Learning ObjectivesLO5 Outline the payroll process: typical transactions, account balances, source documents, and controls.LO6 Give examples of control tests for auditing control over hiring, firing, and payment of employees in the payroll process.LO7 Give examples of the typical substantive procedures used to address the assessed risk of material misstatement in the main accounts in the payroll process.

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Part II: Payroll Cycle:Typical ActivitiesPersonnel management and the payroll accounting process include transactions that affect the wage and salary accounts and a number of related accounts:

Personnel and Labour Relations: Hiring and firing. Supervision: Approval of work time. Timekeeping and cost accounting: Payroll preparation

and cost accounting. Payroll Accounting: Cheque preparation and related

payroll reports. Payroll Distribution: Actual custody and distribution to

employees.

LO5

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Payroll Process

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Personnel hiring / firing

Payroll accounting

Cash disbursement

Supervision, attendance,

and work

Compensation determination

Payroll distribution

LO5

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Payroll Process: Authorization

A personnel department independent of other functions should have authority for hiring and terminating employees.

Should also approve pay rates and deductions from employees.

Direct supervisors should approve the pay base data, such as hours, sick leave, etc.

LO5

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CustodyCustody for the payroll process includes the possession of paycheques, cash, or electronic funds transfer codes.

Access to other documents, such as time cards or time sheets is also considered custody.

LO5

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RecordkeepingThe payroll accounting function should prepare the cheques and related tax reports.

Personnel should not also have authorization nor custody responsibility

LO5

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Periodic ReconciliationPayroll bank accounts can be reconciled like any other bank account.

In addition, payroll tax returns, and labour reports prepared for production provide other avenues for reconciliation

LO5

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Audit Evidence in Management Reports and Files

Payroll systems produce numerous reports that can be used as supporting evidence for assertions.

Personnel Files - Detailed individual employees files (existence).

Timekeeping Records - Detailed records of hourly workers’ time.

Payroll Register - A special journal containing detailed pay information.

LO5

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Audit Evidence in Management Reports and Files

Labour Cost Analysis - Labour cost information used for purposes such as reconciliation and distribution of labour rates.

Government and Tax Reports year-to-date earnings records employee T-4 reports

LO5

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