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

2. 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

3. 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

4. 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

5. 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 : 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

6. 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

7. 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

8. 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