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Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-1 Chapter Twelve Auditing the Human Resource Management Process.

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Presentation on theme: "Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-1 Chapter Twelve Auditing the Human Resource Management Process."— Presentation transcript:

1 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-1 Chapter Twelve Auditing the Human Resource Management Process Chapter Twelve Auditing the Human Resource Management Process

2 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-2 Overview of the Human Resource Management Process The human resource process starts with the establishment of sound policies for hiring, training, evaluating, counseling, promoting, compensating and taking remedial actions for employees. The main concern of the auditor involves payroll transactions once an employee has been hired.

3 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-3 Flowchart for EarthWear Clothiers Operating Human Resource Departments Payroll Initiates personnel changes Payroll master file changes Reviews master file change report Review By date Payroll master file changes Time cards Approved by supervisor   Time cards Input Error corrections From IT To IT

4 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-4 Flowchart for EarthWear Clothiers Payroll Departments IT Payroll master file Error report Payroll processing Payroll cheques Payroll register Error corrections Payroll register Review by date Payroll master file changes report Payroll reporting General ledger Periodic payroll reports Tax reports and forms

5 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-5 Financial Statement Accounts Affected

6 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-6 Types of Documents and Records

7 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-7 The Major Functions

8 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-8 Segregation of Duties

9 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-9 Inherent Risk Assessment In assessing inherent risk the auditor may want to consider the effect of economic conditions on payroll costs, the supply of skilled workers and the frequency of employee turnover. The auditor should be familiar with any existing labour contracts and the impact of regulation on the company. The inherent risk associated with non-officers of the company is generally considered low. The inherent risk associated with officers of the company may not be considered low because of the ability to take advantage of their high position.

10 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-10 Control Risk Assessment Understanding and documenting the human resource management process based on a reliance approach. Setting and documenting the control risk for the human resource management process. Planning and performing tests of controls on payroll transactions.

11 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-11 Control Activities and Test of Controls – Payroll Transactions Occurrence of Payroll Transactions The auditor want assurance that payments for payroll- related services are being made to valid employees for time actually worked. Controls must be in place to ensure that no payments are made to fictitious employees and payments to valid employees are stopped once the employee is terminated.

12 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-12 Control Activities and Test of Controls – Payroll Transactions Authorization of Payroll Transactions The client must have controls for hiring and terminating employees, setting pay rates, making withholdings, awarding benefits and issuing payroll cheques.

13 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-13 Auditing Payroll-Related Accounts Substantive Analytical Procedures

14 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-14 Control Activities and Test of Controls – Payroll Transactions Accuracy of Payroll Transactions The auditor’s main concern is that the employee’s gross pay and payroll deductions may be incorrectly computed.

15 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-15 Control Activities and Test of Controls – Payroll Transactions Classification of Payroll Transactions If payroll expense is charged to the wrong accounts, the financial statement may be misstated. If payroll expense is not properly classified between direct and indirect labour, inventory and cost of goods sold may not be valued properly.

16 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-16 Relating the Assessed Level of Control Risk to Substantive Procedures If the results of the tests of controls for the payroll system support the planned level of control risk, the auditor conducts substantive procedures of payroll- related accounts at the assessed level. If the tests do not support the level of control risk, the nature and extent of substantive testing will be increased.

17 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-17 Tests of Detail of Transactions, Account Balances and Disclosures

18 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-18 Tests of Detail of Transactions, Account Balances and Disclosures

19 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-19 Tests of Detail of Transactions, Account Balances and Disclosures

20 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-20 Payroll Expense Accounts Payroll transactions affect many expense accounts, including direct and indirect manufacturing expense, general and administrative salaries, sales salaries, commissions and payroll tax expenses. If the entity’s internal control is reliable, the auditor does not need to conduct detailed tests of all these payroll expense accounts. Additional testing is necessary only when control weaknesses exist.

21 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-21 Accrued Payroll Liabilities The entity incurs a number of liabilities including payroll taxes withheld, medical and life insurance premiums, pension and other miscellaneous deductions. Accrued wages and salaries Accrued payroll taxes Accrued commissions Accrued bonuses Accrued benefits (vacation & sick pay)

22 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-22 Accrued Payroll Liabilities Cutoff An examination of supporting documentation for the accruals provides evidence on the proper period for recording the expense or liability.

23 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-23 Accrued Payroll Liabilities Existence and Valuation To verify the existence and valuation of an accrued payroll liability, the auditor can trace the amounts included on the account analysis working paper to supporting documentation such as payroll tax reports.

24 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-24 Accrued Payroll Liabilities Completeness The auditor must be aware of the normal payroll- related taxes that are paid by the entity and therefore should be able to determine if accruals have been made for payroll taxes such as social security taxes and unemployment insurance.

25 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-25 Accrued Payroll Liabilities Presentation and Disclosure Completeness Assertion

26 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-26 Evaluating the Audit Findings – Payroll-Related Accounts If the aggregated amount of misstatement is less than the tolerable misstatement, the auditor may accept the accounts as fairly presented. If the misstatement is greater than the tolerable misstatement, the auditor may conclude that the accounts are not fairly presented.

27 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 12-27 End of Chapter 12

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