1. 15 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 15 Audit of the Payroll and Personnel Cycle

2. 15 - 2 Copyright  2003 Pearson Education Canada Inc. What classes of transactions occur in the payroll and personnel cycle?

3. 15 - 3 Copyright  2003 Pearson Education Canada Inc. - receipt of employee services and payment for those services What classes of transactions occur in the payroll and personnel cycle?

4. 15 - 4 Copyright  2003 Pearson Education Canada Inc. In the audit of payroll and personnel, transactions are far more significant than related balance sheet accounts.

5. 15 - 5 Copyright  2003 Pearson Education Canada Inc. In the audit of payroll and personnel, transactions are far more significant than related balance sheet accounts. Why?

6. 15 - 6 Copyright  2003 Pearson Education Canada Inc. In the audit of payroll and personnel, transactions are far more significant than related balance sheet accounts. Related balance sheet accounts are less signifi- cant than the volume of transactions.

7. 15 - 7 Copyright  2003 Pearson Education Canada Inc. What is the sequence of business functions that occurs in the payroll and personnel cycle?

8. 15 - 8 Copyright  2003 Pearson Education Canada Inc. 1. An employee is hired; person- nel records are accumulated. What is the sequence of business functions that occurs in the payroll and personnel cycle? PERSONNE L FILE Tom Taylor

9. 15 - 9 Copyright  2003 Pearson Education Canada Inc. 1. An employee is hired; person- nel records are accumulated. Tom Taylor Ace Company Application for Employment Name: Tom Taylor Employment history:__________________ Education:

10. 15 - 10 Copyright  2003 Pearson Education Canada Inc. 1. An employee is hired; person- nel records are accumulated. Tom Taylor Ace Company Application for Employment Name: Tom Taylor Employment history:__________________ Education: Ace Company Personnel Investigation Employee Candidate: Tom Taylor Comments of References:

11. 15 - 11 Copyright  2003 Pearson Education Canada Inc. 1. An employee is hired; person- nel records are accumulated. Tom Taylor Ace Company Application for Employment Name: Tom Taylor Employment history:__________________ Education: Ace Company Personnel Investigation Employee Candidate: Tom Taylor Comments of References: Ace Company Pay Rate Authorization Employee: Tom Taylor Date: 10/25/04 Authorized rate: $7.70/hr Authorization:

12. 15 - 12 Copyright  2003 Pearson Education Canada Inc. 1. An employee is hired; person- nel records are accumulated. Tom Taylor Ace Company Application for Employment Name: Tom Taylor Employment history:__________________ Education: Ace Company Personnel Investigation Employee Candidate: Tom Taylor Comments of References: Ace Company Pay Rate Authorization Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization: Form TD1 Authorization for Income Tax Withholding Employee name:

13. 15 - 13 Copyright  2003 Pearson Education Canada Inc. 2. The employee works for the company; labour hours are accumulated. Possibly through use of a time clock and resulting time cards

14. 15 - 14 Copyright  2003 Pearson Education Canada Inc. 2. The employee works for the company; labour hours are accumulated. In each department, management may accumulate labour charged to jobs, processes, activities, or cost centers.

15. 15 - 15 Copyright  2003 Pearson Education Canada Inc. 3. Labour hours are entered into the payroll journal and pay is calculated. time card s payroll journal description net pay Nov.2, 2004 Tom Taylor 328.61

16. 15 - 16 Copyright  2003 Pearson Education Canada Inc. 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, 2004 Tom Taylor 328.61 3. Labor hours are entered into the pay-roll journal and pay is calculated. This information is then used to update the payroll master file.

17. 15 - 17 Copyright  2003 Pearson Education Canada Inc. 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, 2004 Tom Taylor 328.61 Summary Payroll Report This report sum- marizes payroll for a period. 3. Labor hours are entered into the payroll journal and pay is calculated. This informa- tion is then used to update the payroll master file. Periodically, a summary payroll report is prepared.

18. 15 - 18 Copyright  2003 Pearson Education Canada Inc. 4. The employee is paid through an imprest payroll account. The cheque is signed by the treasurer. Ace Payroll Jane Treasurer Tom Taylor Bank of Montreal

19. 15 - 19 Copyright  2003 Pearson Education Canada Inc. 5. At year-end, payroll accounting prepares T4 slips and T4 summary. payroll accounting T4 slips T.Taylor earned $21,996.32 in 2004. T4 Summary

20. 15 - 20 Copyright  2003 Pearson Education Canada Inc. How does an auditor design tests of controls for payroll and personnel?

21. 15 - 21 Copyright  2003 Pearson Education Canada Inc. Understand controls as they relate to pay- roll and personnel As discussed in chapter 9 How does an auditor design tests of controls for payroll and personnel?

22. 15 - 22 Copyright  2003 Pearson Education Canada Inc. Assess the planned control risk related to payroll and personnel How does an auditor design tests of controls for payroll and personnel? Understand controls as they relate to pay- roll and personnel

23. 15 - 23 Copyright  2003 Pearson Education Canada Inc. In assessing control risk, the auditor should consider: Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel ?

24. 15 - 24 Copyright  2003 Pearson Education Canada Inc. In assessing control risk, the auditor should consider: - adequate segregation of duties - proper authorization - adequate documents and records - use of prenumbered documents - use of an imprest payroll account Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel

25. 15 - 25 Copyright  2003 Pearson Education Canada Inc. How does an auditor design tests of controls for payroll and personnel? Understand controls as they relate to pay- roll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel Evaluate cost- benefit of test- ing controls

26. 15 - 26 Copyright  2003 Pearson Education Canada Inc. Will substantive tests be reduced sufficiently to justify the cost of performing tests of controls? Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel Evaluate cost- benefit of test- ing controls

27. 15 - 27 Copyright  2003 Pearson Education Canada Inc. How does an auditor design tests of controls for payroll and personnel? Evaluate cost- benefit of test- ing controls Design tests of controls related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel

28. 15 - 28 Copyright  2003 Pearson Education Canada Inc. In designing payroll and personnel tests, the auditor should consider: Do all employees actually exist? Evaluate cost- benefit of test- ing controls Design tests of controls related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel

29. 15 - 29 Copyright  2003 Pearson Education Canada Inc. Is recorded labour accurate? In designing payroll and personnel tests, the auditor should consider: Evaluate cost- benefit of test- ing controls Design tests of controls related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel

30. 15 - 30 Copyright  2003 Pearson Education Canada Inc. Have personnel actions and wage rate changes been authorized? In designing payroll and personnel tests, the auditor should consider: Evaluate cost- benefit of test- ing controls Design tests of controls related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel

31. 15 - 31 Copyright  2003 Pearson Education Canada Inc. Are payroll transactions properly included in the master file and correctly summarized ? In designing payroll and personnel tests, the auditor should consider: Evaluate cost- benefit of test- ing controls Design tests of controls related to payroll and personnel Assess the planned control risk related to payroll and personnel Understand controls as they relate to pay- roll and personnel

32. 15 - 32 Copyright  2003 Pearson Education Canada Inc. Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, TD1 forms, deduction authorizations). Payroll & Personnel Audit Procedures

33. 15 - 33 Copyright  2003 Pearson Education Canada Inc. Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, TD1 form, deduction authorizations). Using the same sample, cross-reference information from personnel to related information in payroll accounting. Payroll & Personnel Audit Procedures

34. 15 - 34 Copyright  2003 Pearson Education Canada Inc. Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, TD1 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? Payroll & Personnel Audit Procedures

35. 15 - 35 Copyright  2003 Pearson Education Canada Inc. Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, TD1 form, deduction authorizations). Using the same sample, cross-reference information from personnel to related information in payroll accounting. Employees with active personnel files are being paid. How does an auditor interpret the results of this test?

36. 15 - 36 Copyright  2003 Pearson Education Canada Inc. Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, TD1 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 cheques. Payroll & Personnel Audit Procedures

37. 15 - 37 Copyright  2003 Pearson Education Canada Inc. Ace Payroll Jane Treasurer Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll cheques. when examining cancelled pay- cheques, note signature of treasurer and endorsement of the employee Payroll & Personnel Audit Procedures Bank of Montreal

38. 15 - 38 Copyright  2003 Pearson Education Canada Inc. Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll cheques. when examining cancelled pay- cheques, note signature of treasurer and endorsement of the employee Payroll & Personnel Audit Procedures Ace Payroll Jane Treasurer Compare endorsement to employee signature on TD1 Bank of Montreal

39. 15 - 39 Copyright  2003 Pearson Education Canada Inc. Select a sample of employee files from payroll accounting. Cross-reference this information to related files in personnel. payroll accounting personnel Payroll & Personnel Audit Procedures

40. 15 - 40 Copyright  2003 Pearson Education Canada Inc. Select a sample of employee files from payroll accounting. Cross-reference this information to related files in personnel. payroll accounting personnel Payroll & Personnel Audit Procedures How does an auditor interpret the results of this test?

41. 15 - 41 Copyright  2003 Pearson Education Canada Inc. Select a sample of employee files from payroll accounting. Cross-reference this information to related files in personnel. Payroll & Personnel Audit Procedures Employees being paid have active personnel files. How does an auditor interpret the results of this test?

42. 15 - 42 Copyright  2003 Pearson Education Canada Inc. This procedure addresses the auditor’s concern regarding nonexistent employees. Payroll & Personnel Audit Procedures Select a sample of employee files from payroll accounting. Cross-reference this information to related files in personnel.

43. 15 - 43 Copyright  2003 Pearson Education Canada Inc. Observe employee and management use of time clock and time cards. Payroll & Personnel Audit Procedures

44. 15 - 44 Copyright  2003 Pearson Education Canada Inc. Trace a sample of time cards to payroll accounting records for those employees. Payroll & Personnel Audit Procedures payroll accounting

45. 15 - 45 Copyright  2003 Pearson Education Canada Inc. Trace a sample of time cards to payroll accounting records for those employees. How does an auditor interpret the results of this test? payroll accounting Payroll & Personnel Audit Procedures

46. 15 - 46 Copyright  2003 Pearson Education Canada Inc. Trace a sample of time cards to payroll accounting records for those employees. Payroll & Personnel Audit Procedures Employees who turned in a clock card were paid. Pay was accurate. How does an auditor interpret the results of this test?

47. 15 - 47 Copyright  2003 Pearson Education Canada Inc. payroll accounting Trace a sample of payroll accounting records to employee time cards. Payroll & Personnel Audit Procedures

48. 15 - 48 Copyright  2003 Pearson Education Canada Inc. Trace a sample of payroll accounting records to employee time cards. How does an auditor interpret the results of this test? payroll accounting Payroll & Personnel Audit Procedures

49. 15 - 49 Copyright  2003 Pearson Education Canada Inc. Trace a sample of payroll accounting records to employee time cards. Payroll & Personnel Audit Procedures How does an auditor interpret the results of this test? Recorded payments were for work actually performed by existing employees.

50. 15 - 50 Copyright  2003 Pearson Education Canada Inc. Compare total time card labour to total labour charged to jobs, processes, activi- ties, cost centres. job cost sheet labor 43.6 hr job cost sheet labor 43.6 hr job cost sheet labor 43.6 hr job cost sheet labour 43.6 hr Payroll & Personnel Audit Procedures

51. 15 - 51 Copyright  2003 Pearson Education Canada Inc. Compare total time card labour to total labour charged to jobs, processes, activi- ties, cost centres. How does an auditor interpret the results of this test? job cost sheet labor 43.6 hr job cost sheet labor 43.6 hr job cost sheet labor 43.6 hr job cost sheet labour 43.6 hr Payroll & Personnel Audit Procedures

52. 15 - 52 Copyright  2003 Pearson Education Canada Inc. Compare total time card labour to total labour charged to jobs, processes, activi- ties, cost centers. Payroll & Personnel Audit Procedures The hours for which employees were paid were charged to production. How does an auditor interpret the results of this test?

53. 15 - 53 Copyright  2003 Pearson Education Canada Inc. Perform a surprise payroll payoff, where- by employees must pick up and sign for their cheques in the presence of a super- visor and the auditor. Investigate un- claimed cheques. Payroll & Personnel Audit Procedures

54. 15 - 54 Copyright  2003 Pearson Education Canada Inc. Perform a surprise payroll payoff, where- by employees must pick up and sign for their cheques in the presence of a super- visor and the auditor. Investigate un- claimed cheques. How does an auditor interpret the results of this test? Payroll & Personnel Audit Procedures

55. 15 - 55 Copyright  2003 Pearson Education Canada Inc. Perform a surprise payroll payoff, where- by employees must pick up and sign for their cheques in the presence of a super- visor and the auditor. Investigate un- claimed cheques. Payroll & Personnel Audit Procedures Those claiming paycheques are the appropriate employees. How does an auditor interpret the results of this test?