Controls

and Substantive Tests

Understand internal control – payroll and personnel

Audit procedures

Sample size

Items to select

Timing

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


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


Payroll Tax Forms and

Payments

Timely payment of the payroll taxes

withheld and other withholdings

Preparation of payroll tax forms


Inventory and Fraudulent

Payroll Considerations

Tests for nonexistent employees

Relationship between payroll

and inventory valuation


Identify client business

risks affecting

payroll liability accounts

Methodology for Designing Tests

of Balances for Payroll Liabilities

Set tolerable misstatement

and assess inherent risk

for payroll liability accounts

Assess control risk for the

payroll and personnel cycle

Phase I

Phase I

Phase I




Design and perform

tests of controls and

substantive tests

of transactions

for the payroll and

personnel cycle

Phase II


Timing

Items to select

Sample size

Audit procedures



Design and perform

analytical procedures

for the payroll and

personnel cycle

Design tests of

details of payroll

accounts balances

to satisfy

balance-related

audit objectives

Phase III

Phase III



Design and perform analytical

procedures for the payroll



Analytical Procedures for the


Compare direct labor as a

percentage of sales with

previous years

Misstatement of directlabor and inventory

Analytical procedure

Compare payroll expense

account balances with

previous years

Misstatement of payroll

expense accounts

Possible misstatement


Analytical Procedures for the


Analytical procedure

Compare commission expense

as a percentage of sales with

previous years

Misstatement of

commission expense

and commission liability

Compare payroll tax expense

as a percentage of salaries and

wages with previous years

Misstatement of payroll

tax expense and payroll

tax liability

Possible misstatement

Compare accrued payroll tax

accounts with previous years

Misstatement of accrued

payroll taxes and expense



Design and perform tests of

details of balances for accounts

in the payroll and personnel cycle.


Two Major Balance-related

Audit 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).


Tests of Details of Balances

for 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


Tests of Details of Balances

for Expense Accounts

Officers’ compensation

Commissions

Payroll tax expense

Total payroll

Contract labor


Presentation and Disclosure

Objectives

Required disclosures are not extensive

Some complex transactions require

footnote disclosure


Types of Audit Tests for the


TOC + STOT + AP + TDB= Sufficient appropriate evidence per GAAS

Cash inBank

PayrollLiabilities

Direct Labor andPayroll Expenses

Payments Expenses

Audited byTOC, STOT, and AP

Endingbalance

Endingbalance

Audited by AP and TDB

Audited byTOC, STOT, and AP


End of Chapter 18

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Documents

business functionsand

payroll transactionfor

recordsthe payroll

payroll andpersonnel

personnel cyclecash

personnel cyclein

personnel cycleaccrued

learning objective