1. Audit Payroll and Personnel Cycle

2. Identify the accounts and transactions in the payroll
and personnel cycle.

3. 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.

4. 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

5. 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

6. 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.

7. 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.

8. Describe the business functions and the related documents and
records in the payroll and
personnel cycle.

9. 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.

10. Business Functions in the Cycle and Related Documents and Records
The payroll and personnel cycle….
Begins
Personnel
Hiring
Ends
Payments

11. Personnel and Employment
Personnel records
Deduction authorization form
Rate authorization form

12. Timekeeping and Payroll Preparation
Time Card
Job Time Ticket
Payroll Transaction File
Payroll Journal
Payroll Master File

13. Payroll bank account reconciliation
Payment of Payroll
Payroll check
Payroll bank account reconciliation

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

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

16. 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.

17. 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

18. 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

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

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

21. 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.

22. 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.

23. 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

24. Design and perform analytical procedures for the payroll
and personnel cycle.

25. Analytical Procedures for the Payroll and Personnel Cycle
Possible misstatement
Compare payroll expense
account balances with
previous years
Misstatement of payroll
expense accounts
Compare direct labor as a
percentage of sales with
previous years
Misstatement of direct
labor and inventory

26. Analytical Procedures for the Payroll and Personnel Cycle
Possible misstatement
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
Compare accrued payroll
tax accounts with prior year
Misstatement of accrued
payroll taxes and expense

27. Design and perform tests of details of balances for
accounts in the payroll
and personnel cycles.

28. 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).

29. 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

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

31. 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

32. Presentation and Disclosure Objectives
Required disclosures are not extensive
Some complex transactions require
footnote disclosure