Audit of the Payroll Cycle Dr. Donald K. McConnell Jr. 9/21/2018

Auditors Do Not Characteristically Do A Lot Of Audit Testing in Payroll Cycle Inherent and control risk are often low in this cycle Examples: Transactions are uniform, uncomplicated, and based on historical information Employees carefully monitor their pay! There are extensive state and federal audits of payroll taxes, e.g. unemployment taxes 9/21/2018

Testing Controls in a Controls Reliance Audit of Payroll Cycle Select a sample of entries in payroll register, e.g.: 15-25 paychecks During nine months ended September 30 Typical tests of controls [note these do not test dollar amounts directly.] Examine employment authorization form in HR files, noting signed off by authorized employee or owner manager Exam W-4 copy signed by employee Examine time card or time sheet initialed by authorized supervisor 9/21/2018

Testing Controls in a Controls Reliance Audit of Payroll Cycle (con.) Typical tests of controls [con.]: Examine employee signed forms authorizing various payroll deductions, e.g. medical insurance, benefit plan deductions Compare employee signatures on these various documents for consistency of signature appearance 9/21/2018

What about Substantive TD testing? Dollar amount tests such as: Testing footings of payroll journal Tracing payroll journal postings to general ledger [Pg 18-1, APG step 2-b, c] Reperforming net pay calculations Au 350.48: substantive tests of details [such as tedious tests listed above] can be eliminated where: Control risk in payroll cycle is low AP risk in payroll cycle is low: Analytics should detect material misstatement Other substantive testing should detect material misstatement How do you know control risk is low? 9/21/2018

Other Substantive Testing in The Cycle The following summarize key APG issues in packet, pg. 18-1: Scan payroll register for unusual entries and investigate Officers compensated in accordance with board minute authorization? Test for fictitious employees (payroll ghosts): Surprise payroll observation: Auditor distributes checks, or Paycheck stubs, if P/R direct deposit Rarely done anymore Usually done by brand new audit staff 9/21/2018

Year End Substantive Testing in Payroll Cycle Test of year end payroll accrual Analytical testing: compare salary expense account balance to prior years 9/21/2018

Evaluating Internal Controls in Payroll Cycle We are looking for key controls which address management assertions, i.e. completeness, existence, etc. In a controls rely audit, we test these key controls through tests of controls to determine if control risk is low Packet page 18-2 lists key controls we hope to see in place 9/21/2018