1. Learning Objectives LO5 Outline the payroll process: typical transactions, account balances, source documents, and controls. LO6 Give examples of control tests for auditing control over hiring, firing, and payment of employees in the payroll process. LO7 Give examples of the typical substantive procedures used to address the assessed risk of material misstatement in the main accounts in the payroll process. 1

2. Part II: Payroll Cycle: Typical Activities 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. LO5 2

3. Payroll Process Start Here Personnel hiring / firing Payroll accounting Cash disbursement Supervision, attendance, and work Compensation determination Payroll distribution LO5 3

4. Payroll Process: Authorization A personnel department independent of other functions should have authority for hiring and terminating employees.  Should also approve pay rates and deductions from employees. Direct supervisors should approve the pay base data, such as hours, sick leave, etc. LO5 4

5. Custody Custody for the payroll process includes the possession of paycheques, cash, or electronic funds transfer codes. Access to other documents, such as time cards or time sheets is also considered custody. LO5 5

6. Recordkeeping The payroll accounting function should prepare the cheques and related tax reports.  Personnel should not also have authorization nor custody responsibility LO5 6

7. 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 LO5 7

8. Audit Evidence in Management Reports and Files 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. LO5 8

9. Audit Evidence in Management Reports and Files 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 LO5 9