1. Payroll and Production
CAS 265 – Communicating deficiencies in internal control to those charged with governance and management
CAS 300 – Planning an audit of financial statements
CAS 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment
CAS Materiality in Planning and Performing an Audit
CAS The Auditor’s Response to Assessed Risk
CAS 500 – Audit Evidence
CAS 530 – Audit Sampling

2. Risk Assessment
Production accounting requires flexibility and judgement. A main source of risk in the production process.
The main risk related to payroll relates to the ownership assertion.

3. Production Process
The production cycle includes transactions that flow through the following business activities:
Most of the transactions in a production cycle are cost accounting allocations, unit cost determinations and standard cost calculations.
Think of the audit of inventory as two phases:

4. Production Process Start Here Determine cost of goods sold
Production planning
Production Process
Cost accounting
Inventory planning
Produce goods and services

5. Authorization of the Production Process
Production planning starts with a sales forecast and interacts with inventory planning to create production orders.

6. Custody of Production Items
Supervisors and workers have physical custody of materials, equipment and labour while production work is performed.

7. Cost Accounting
When production is complete, production records including the production orders and materials and labour records are sent to the cost accounting department.

8. Periodic Reconciliation
As with financial accounting records,

9. Documentary Audit Evidence
Production accounting systems produce timely reports to supervise and control production. These can be used as supporting evidence for assertions:

10. Control Risk Assessment
Accounts include:

11. General Controls
Proper segregation of responsibilities for authorization, custody, recording and reconciliation:
Controls should produce evidence to allow for detail control checking procedures.
Complex computer systems could be used extensively
The use of Internal Control Questionnaires.

12. Test of Controls
Tests of controls should address all of the control objectives required for the audit
What should these tests include:

13. Direction of Testing - completeness
Bill of materials. Labour hour needs.
Match details
START
Sample of production orders
Issue slips.
Materials-used report.
Production cost reports
Trace bill of materials to the documents.
Labour reports.
Production cost reports
Trace labour hours to the documents.
Check the sample documents are authorized.
Production Planning Department
Cost Accounting Department

14. Direction of Testing - validity
Recalculate costs. (Accuracy)
Find cost reports for the sample
Issue slips.
Materials-used report.
Vouch materials. (Validity)
Sample of Production cost reports
START
Materials requisitions.
Bill of materials
General Ledger Inventory Account
Vouch labour costs.
(Validity)
Vouch overhead.
(Accuracy, validity)
Compare materials. (Accuracy)
Labour reports.
Overhead schedules
Production
Cost Accounting Department

15. Final Assessment of Controls
The purpose of testing controls is to determine nature, extent, and timing of substantive procedures.
i.e. The same as the other cycles

16. Substantive Procedures of the Production Process.
What are substantive procedures, and what do they do?
The auditor’s assessment of risk is used to adapt the procedures to the audit engagement.
This will include analytical procedures
Tests of transactions and balances. E.g.
RM - Select items from the inventory balance
WIP –
OH –

17. The Payroll Cycle
Personnel management and the payroll accounting process include transactions that affect the wage and salary accounts and a number of related accounts:
Personnel and Labour Relations: Hiring and firing.
Supervision: Approval of work time.
Timekeeping and cost accounting: Payroll preparation and cost accounting.
Payroll Accounting: Cheque preparation and related payroll reports.
Payroll Distribution: Actual custody and distribution to employees.

18. Payroll Process Start Here Cash disbursement Personnel hiring / firing
Payroll distribution
Payroll Process
Compensation determination
Payroll accounting
Supervision, attendance, and work

19. Authorization of the Payroll Process
A personnel department independent of other functions should have authority for hiring and terminating employees.
Direct supervisors should approve

20. Custody
Custody for the payroll process includes
Access to documents

21. Recordkeeping
The payroll accounting function should prepare the cheques and related tax reports.

22. Periodic Reconciliation
Payroll bank accounts can be reconciled like any other bank account.
In addition, payroll tax returns, and labour reports prepared for production provide other avenues for reconciliation

23. Sources of Audit Evidence
Payroll systems produce numerous reports that can be used as supporting evidence for assertions.
Personnel Files - Detailed individual employees files (existence).
Timekeeping Records - Detailed records of hourly workers’ time.
Payroll Register - A special journal containing detailed pay information.
Labour Cost Analysis - Labour cost information used for purposes such as reconciliation and distribution of labour rates.
Government and Tax Reports
year-to-date earnings records
employee T-4 reports

24. Control Risk Assessment
The major risks in the payroll cycle are

25. General Control Considerations
Proper segregation of responsibilities
Custody of payroll distribution by persons
Recordkeeping is performed by

26. Computer-Based Payroll
With computer-based payroll, various records and approval signatures may not exist.
Information about payroll is often gathered

27. Detailed Test of Controls
Tests of controls should address all of the control objectives.
Tests include:
Note dual direction of testing for completeness and validity

28. Testing of Payroll – dual direction
Trace rates.
Trace to authorizations
Vouch rates
Sample of Personnel Files
Sample of Payroll Registers
Authorization Files
Trace deductions
Vouch deductions
Personnel Department
Payroll Department

29. Computerized Payroll Processing
Payroll processing and payroll register preparation are usually the first computer applications a business implements.

30. Control Risk Assessment
The purpose of testing controls is to determine
Good controls – low control risk:
Poor controls – high control risk:

31. Substantive Procedures of the Payroll Process.
What do substantive procedures do?
Analytical procedures

32. Substantive Procedures of the Payroll Process.
Tests of transactions and balances
For a sample of employee payroll payments:

33. Sample of payroll register entries
Problem EP 13-5, Page 739
The diagram below describes several payroll test of control procedures. It shows the direction of the tests, leading samples of time cards, payrolls, and cumulative year-to-date earnings records to rectangles.
Required: For each of the red rectangles, write a payroll test of controls and describe the evidence it can produce.
Trace time (1)
Sample of clock cards
Trace (6)
Year-to-date records
Payroll register
Recalculate (3)
Reconcile all (6)
Vouch time (2)
Sample of payroll register entries
Management reports
Clock Cards
Trace (7)
Vouch cheques (4)
Vouch transfer (5)
General Ledger
Trace (7)
Bank statement

34. Problem EP 13-8, Page 741
The diagram below describes several cost accounting test of control procedures. It shows the direction of the tests, leading samples of cost accounting analyses, management reports, and the general ledger.
Required: For each of the rectangles, write a cost accounting test of controls and describe the evidence it can produce.
Clock Cards
(2)
Payrolls
(1)
Management Reports
(3)
Sample of cost accounting analyses
General Ledger
Cost Accounting Analyses
(4)
Sample from GL
Sample of management reports
Vouch time
Trace
Reconcile
Vouch supporting analyses