Auditing Chapt 17

7/16/2019 Auditing Chapt 17

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2003 Prentice Hall Business Publishing,Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 1

Audit of the Payroll

and Personnel Cycle

Chapter 17


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Learning Objective 1

Identify the accounts and

transactions in the payroll

and personnel cycle.


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Accounts and Transactions in the

Payroll and Personnel Cycle

The overall objective in the audit of the payrolland personnel cycle is to evaluate whether the

account balances affected by the cycle are

fairly stated in accordance with generallyaccepted accounting principles.


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Payroll and Personnel CycleAccrued Wages, Salaries,Bonuses, and Commissions

Payment Beginningbalance

Earned wages,salaries, etc.

Ending balance

Cash in Bank

Payment

for salaries

Payment for

payroll taxes

Direct Labor

Withheld Income Taxes

and Other DeductionsPayment Beginningbalance

Payroll withholding

Ending balance


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Withheld Income Taxesand Other Deductions

Payment Beginningbalance

Payroll withholding

Ending balance

Accrued Payroll Tax ExpensePayment Beginning balance

Payroll tax expense

Ending balance

Cash in Bank

Payment

for salaries

Payment for

payroll taxes

Payroll Tax Expense


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Separate operating accounts for payroll alsonormally include officers salaries and bonuses,

office salaries, sales salaries and commissions,

and indirect manufacturing labor.


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These accounts have the same relationship

to accrued wages and withheld taxes and

other deductions that is shown for direct labor.




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 withthe hiring of personnel and ends with payment

to the employees for the services performed

and to the government and other institutionsfor the withheld and accrued payroll taxes

and benefits.



Personnel and Employment

Personnel records

Deduction authorization form

Rate authorization form



Timekeeping and Payroll

Preparation

Time Card

Job Time Ticket

Payroll Transaction FilePayroll Journal

Payroll Master File



Payment of Payroll

Payroll check

Payroll bank account reconciliation

Paycheckfor

Dept.ofTreasurer

JohnDoe

Payche

ckfo

r

Date

Dept.

ofTre

asure

r

Jane

Doe

Date



Preparation of Payroll Tax

Returns and Payment of Taxes

W-2 FormPayroll Tax Returns




Understand internal control and

design and perform tests ofcontrols and substantive tests

of transactions for thepayroll and personnel cycle.



Methodology for Designing Tests of

BalancesAccounts Receivable

Understand internal control

payroll and personnel.

Assess planned control risk

payroll and personnel.

Evaluate cost-benefit

of testing controls.





Design tests of details of

controls and substantive tests

of transactions for payroll

and personnel to meet

transaction-relatedaudit objectives.

Audit procedures

Sample size

Items to select

Timing



Understand Internal Control


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

Payment of the payroll taxes withheld

and other withholdings on a timely basis

Preparation of payroll tax forms



Inventory and Fraudulent

Payroll Considerations

Relationship between payroll

and inventory valuation

Tests for nonexistent payroll





Identify client business risks

affecting payroll liability accounts.

Set tolerable misstatement

and assess inherent risk

for payroll liability accounts.

Assess control risk for the

payroll and personnel cycle.


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Design and perform tests of

controls and substantive tests

of transactions for thepayroll and personnel cycle.

Design and perform analyticalprocedures for the

payroll and personnel cycle.


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Design tests of details ofpayroll accounts balances

to satisfy balance-related

audit objectives.

Audit proceduresSample size

Items to select

Timing


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Design and perform analytical

procedures for the payroll

and personnel cycle.


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Analytical Procedures for the


Analytical Procedure Possible MisstatementCompare payroll expense Misstatement of payroll

account balance with expense accountsprevious years.

Compare direct labor as a Misstatement of directpercentage of sales with labor and inventory

previous years.Compare commission Misstatement ofexpense as a percentage of commission expense andsales with previous years. commission liability


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Analytical Procedures for the


Analytical Procedure Possible MisstatementCompare payroll tax expense Misstatement of payroll

as a percentage of salaries and tax expense and payrollwages with previous years. tax liability

Compare accrued payroll tax Misstatement of accruedaccounts with previous years. payroll taxes and payroll

tax expense


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Design and perform tests

of details of balances for

accounts in the payroll

and personnel cycles.


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Tests of Details of Balances

for Liability Accounts

Amounts withheld from employees pay

Accrued salaries and wagesAccrued commissions

Accrued bonuses

Accrued vacation pay, sick pay, or other benefits

Accrued payroll taxes


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Tests of Details of Balances

for Expense Accounts

Officers compensation

CommissionsPayroll tax expense

Total payroll

Contract labor


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Types of Audit Tests for the


Cash inBank

PayrollLiabilities

Direct Labor andPayroll Expenses

Payments Expenses

Ending

balance

Ending

balance

TOC+STOT+AP+TDP

= Sufficient competent evidence per GAAS

Audited byTOC,STOT, and AP

Audited byAP and TDP

Audited byTOC, STOT, and AP

Audited byAP and TDP


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End of Chapter 17