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Audit of the Payroll and Personnel Cycle
Chapter 20
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Learning Objective 1
Identify the accounts and transactions in the payroll and personnel cycle.
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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
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Accounts in the Payroll and Personnel Cycle
Accrued Wages, Salaries, Bonuses, and Commissions
Payment Beginning balance
Earned wages, salaries, etc.
Ending balance
Direct Labor
Cash in Bank
Payment for salaries
Payment for payroll taxes
Withheld Income Taxes and Other Deductions
Payment Beginning balance Payroll withholding
Ending balance
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Accounts in the Payroll and Personnel Cycle
In most systems the accrued wages and salaries account is used only at the end of an accounting period.
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Learning Objective 2
Describe the business functions and the related documents and records in the payroll and personnel cycle.
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Business Functions in the Cycle and Related Documents and
Records
The payroll and personnel cycle….
Begins
Personnel Hiring
Ends
Payments
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Personnel and Employment
Personnel records Deduction authorization form
Rate authorization form
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Timekeeping and Payroll Preparation
Time Card
Job Time Ticket
Payroll Transaction File
Payroll Journal
Timekeeping and Payroll Preparation
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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.
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Payment of Payroll
Payroll check Payroll bank account reconciliation
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Preparation of Payroll Tax Returns and Payment of Taxes
W-2 Form Payroll tax returns
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Learning Objective 3
Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle.
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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
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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
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Payroll Tax Forms and Payments
Preparation of payroll tax forms Timely payment of the payroll taxes withheld and other withholdings
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Inventory and Fraudulent Payroll Considerations
Relationship between payroll and inventory valuation Tests for nonexistent employees
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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
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Methodology for Designing Tests of Balances for Payroll Liabilities
Design and perform tests of controls and
substantive tests of transactions
for the payroll and personnel cycle
Phase II
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Timing
Items to select
Sample size
Audit procedures
Methodology for Designing Tests of Balances for Payroll Liabilities
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
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Learning Objective 4
Design and perform analytical procedures for the payroll and personnel cycle.
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Analytical Procedures for the Payroll and Personnel Cycle
Compare direct labor as a percentage of sales with previous years
Misstatement of direct labor and inventory
Analytical procedure
Compare payroll expense account balances with previous years
Misstatement of payroll expense accounts
Possible misstatement
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Analytical Procedures for the Payroll and Personnel Cycle
Analytical procedure
Compare commission expense as a % of sales with previous years
Misstatement of commission expense and commission liability
Compare payroll tax expense as a % of salaries and wages with prior year
Misstatement of payroll tax expense and payroll tax liability
Possible misstatement
Compare accrued payroll tax accounts with prior year
Misstatement of accrued payroll taxes and expense
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Learning Objective 5
Design and perform tests of details of balances for accounts in the payroll and personnel cycle.
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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).
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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
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Tests of Details of Balances for Expense Accounts
Officers’ compensation
Commissions
Payroll tax expense
Total payroll
Contract labor
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Presentation and Disclosure Objectives
Required disclosures are not extensive Some complex transactions require footnote disclosure
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Types of Audit Tests for the Payroll and Personnel Cycle
TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS
Cash in Bank
Payroll Liabilities
Direct Labor and Payroll Expenses
Payments Expenses
Audited by TOC, STOT, and AP
Ending balance
Ending balance
Audited by AP and TDB
Audited by TOC, STOT, and AP