arens14e_ch20_ppt

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

Audit of the PayrollAudit of the Payrolland Personnel Cycleand Personnel Cycle

Chapter 20Chapter 20

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 20 - 20 - 22

Learning Objective 1Learning Objective 1

Identify the accounts and transactions Identify the accounts and transactions in the payroll and personnel cycle.in the payroll and personnel cycle.


The overall objective in the audit of the payrolland personnel cycle is to evaluate whether theaccount balances affected by the cycle arefairly stated in accordance with generallyaccepted accounting principles.

Accounts in the Payroll and Accounts in the Payroll and Personnel CyclePersonnel Cycle



Accrued 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

Payment BeginningbalancePayrollwithholding

Ending balance



In most systems the accrued wages andsalaries account is used only at theend of an accounting period.



Describe the business functions and Describe the business functions and the related documents and records in the related documents and records in the payroll and personnel cycle.the payroll and personnel cycle.


Business Functions in the Business Functions in the Cycle and Related Cycle and Related

Documents and RecordsDocuments and Records

The payroll and personnel cycle….

BeginsPersonnelHiring

Ends Payments


Personnel and EmploymentPersonnel and Employment

Personnel records

Deduction authorization form

Rate authorization form


Timekeeping and Payroll Timekeeping and Payroll PreparationPreparation

Time Card

Job Time Ticket

Payroll Transaction File

Payroll Journal

Timekeeping andPayroll Preparation


Payroll Master FilePayroll Master File

A payroll master file is used forrecording each payroll transactionfor each employee and maintaining totalemployee wages paid for the year to date.


Payment of PayrollPayment of Payroll

Payroll check

Payroll bank account reconciliation


Preparation of Payroll Tax Preparation of Payroll Tax Returns and Payment of TaxesReturns and Payment of Taxes

W-2 Form

Payroll tax returns



Understand internal control and design Understand internal control and design and perform tests of controls and and perform tests of controls and substantive tests of transactions for substantive tests of transactions for the payroll and personnel cycle.the payroll and personnel cycle.


Methodology for Designing Methodology for Designing Controls and Substantive TestsControls 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 andsubstantive tests of transactionsfor payroll and personnel to meet

transaction-related audit objectives


Understand Internal Control Understand Internal Control –Payroll and Personnel Cycle–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 Payroll Tax Forms and PaymentsPayments

Preparation of payroll tax forms

Timely payment of the payroll taxeswithheld and other withholdings


Inventory and FraudulentInventory and FraudulentPayroll ConsiderationsPayroll Considerations

Relationship between payroll and inventory valuation

Tests for nonexistent employees


Identify client businessrisks affecting

payroll liability accounts

Methodology for Designing TestsMethodology for Designing Testsof Balances for Payroll Liabilitiesof Balances for Payroll Liabilities

Set tolerable misstatementand assess inherent risk

for payroll liability accounts

Assess control risk for thepayroll and personnel cycle

Phase I

Phase I

Phase I



Design and performtests of controls and

substantive testsof transactions

for the payroll andpersonnel cycle

Phase II


Timing

Items to select

Sample size

Audit procedures


Design and performanalytical procedures

for the payroll andpersonnel cycleDesign tests of

details of payrollaccounts balances

to satisfybalance-relatedaudit objectives

Phase III

Phase III



Design and perform analytical Design and perform analytical procedures for the payroll and procedures for the payroll and personnel cycle.personnel cycle.


Analytical Procedures for Analytical Procedures for the Payroll and Personnel the Payroll and Personnel

CycleCycle

Compare direct labor as apercentage of sales withprevious years

Misstatement of directlabor and inventory

Analytical procedure

Compare payroll expenseaccount balances withprevious years

Misstatement of payrollexpense accounts

Possible misstatement


Analytical Procedures for Analytical Procedures for the Payroll and Personnel the Payroll and Personnel

CycleCycleAnalytical procedure

Compare commission expense as a % ofsales with previous years

Misstatement ofcommission expenseand commission liability

Compare payroll tax expense as a % of salariesand wages with prior year

Misstatement of payrolltax expense and payrolltax liability

Possible misstatement

Compare accrued payroll tax accounts with prior year

Misstatement of accruedpayroll taxes and expense



Design and perform tests of details of Design and perform tests of details of balances for accounts in the payroll balances for accounts in the payroll and personnel cycle.and personnel cycle.


Two Major Balance-relatedTwo Major Balance-relatedAudit ObjectivesAudit Objectives

1.Accruals in the trial balanceare stated at the correctamounts (accuracy).

2.Transactions in the payroll andpersonnel cycle are recordedin the proper period (cutoff).


Tests of Details of BalancesTests of Details of Balancesfor Liability Accountsfor 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 BalancesTests of Details of Balancesfor Expense Accountsfor Expense Accounts

Officers’ compensation Commissions Payroll tax expense Total payroll Contract labor


Presentation and Disclosure Presentation and Disclosure ObjectivesObjectives

Required disclosures are not extensive

Some complex transactions requirefootnote disclosure


Types of Audit Tests for the Types of Audit Tests for the Payroll and Personnel CyclePayroll and Personnel Cycle

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

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

End of Chapter 20End of Chapter 20