CHAPTER 16 Audit of the Payroll and Personnel Cycle

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CHAPTER 16 Audit of the Payroll and Personnel Cycle

What classes of transactions occur in the payroll and personnel cycle? - receipt of employee services and payment for those services

Why? In the audit of payroll and personnel, transactions are far more significant than related balance sheet accounts. Why?

In the audit of payroll and personnel, transactions are far more significant than related balance sheet accounts. Related balance sheet accounts are less significant than the volume of transactions.

1. An employee is hired; personnel records are accumulated. What is the sequence of business functions that occurs in the payroll and personnel cycle? 1. An employee is hired; personnel records are accumulated. Tom Taylor PERSONNEL FILE

Application for Employment 1. An employee is hired; personnel records are accumulated. Tom Taylor Ace Company Application for Employment Name: Tom Taylor Employment history:__________________ Education:

Application for Employment Personnel Investigation 1. An employee is hired; personnel records are accumulated. Tom Taylor Ace Company Application for Employment Ace Company Personnel Investigation Name: Tom Taylor Employment history:__________________ Education: Employee Candidate: Tom Taylor Comments of References:

Pay Rate Authorization 1. An employee is hired; personnel records are accumulated. Tom Taylor Ace Company Pay Rate Authorization Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization: Ace Company Application for Employment Ace Company Personnel Investigation Name: Tom Taylor Employment history:__________________ Education: Employee Candidate: Tom Taylor Comments of References:

Pay Rate Authorization 1. An employee is hired; personnel records are accumulated. Tom Taylor Ace Company Pay Rate Authorization Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization: Ace Company Application for Employment Ace Company Personnel Investigation Name: Tom Taylor Employment history:__________________ Education: Form W-4 Employee Candidate: Tom Taylor Comments of References: Authorization for Federal Income Tax Withholding Employee name:

2. The employee works for the company; labor hours are accumulated. Possibly through use of a time clock and resulting time cards

management may accumulate 2. The employee works for the company; labor hours are accumulated. In each department, management may accumulate labor charged to jobs, processes, activities, or cost centers.

3. Labor hours are entered into the payroll journal and pay is calculated. time cards payroll journal description net pay Nov.2, 19x9 Tom Taylor 328.61

3. Labor hours are entered into the payroll journal and pay is calculated. This information is then used to update the payroll master file. payroll master file employee _ $$ _ Tom Taylor 11/2 net 328.61 y-t-d net 753.12 time cards payroll journal description net pay Nov.2, 19x9 Tom Taylor 328.61

3. Labor hours are entered into the payroll journal and pay is calculated. This information is then used to update the payroll master file. Periodically, a summary payroll report is prepared. payroll master file employee _ $$ _ Tom Taylor 11/2 net 328.61 y-t-d net 753.12 time cards payroll journal description net pay Nov.2, 19x9 Tom Taylor 328.61 Summary Payroll Report This report sum- marizes payroll for a period.

Jane Treasurer 4. The employee is paid through an imprest payroll account. The check is signed by the treasurer. Ace Payroll Tom Taylor Jane Treasurer

5. At year-end, payroll accounting prepares federal W-2 forms and payroll tax returns. Payroll Tax Return W-2 form T.Taylor earned $21996.32 in 19x9. payroll accounting

How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel?

As discussed in chapter 9 Understand controls as they relate to payroll and personnel As discussed in chapter 9 How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel?

control risk related to Understand controls as they relate to payroll and personnel How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel? Assess the planned control risk related to payroll and personnel

In assessing control risk, the auditor should consider: Understand controls as they relate to payroll and personnel In assessing control risk, the auditor should consider: ? Assess the planned control risk related to payroll and personnel

In assessing control risk, the auditor should consider: Understand controls as they relate to payroll and personnel In assessing control risk, the auditor should consider: Assess the planned control risk related to payroll and personnel - adequate separation of duties - proper authorization - adequate documents and records - use of prenumbered documents - use of an imprest payroll account

control risk related to Assess the planned control risk related to payroll and personnel Understand controls as they relate to payroll and personnel Evaluate cost- benefit of testing controls Understand controls as they relate to payroll and personnel How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel?

control risk related to Assess the planned control risk related to payroll and personnel Understand controls as they relate to payroll and personnel Evaluate cost- benefit of testing controls Will substantive tests be reduced sufficiently to justify the cost of performing tests of controls?

control risk related to Understand controls as they relate to payroll and personnel How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel? Assess the planned control risk related to payroll and personnel Evaluate cost- benefit of testing controls Design tests of controls and substantive tests of transactions related to payroll and personnel

In designing payroll and personnel tests, the auditor should consider: Evaluate cost- benefit of testing controls Design tests of controls and substantive tests of transactions related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to payroll and personnel In designing payroll and personnel tests, the auditor should consider: Do all employees actually exist?

In designing payroll and personnel tests, the auditor should consider: Evaluate cost- benefit of testing controls Design tests of controls and substantive tests of transactions related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to payroll and personnel In designing payroll and personnel tests, the auditor should consider: Is recorded labor accurate?

In designing payroll and personnel tests, the auditor should consider: Evaluate cost- benefit of testing controls Design tests of controls and substantive tests of transactions related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to payroll and personnel In designing payroll and personnel tests, the auditor should consider: Have personnel actions and wage rate changes been authorized?

In designing payroll and personnel tests, the auditor should consider: Evaluate cost- benefit of testing controls Design tests of controls and substantive tests of transactions related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to payroll and personnel In designing payroll and personnel tests, the auditor should consider: Are payroll transactions properly included in the master file and correctly summarized?

Payroll & Personnel Audit Procedures Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, W-4 form, deduction authorizations). Using the same sample, cross-reference information from personnel to related information in payroll accounting. How does an auditor interpret the results of this test?

How does an auditor interpret the results of this test? Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, W-4 form, deduction authorizations). Using the same sample, cross-reference information from personnel to related information in payroll accounting. How does an auditor interpret the results of this test? Employees with active personnel files are being paid.

Payroll & Personnel Audit Procedures Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, W-4 form, deduction authorizations). Using the same sample, cross-reference information from personnel to related information in payroll accounting. Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll checks.

Payroll & Personnel Audit Procedures Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll checks. when examining cancelled paychecks, note signature of treasurer and endorsement of the employee Ace Payroll Jane Treasurer Compare endorsement to employee signature on W-2

Payroll & Personnel Audit Procedures Select a sample of employee files from payroll accounting. Cross-reference this information to related files in personnel. How does an auditor interpret the results of this test? Employees being paid have active personnel files.

Payroll & Personnel Audit Procedures Select a sample of employee files from payroll accounting. Cross-reference this information to related files in personnel. This procedure addresses the auditor’s concern regarding nonexistent employees.

Payroll & Personnel Audit Procedures Observe employee and management use of time clock and time cards.

Payroll & Personnel Audit Procedures Trace a sample of time cards to payroll accounting records for those employees. payroll accounting

Payroll & Personnel Audit Procedures Trace a sample of time cards to payroll accounting records for those employees. payroll accounting How does an auditor interpret the results of this test?

Payroll & Personnel Audit Procedures Trace a sample of time cards to payroll accounting records for those employees. How does an auditor interpret the results of this test? Employees who turned in a clock card were paid. Pay was accurate.

Payroll & Personnel Audit Procedures Trace a sample of payroll accounting records to employee time cards. payroll accounting

Payroll & Personnel Audit Procedures Trace a sample of payroll accounting records to employee time cards. payroll accounting How does an auditor interpret the results of this test?

Payroll & Personnel Audit Procedures Trace a sample of payroll accounting records to employee time cards. How does an auditor interpret the results of this test? Recorded payments were for work actually performed by existing employees.

Payroll & Personnel Audit Procedures Compare total time card labor to total labor charged to jobs, processes, activities, cost centers. job cost sheet labor 43.6 hr

Payroll & Personnel Audit Procedures Compare total time card labor to total labor charged to jobs, processes, activities, cost centers. job cost sheet labor 43.6 hr job cost sheet labor 43.6 hr job cost sheet labor 43.6 hr job cost sheet labor 43.6 hr How does an auditor interpret the results of this test?

Payroll & Personnel Audit Procedures Compare total time card labor to total labor charged to jobs, processes, activities, cost centers. How does an auditor interpret the results of this test? The hours for which employees were paid were charged to production.

Payroll & Personnel Audit Procedures Perform a surprise payroll payoff, where- by employees must pick up and sign for their checks in the presence of a super- visor and the auditor. Investigate un- claimed checks.

Payroll & Personnel Audit Procedures Perform a surprise payroll payoff, where- by employees must pick up and sign for their checks in the presence of a super- visor and the auditor. Investigate un- claimed checks. How does an auditor interpret the results of this test? Those claiming paychecks are the appropriate employees.