Auditing Arens Chapter 20

8/19/2019 Auditing Arens Chapter 20

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©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 Payroll

and Personnel Cycleand Personnel Cycle

Chapter 20Chapter 20


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©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 transactionsIdentify the accounts and transactions

in the payroll and personnel cycle.in the payroll and personnel cycle.


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he overall objective in the audit of the payroland personnel cycle is to evaluate !hether th

account balances a"ected by the cycle arefairly stated in accordance !ith generallyaccepted accounting principles.

Accounts in the Payroll andAccounts in the Payroll and

Personnel CyclePersonnel Cycle


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Personnel CyclePersonnel CycleAccrued Wages, Salaries,

Bonuses, and Commissions

Payment Beginningbalance

Earned wages,salaries, etc.

Ending balance

DirectLabor

Cash in Bank

Payment orsalaries

Payment or!ayroll ta"es

Withheld #ncome $a"es

and %ther DeductionsPayment Beginning

balancePayrollwithholding

Ending balance


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Personnel CyclePersonnel Cycle

In #ost syste#s the accrued !ages andsalaries account is used only at the

end of an accounting period.


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


$escribe the business functions and$escribe the business functions and

the related docu#ents and records inthe related docu#ents and records in

the payroll and personnel cycle.the payroll and personnel cycle.


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

%usiness &unctions in the%usiness &unctions in the

Cycle and 'elatedCycle and 'elated

$ocu#ents and 'ecords$ocu#ents and 'ecords

he payroll and personnel cycle(.

%eginsPersonnel)iring

*nds Pay#ents


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

Personnel and *#ploy#entPersonnel and *#ploy#ent

Personnel records

$eduction authori+ation for#

'ate authori+ation for#


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

i#e,eeping and Payroll i#e,eeping and Payroll

PreparationPreparation

$ime Card

&ob $ime $icket

Payroll $ransaction 'ilePayroll &ournal

i#e,eeping and

Payroll Preparation


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Payroll -aster &ilePayroll -aster &ile

A payroll #aster le is used forrecording each payroll transaction

for each e#ployee and #aintaining totale#ployee !ages paid for the year to date.


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Pay#ent of PayrollPay#ent of Payroll

Payroll chec,

Payroll ban, account reconciliation


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Preparation of Payroll a/Preparation of Payroll a/

'eturns and Pay#ent of a/es'eturns and Pay#ent of a/es

2 &or#

Payroll ta/ returns


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Learning Objective Learning Objective

3nderstand internal control and design3nderstand internal control and design

and perfor# tests of controls andand perfor# tests of controls and

substantive tests of transactions forsubstantive tests of transactions forthe payroll and personnel cycle.the payroll and personnel cycle.


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-ethodology for $esigning-ethodology for $esigning

Controls and 4ubstantive estsControls and 4ubstantive ests

(nderstand internal control ) !ayroll and !ersonnel

Audit !rocedures

Sam!le si*e

#tems to select

$iming

Assess !lanned control risk ) !ayroll and !ersonnel

Determine e"tent o testing controls

Design tests o controls and

substanti+e tests o transactionsor !ayroll and !ersonnel to meet

transactionrelated auditob-ecti+es


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3nderstand Internal Control3nderstand Internal Control

5Payroll and Personnel Cycle5Payroll and Personnel Cycle

Ade6uate separation of duties

Proper authori+ation

Ade6uate docu#ents and records Physical control over assets and records

Independent chec,s on perfor#ance


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Payroll a/ &or#s andPayroll a/ &or#s and

Pay#entsPay#ents

Preparation of payroll ta/ for#s

i#ely pay#ent of the payroll ta/es!ithheld and other !ithholdings


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©2012 Prentice Hall Business Publishing,©2012 Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 20 -20 - 1!1!

Inventory and &raudulentInventory and &raudulent

Payroll ConsiderationsPayroll Considerations

'elationship bet!een payroll and inventory valuation

ests for none/istent e#ployees


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©2012 Prentice Hall Business Publishing,©2012 Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 20 -20 - 1"1"

Identify client businessris,s a"ecting

payroll liability accounts

-ethodology for $esigning ests-ethodology for $esigning ests

of %alances for Payroll Liabilitiesof %alances for Payroll Liabilities

4et tolerable #isstate#entand assess inherent ris,

for payroll liability accounts

Assess control ris, for thepayroll and personnel cycle

Phase I

Phase I

Phase I


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©2012 Prentice Hall Business Publishing,©2012 Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 20 -20 - 1#1#



$esign and perfor#tests of controls and

substantive testsof transactionsfor the payroll and

personnel cycle

Phase II


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i#ing

Ite#s to select

4a#ple si+e

Audit procedures



$esign and perfor#analytical procedures

for the payroll and

personnel cycle

$esign tests of details of payroll

accounts balancesto satisfybalancerelatedaudit objectives

Phase III

Phase III


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$esign and perfor# analytical$esign and perfor# analytical

procedures for the payroll andprocedures for the payroll and

personnel cycle.personnel cycle.

Ana yt ca Proce ures orna yt ca roce ures or


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Ana yt ca Proce ures orna yt ca roce ures orthe Payroll and Personnelthe Payroll and Personnel

CycleCycle

Com!are direct labor as a

!ercentage o sales with!re+ious years

isstatement o directlabor and in+entory

Analytical !rocedure

Com!are !ayroll e"!ense

account balances with!re+ious years

isstatement o !ayroll

e"!ense accounts

Possible misstatement

Ana yt ca Proce ures orna yt ca roce ures or


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Ana yt ca Proce ures orna yt ca roce ures orthe Payroll and Personnelthe Payroll and Personnel

CycleCycleAnalytical !rocedureCom!are commissione"!ense as a / o sales with !re+ious years

isstatement o commission e"!enseand commission liabilit

Com!are !ayroll ta"e"!ense as a / o salaries

and wages with !rior year

isstatement o !ayrollta" e"!ense and !ayroll

ta" liability

Possible misstatement

Com!are accrued !ayrollta" accounts with !rior year

isstatement o accrue!ayroll ta"es and e"!en


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$esign and perfor# tests of details of$esign and perfor# tests of details of

balances for accounts in the payrollbalances for accounts in the payroll

and personnel cycle.and personnel cycle.


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!o -ajor %alancerelated !o -ajor %alancerelated

Audit ObjectivesAudit Objectives

1.Accruals in the trial balanceare stated at the correcta#ounts 9accuracy:.

2.ransactions in the payroll andpersonnel cycle are recorded

in the proper period 9cuto":.


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ests of $etails of %alances ests of $etails of %alances

for Liability Accountsfor Liability Accounts

A#ounts !ithheld fro# e#ployees; pay

Accrued salaries and !ages

Accrued co##issions Accrued bonuses

Accrued vacation pay< sic, pay< or other bene

Accrued payroll ta/es


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©2012 Prentice Hall Business Publishing,©2012 Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 20 -20 - 2!2!

ests of $etails of %alances ests of $etails of %alances

for */pense Accountsfor */pense Accounts

O=cers; co#pensation

Co##issions

Payroll ta/ e/pense otal payroll

Contract labor


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©2012 Prentice Hall Business Publishing,©2012 Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 20 -20 - 2"2"

Presentation and $isclosurePresentation and $isclosure

ObjectivesObjectives

'e6uired disclosures are not e/tensive

4o#e co#ple/ transactions re6uirefootnote disclosure


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©2012 Prentice Hall Business Publishing,©2012 Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 20 -20 - 2#2#

ypes of Audit ests for the ypes of Audit ests for the

Payroll and Personnel CyclePayroll and Personnel Cycle

$%C 0 S$%$ 0 AP 0 $DB1 Su2cient a!!ro!riate e+idence !er 3AAS

Cash inBank

PayrollLiabilities

Direct Labor andPayroll E"!enses

Payments E"!enses

Audited by$%C, S$%$, and AP

Endingbalance

Endingbalance

Audited by AP and $DB

Audited by$%C, S$%$, and AP


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

*nd of Chapter 20*nd of Chapter 20

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Auditing Arens Chapter 20