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CHAPTER 16 Audit of the Payroll and Personnel Cycle

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Presentation on theme: "CHAPTER 16 Audit of the Payroll and Personnel Cycle"— Presentation transcript:

1 CHAPTER 16 Audit of the Payroll and Personnel Cycle

2 What classes of transactions occur in the payroll and personnel cycle?
- receipt of employee services and payment for those services

3 Why? In the audit of payroll and personnel, transactions are far
more significant than related balance sheet accounts. Why?

4 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.

5 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? 1. An employee is hired; person- nel records are accumulated. Tom Taylor PERSONNEL FILE

6 Application for Employment
1. An employee is hired; person- nel records are accumulated. Tom Taylor Ace Company Application for Employment Name: Tom Taylor Employment history:__________________ Education:

7 Application for Employment Personnel Investigation
1. An employee is hired; person- nel records are accumulated. Tom Taylor Ace Company Application for Employment Ace Company Personnel Investigation Name: Tom Taylor Employment history:__________________ Education: Employee Candidate: Tom Taylor Comments of References:

8 Pay Rate Authorization
1. An employee is hired; person- nel records are accumulated. Tom Taylor Ace Company Pay Rate Authorization Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization: Ace Company Application for Employment Ace Company Personnel Investigation Name: Tom Taylor Employment history:__________________ Education: Employee Candidate: Tom Taylor Comments of References:

9 Pay Rate Authorization
1. An employee is hired; person- nel records are accumulated. Tom Taylor Ace Company Pay Rate Authorization Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization: Ace Company Application for Employment Ace Company Personnel Investigation Name: Tom Taylor Employment history:__________________ Education: Form W-4 Employee Candidate: Tom Taylor Comments of References: Authorization for Federal Income Tax Withholding Employee name:

10 2. The employee works for the company; labor hours are accumulated.
Possibly through use of a time clock and resulting time cards

11 management may accumulate
2. The employee works for the company; labor hours are accumulated. In each department, management may accumulate labor charged to jobs, processes, activities, or cost centers.

12 3. Labor hours are entered into the payroll journal and pay is
calculated. time cards payroll journal description net pay Nov.2, 19x9 Tom Taylor

13 3. Labor hours are entered into the payroll journal and pay is
calculated. This information is then used to update the pay- roll master file. payroll master file employee _ $$ _ Tom Taylor 11/2 net y-t-d net time cards payroll journal description net pay Nov.2, 19x9 Tom Taylor

14 3. Labor hours are entered into the payroll journal and pay is
calculated. This information is then used to update the pay- roll master file. Periodically, a summary payroll report is prepared. payroll master file employee _ $$ _ Tom Taylor 11/2 net y-t-d net time cards payroll journal description net pay Nov.2, 19x9 Tom Taylor Summary Payroll Report This report sum- marizes payroll for a period.

15 Jane Treasurer 4. The employee is paid through an
imprest payroll account. The check is signed by the treasurer. Ace Payroll Tom Taylor Jane Treasurer

16 5. At year-end, payroll accounting prepares federal W-2 forms and
payroll tax returns. Payroll Tax Return W-2 form T.Taylor earned $ in 19x9. payroll accounting

17 How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel?

18 As discussed in chapter 9
Understand controls as they relate to pay- roll and personnel As discussed in chapter 9 How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel?

19 control risk related to
Understand controls as they relate to pay- roll and personnel How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel? Assess the planned control risk related to payroll and personnel

20 In assessing control risk, the auditor should consider:
Understand controls as they relate to pay- roll and personnel In assessing control risk, the auditor should consider: ? Assess the planned control risk related to payroll and personnel

21 In assessing control risk, the auditor should consider:
Understand controls as they relate to pay- roll and personnel In assessing control risk, the auditor should consider: Assess the planned control risk related to payroll and personnel - adequate separation of duties - proper authorization - adequate documents and records - use of prenumbered documents - use of an imprest payroll account

22 control risk related to
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 Understand controls as they relate to pay- roll and personnel How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel?

23 control risk related to
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 Will substantive tests be reduced sufficiently to justify the cost of performing tests of controls?

24 control risk related to
Understand controls as they relate to pay- roll and personnel How does an auditor design tests of controls and substantive tests of transactions for payroll and personnel? Assess the planned control risk related to payroll and personnel Evaluate cost- benefit of test- ing controls Design tests of controls and substantive tests of transactions related to payroll and personnel

25 In designing payroll and personnel tests, the auditor should consider:
Evaluate cost- benefit of test- ing controls Design tests of controls and substantive tests of transactions 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 In designing payroll and personnel tests, the auditor should consider: Do all employees actually exist?

26 In designing payroll and personnel tests, the auditor should consider:
Evaluate cost- benefit of test- ing controls Design tests of controls and substantive tests of transactions 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 In designing payroll and personnel tests, the auditor should consider: Is recorded labor accurate?

27 In designing payroll and personnel tests, the auditor should consider:
Evaluate cost- benefit of test- ing controls Design tests of controls and substantive tests of transactions 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 In designing payroll and personnel tests, the auditor should consider: Have personnel actions and wage rate changes been authorized?

28 In designing payroll and personnel tests, the auditor should consider:
Evaluate cost- benefit of test- ing controls Design tests of controls and substantive tests of transactions 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 In designing payroll and personnel tests, the auditor should consider: Are payroll transactions properly included in the master file and correctly summarized?

29 Payroll & Personnel Audit Procedures
Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, W-4 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?

30 How does an auditor interpret the results of this test?
Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, W-4 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? Employees with active personnel files are being paid.

31 Payroll & Personnel Audit Procedures
Select a sample of employee files from personnel. Determine whether files are complete (job application, references, wage rate authorizations, W-4 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 checks.

32 Payroll & Personnel Audit Procedures
Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll checks. when examining cancelled pay- checks, note signature of treasurer and endorsement of the employee Ace Payroll Jane Treasurer Compare endorsement to employee signature on W-2

33 Payroll & Personnel Audit Procedures
Select a sample of employee files from payroll accounting. Cross-reference this information to related files in personnel. How does an auditor interpret the results of this test? Employees being paid have active personnel files.

34 Payroll & Personnel Audit Procedures
Select a sample of employee files from payroll accounting. Cross-reference this information to related files in personnel. This procedure addresses the auditor’s concern regarding nonexistent employees.

35 Payroll & Personnel Audit Procedures
Observe employee and management use of time clock and time cards.

36 Payroll & Personnel Audit Procedures
Trace a sample of time cards to payroll accounting records for those employees. payroll accounting

37 Payroll & Personnel Audit Procedures
Trace a sample of time cards to payroll accounting records for those employees. payroll accounting How does an auditor interpret the results of this test?

38 Payroll & Personnel Audit Procedures
Trace a sample of time cards to payroll accounting records for those employees. How does an auditor interpret the results of this test? Employees who turned in a clock card were paid. Pay was accurate.

39 Payroll & Personnel Audit Procedures
Trace a sample of payroll accounting records to employee time cards. payroll accounting

40 Payroll & Personnel Audit Procedures
Trace a sample of payroll accounting records to employee time cards. payroll accounting How does an auditor interpret the results of this test?

41 Payroll & Personnel Audit Procedures
Trace a sample of payroll accounting records to employee time cards. How does an auditor interpret the results of this test? Recorded payments were for work actually performed by existing employees.

42 Payroll & Personnel Audit Procedures
Compare total time card labor to total labor charged to jobs, processes, activi- ties, cost centers. job cost sheet labor hr

43 Payroll & Personnel Audit Procedures
Compare total time card labor to total labor charged to jobs, processes, activi- ties, cost centers. job cost sheet labor hr job cost sheet labor hr job cost sheet labor hr job cost sheet labor hr How does an auditor interpret the results of this test?

44 Payroll & Personnel Audit Procedures
Compare total time card labor to total labor charged to jobs, processes, activi- ties, cost centers. How does an auditor interpret the results of this test? The hours for which employees were paid were charged to production.

45 Payroll & Personnel Audit Procedures
Perform a surprise payroll payoff, where- by employees must pick up and sign for their checks in the presence of a super- visor and the auditor. Investigate un- claimed checks.

46 Payroll & Personnel Audit Procedures
Perform a surprise payroll payoff, where- by employees must pick up and sign for their checks in the presence of a super- visor and the auditor. Investigate un- claimed checks. How does an auditor interpret the results of this test? Those claiming paychecks are the appropriate employees.

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