Audit of the Payroll and Personnel Cycle Chapter 17

Identify the accounts and transactions in the payroll Learning Objective 1 Identify the accounts and transactions in the payroll and personnel cycle.

Accounts and Transactions in the Payroll and Personnel Cycle 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 and Transactions in the Payroll and Personnel Cycle Accrued Wages, Salaries, Bonuses, and Commissions Payment Beginning balance Earned wages, salaries, etc. Ending balance Cash in Bank Payment for salaries Payment for payroll taxes Direct Labor Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance

Accounts and Transactions in the Payroll and Personnel Cycle Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance Cash in Bank Payment for salaries Payment for payroll taxes Accrued Payroll Tax Expense Payment Beginning balance Payroll tax expense Ending balance Payroll Tax Expense

Accounts and Transactions in the Payroll and Personnel Cycle Separate operating accounts for payroll also normally include officers’ salaries and bonuses, office salaries, sales salaries and commissions, and indirect manufacturing labor.

Accounts and Transactions in the Payroll and Personnel Cycle 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 Learning Objective 2 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 with the hiring of personnel and ends with payment to the employees for the services performed and to the government and other institutions for 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 File Payroll Journal Payroll Master File

Payroll bank account reconciliation Payment of Payroll Payroll check Payroll bank account reconciliation

Preparation of Payroll Tax Returns and Payment of Taxes W-2 Form Payroll Tax Returns

Understand internal control and design and perform tests of Learning Objective 3 Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle.

Methodology for Designing Tests of Balances – Accounts Receivable Understand internal control – payroll and personnel. Assess planned control risk – payroll and personnel. Evaluate cost-benefit of testing controls.

Methodology for Designing Tests of Balances – Accounts Receivable Design tests of details of controls and substantive tests of transactions for payroll and personnel to meet transaction-related audit objectives. Audit procedures Sample size Items to select Timing

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

Payroll Tax Forms and Payments Preparation of payroll tax forms Payment of the payroll taxes withheld and other withholdings on a timely basis

Inventory and Fraudulent Payroll Considerations Relationship between payroll and inventory valuation Tests for nonexistent payroll

Methodology for Designing Tests of Balances – Accounts Receivable 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.

Methodology for Designing Tests of Balances – Accounts Receivable Design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle. Design and perform analytical procedures for the payroll and personnel cycle.

Methodology for Designing Tests of Balances – Accounts Receivable Design tests of details of payroll accounts balances to satisfy balance-related audit objectives. Audit procedures Sample size Items to select Timing

Design and perform analytical procedures for the payroll Learning Objective 4 Design and perform analytical procedures for the payroll and personnel cycle.

Analytical Procedures for the Payroll and Personnel Cycle Analytical Procedure Possible Misstatement Compare payroll expense Misstatement of payroll account balance with expense accounts previous years. Compare direct labor as a Misstatement of direct percentage of sales with labor and inventory previous years. Compare commission Misstatement of expense as a percentage of commission expense and sales with previous years. commission liability

Analytical Procedures for the Payroll and Personnel Cycle Analytical Procedure Possible Misstatement Compare payroll tax expense Misstatement of payroll as a percentage of salaries and tax expense and payroll wages with previous years. tax liability Compare accrued payroll tax Misstatement of accrued accounts with previous years. payroll taxes and payroll tax expense

Design and perform tests of details of balances for Learning Objective 5 Design and perform tests of details of balances for accounts in the payroll and personnel cycles.

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

Tests of Details of Balances for Expense Accounts Officers’ compensation Commissions Payroll tax expense Total payroll Contract labor

Types of Audit Tests for the Payroll and Personnel Cycle Cash in Bank Payroll Liabilities Direct Labor and Payroll Expenses Payments Expenses Audited by TOC, STOT, and AP Audited by TOC, STOT, and AP Ending balance Ending balance Audited by AP and TDP Audited by AP and TDP TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS

End of Chapter 17