U U N IT

6
Audit of Various Cycles

Unit Overview

In the previous unit, we learned about the importance of audit evidence to the audit
cycle as well as what criteria evidence must possess to be sufficient and appropriate
for inclusion in audit working papers and giving an audit opinion. We also learned
about the ways in which auditors can gather various types of evidence as well as
the possible ways of selecting the items forming the evidence. Knowledge from the
previous session is a foundation for actual performance of the audit as in this unit we
will be using the type of tests we learnt about to acquire the kind of evidence unit 5
described. It is also necessary to be able to select the items to be tested as described
under Audit Sampling also in unit 5. The general knowledge from unit 5 will be
applied to specific cycles in this unit. The actual tests performed during an actual
audit of financial statements will be explored in this unit.

Unit 6 Learning Objectives

By the end of this Unit, you will be able to:
1. Validate the use of substantive procedures in relation to financial statement
assertions.
2. Explain the substantive procedures used in auditing each balance.
3. Design and propose audit procedures for the following areas:
• Bank and cash
• Inventory
• Receivables
• Payroll.

This Unit is divided into four (4) sessions as follows:

Session 6.1: Audit of Cash and Bank Cycle

Session 6.2: Audit of Inventory and Warehousing Cycle
Session 6.3: Audit of Receivables Cycle
Session 6.4: Audit of Payroll Cycle

© 2017 University of the West Indies Open Campus  77

 READING
Required Readings and Resources
Prescribed Text - Arens, A.A., Elder, R.J., and Beasley, Mark
Auditing and Assurance Services: An Integrated Approach. 14th
Edition Prentice Hall (Chapter 13, 15 & 17).

Additional Readings and Supplementary Resources

Zeepedia.com, Fundamentals of Auditing (Lessons 26 & 27)
Available at http://www.zeepedia.com/read.php?an_introduction_
fundamentals_of_auditing&b=25&c=1

You are also advised to locate and read: Additional papers relevant
to the topics covered.

78  ACCT3044 Advanced Auditing – UNIT 6

 SSession 6.1

Audit of Cash and Bank Cycle

Introduction
The cash and bank balance is impacted by almost all transactions an organization
engages in. Just to give you an idea of how much of an impact transactions have on the
cash and bank cycle think about the functioning of a hotel. Whenever payments are
made to suppliers, the cash or bank balance decreases, when payments are received
from guests, the cash or bank balance increases, for payments made to employees,
cash or bank balance decreases, if stocks are issued, cash or bank balance increases
and if dividends are paid, cash or bank balance decreases. As a result of all of this, the
evidence accumulated from the test of other cycles can be used as evidence of how
true and fair the cash and bank balance is. Therefore, in most audits cash and bank
balances are considered to be a significant area regardless of whether the balance is
immaterial or not. In this session we will be learning about the cash and bank cycle
and the design of an audit programme to adequately test this cycle.

Cash and Bank Transactions within an Entity

The auditor would have acquired an understanding of the types of bank and cash
accounts owned by the client during the “Understand the Business” process at the
initial phase of the audit. Some possible cash and bank accounts the auditor generally
encounters are as follows:

- General Cash account which is normally maintained with a bank. This account
facilitates most of the transactions the client engages in such as payroll, supplier
payments and deposits from business operations.

- Imprest Payroll account is a separate account used by the client to facilitate payroll
expenses only. Some clients opt to use this account as a means of control over the
payroll payment function. A fixed sum is placed in this account that is equivalent
to the payroll expense. A list is sent to the bank at which this account is being
maintained, comprising the names, account numbers and payment amount each
employee on the list should receive.

- Branch Bank accounts are maintained for each location provided that the client’s
operations span several locations. The deposits and disbursements for each location
are made to a separate bank account and arrangements can be put in place for the
transfer of funds from all these accounts to the main account.

ACCT3044 Advanced Auditing – UNIT 6  79

 - Imprest Petty Cash Fund is generally maintained on the site of the client’s operation
and is set aside for incidentals such as purchase of office supplies or unplanned
transportation expenses.
- Cash Equivalents are highly liquid short term investments which usually consist
of excess cash the operations accumulate that will be needed in the near future.
Cash equivalents generally include time deposits, certificate of deposit and money
market funds.
An auditor must thoroughly understand the accounts maintained by the client in order
to audit them. The auditor must also be knowledgeable of the management assertions
attached to the accounts so that the procedures can be designed to adequately test the
assertions. Each account maintained by the client may require different procedures to
obtain the required evidence.

Audit Procedures
Generally, the audit programmes used by auditors not only have the procedures that
auditors should perform to obtain audit evidence but also comprise information
acquired from a previous process that will impact the performance of the procedures
as well as other information that makes the documentation of the evidence flow in a
logical manner. Several templates of audit programmes for auditing cash and bank are
developed and can be accessed using the internet. Some auditors choose to develop
their own audit programmes but all the procedures should be similar but just further
tailored to a particular client.

The diagram below displays a methodology used by auditors when designing audit
tests for the various cycles:

Diagram 6.1 Designing Test of Details of Balance for Cash in Bank

80  ACCT3044 Advanced Auditing – UNIT 6

 The auditor must determine what the specific objectives are of auditing the cash and
bank cycles. Generally the objectives surround responding appropriately to assessed
risks surrounding the cash and bank cycles at the financial statement level and the
assertion level by designing and performing audit procedures. At this point the risk
assessment procedures would have already been performed and the auditor would
have been aware of the extent of texting deemed necessary as a result of the areas
being high or low risk.

The assertions made about cash and bank are existence, completeness, accuracy, rights
and obligations, valuation and cut off. The auditor must design or use procedures to
confirm these assertions.

Bank Confirmation Procedure

The auditor decides which bank balances he/she wants to confirm dependent on the
materiality of the balance, the volume of transaction on the account and the impact of
internal controls on the balances. The auditor generally prepares a confirmation letter
requesting the bank of choice to confirm the account numbers, the currency of the
account and the balance on the account as at the date of the audit. This confirmation
would be signed by the client and dispatched to the bank. The bank’s reply must
be sent directly to the auditor. This procedure satisfies the assertions of existence,
completeness, rights and obligation, valuation and cut off.

Re-perform Bank Reconciliation and Verify Reconciling Items

Provided that the client utilizes a bank reconciliation as a control over the cash and bank
balances, the auditor will re-form the bank reconciliation to confirm it was properly
done and is mathematically accurate. In a bank reconciliation a person independent
of the handling, recording of cash receipts and disbursements traces the cash book
balance to the balance per the bank statement and investigates the difference which
usually results from unrecorded deposits in transit, uncashed cheques, cancelled
cheques and interest and bank charges. The auditor verifies the reconciling items by
tracing a sample of them to source documents. This procedure satisfies the existence,
completeness and valuation assertions.

Test Transfers within Bank Statements

The auditor generally requests a schedule of intercompany bank transfers. There is
the risk that the client made errors when recording transfers as well as there could
be an intentional effort to embezzle funds. The procedures performed within this test
include:
- Verification of the information on the client schedule
- Tracing of interbank transfers to both accounts the funds were transferred between
- Verification that the date of disbursement and receipt of a transfer between accounts
is the same
- Verification that disbursements and receipts are correctly included or excluded from
the year end balance

ACCT3044 Advanced Auditing – UNIT 6  81

 These procedures are generally performed when there is a high volume of interbank
transfers and is done on a sample of the transfers. These procedures are also used to
detect fraud. The assertion satisfied by this procedure is occurrence.

Surprise Cash Count

Based on the materiality set for the cash balance, it may be deemed material. The
auditor generally performs an unannounced cash count to determine if the cash on
hand is as per company policy and if any disbursement and receipt is supported by
valid supporting documentation.

Be mindful that not all the types of tests can be utilized in the collection of evidence.
Only the ones that are most suitable to address the assessed risk, audit objectives and
management assertions must be used. The auditor then concludes on the procedures
performed. The conclusion directly addresses the objective of the procedure. Sometimes
the results of the procedures will require the auditor to do extended procedures. Also
the auditor makes recommendations to improve the client’s operations, citing any
errors noted from performance of the procedures

LEARNING ACTIVITY 6.1

Auditing Cash and Bank
You are a junior auditor on the external audit engagement of a five
star hotel Negril, Jamaica. As a part of your professional development
you are required to assist with the planning of an audit. The planning
of the cash and bank area was assigned to you. Your client has
several accounts with several banks in various currencies. All
suppliers are paid via bank transfer. The client also pays salaries
fortnightly and also via bank transfer. The total payroll amount is
transferred prior to pay day from the main account to a Payroll
Account. Guests pay cash at the front desk upon arrival for their
rooms as well as for other services. These monies are lodged to the
bank daily at approximately 3 pm. A lodgment slip is prepared which
details the sum of each currency collected. This lodgment slip is
stamped by the bank as evidence that sums have been received.

1. List and explain all the possible risks your client faces given the
details in the paragraph above.

2. Design the procedures you deem necessary to address the risks

you outlined in your response to 1 above.

3. Describe five controls necessary in the cash and bank area.

Post your response to the discussion forum. Engage a peer whether
to agree or disagree with a risk and or procedure that you did not
mention in your response.

82  ACCT3044 Advanced Auditing – UNIT 6

 Session 6.1 Summary
In this session, the various cash and bank accounts and possible transactions an
auditor is concerned about as it related to the cash and bank cycle were outlined.
The management assertions about the cash and bank balances and transactions were
highlighted. The most common audit procedures used to gather evidence in the cash
and bank cycle were also discussed. In the next session we will focus on audit of
inventory and warehousing cycle.

ACCT3044 Advanced Auditing – UNIT 6  83

 SSession 6.2

Audit of Inventory and Warehousing

Cycle

Introduction
The nature of the client’s business dictates the inventory items as well as the warehousing
practices. Common among auditors is the view that audit of the inventory is one of the
most time consuming and challenging areas. This is so as inventory generally consists
of a diverse list of items, sometimes located in several locations and the valuation
method for the various categories of items may differ and inventory is generally of
a significant amount. This area presents a risk of material misstatements as a result
of its challenges and therefore, related audit procedures are normally extensive. In
this session we will explore the inventory and warehousing cycle and related audit
procedures.

Inventory Process and Records

Inventory purchase is initiated by a purchase requisition, created by either an inventory
personnel or computer when the inventory level in the system reaches a predetermined
quantity. A purchase requisition details the description of the items requested as well
as the quantities. Several levels of authorization are needed on a purchase requisition.
A purchase order follows a purchase requisition. This too requires approval from
senior management and is used to generate payment for the goods requested. These
documents, though used to initiate the purchase of inventory, are tested under the
purchases and payables cycle.

When inventory is purchased, the supplier issues an invoice which details the items
bought, quantity of each, date of purchase and cost of items. When the goods are
delivered to the client, the client’s personnel prepares a Goods Received Note (GRN)
which details all the items and quantities received. The inventory items are then entered
into the inventory system either manually or by scanning them. The inventory system
could also be paper based and items from the GRN entered on bin cards. Dependent
on the client, goods could be stored in the warehouse for production purposes or for
retail. However, inventory is generally released from the warehouse upon receipt of a
Goods Requisition document which too must be adequately authorized. In the event
that the goods are for retail, it is generally sold directly from the inventory and in that
case a receipt is issued and cash or valuables received whether immediately or at a
future date.

84  ACCT3044 Advanced Auditing – UNIT 6

 All these records may be used at some point of the audit of the inventory transactions
and balance. It is possible that more or less documents are used but this is dependent
on the client’s policies which would have been thoroughly documented from the
initial stage of the audit.

Audit Procedures
As per International Accounting Standards (IAS) 2 a requirement is that inventory
must be valued at the lower of cost and net realizable value. Cost as defined by the
standard is “The cost of purchase of inventory and cost incurred in bringing inventory
to its present location and condition.”

Net realizable value is defined by the same standard as “The estimated selling price
in the ordinary course of business, less the estimated costs of completion and the
estimated costs necessary to make the sale.” The definitions alert auditors to the value
of inventory on the financial statements. In order for the auditor to be able to determine
if inventory was correctly valued, the various documents involved in the process must
be verified as well as the actual inventory condition at year end.

Management assertions related to this area are completeness, existence, rights

and obligations and valuation. The auditor’s responsibility is to obtain sufficient
appropriate evidence about inventory from:
- Inventory records
- Controls over the inventory system
- Physical inventory count results and
- Test counting of the inventory

Refer to the Diagram 6.1 in Session 6.1 for the methodology used to design audit
procedures. These steps can be utilized when designing audit procedures over the
inventory and warehousing cycle.

The following procedures can generally be found in the inventory audit programme:

Physical Inventory Observation

It is the client’s responsibility to design appropriate procedures to obtain and record
accurate count results. The auditor evaluates the count procedures as well as test
count inventory items as well as inquire of client staff in order to conclude on whether
the count procedures were effective and if the results can be relied on. The auditor
usually selects a sample of the inventory from the client’s inventory list and locate
the items and compare the count results to the results recorded by the client. This test
count satisfies the assertion of existence. Completeness of the inventory is verified by
selecting items from the shelf and comparing count results to the client’s inventory
count. During a physical count, the auditor makes note of obsolete items, excludes
inventory owned by client’s customers as well as include inventory located in other
locations.

ACCT3044 Advanced Auditing – UNIT 6  85

 Reconcile the Inventory Count to the General Ledger
The client uses the inventory count results to update the quantity of the various
items in their accounting system which is used to arrive at the figure presented in the
financial statements. The auditor takes copies of the client’s inventory count sheets
after performing test counts at the year end. At the final audit, the auditor obtains
client’s count sheets and selects a sample of inventory items. These items are then
agreed to the auditor’s copies of the same count sheet. If no differences are noted, the
quantity for each item is agreed to the quantity in the client’s inventory system. This
test verifies the accuracy of the general ledger. The completeness of the inventory
items in the inventory system is also tested when a sample is selected from it and
agreed to the quantity on the auditor’s copy of the verified count sheets.

Inventory Pricing Test

The auditor verifies the unit prices of inventory to determine if the recorded cost
is accurate. Generally a sample of inventory items are selected from the client’s
inventory listing and traced to related invoices or contracts. An extension of this test
is the Inventory Compilation Test where the prices from the source documents are
used to multiply the quantities verified. The total of the client’s inventory summary is
then agreed to the general ledger. It is the auditor’s duty to determine if the inventory
is valued at the lower of cost and net realizable value. The contracts and invoices tell
the auditors the cost of the items. The auditor compares this price to the net realizable
value of the inventory and determines if the inventory is valued at the lower of
the two.

Inventory Cut-off Test

Proper cut-off procedures must be performed by the client to ensure that the inventory
recorded in the financial statements belongs to the fiscal period being audited. The
auditor generally observes at the inventory count to ensure no goods purchased
after the period end is included in the stock. Also the auditor obtains records of a
sample of the last invoices and goods requisition notes as well as first invoices and
goods requisition notes after the year end. The auditor traces records obtained for
the inventory system to verify that the last invoices before the year end have been
included in the year-end inventory, that the last requisitions were excluded from the
year-end inventory, that the first invoices were not included in the year-end inventory
and that the requisitions were not distributed prior to the year end.

Other procedures are also performed to test inventory. These procedures are dependent
on the nature of the client’s operations. For example, if the client buys raw materials
for production before goods are sold, the auditor may be interested in the classification
of the inventory items, to determine if raw materials were presented separately from
work in progress and separate from finished goods. An auditor must be familiar
with the accounting principles governing inventory in order to adequately audit it.
Knowledge of the assertions pertaining to inventory is also required knowledge.

86  ACCT3044 Advanced Auditing – UNIT 6

 LEARNING ACTIVITY 6.2
Inventory Audit Procedures

1. Design the procedures you think are relevant to the planning and
attendance at a client’s physical inventory count.

2. Discuss the reason/s you consider the procedures designed at

question one above to be important.

3. Post your response in the discussion forum and engage at least

one of your peers.

Session 6.2 Summary

In this session the inventory process was explained and the documents produced
in the process were outlined and their purpose explained. The most common audit
procedures used to verify management assertion in the inventory and warehousing
cycle were explained. The learning activities facilitated the opportunity for you to
think about the auditor’s duty as it relates to the planning and performance of the
physical inventory count. In the next session we will be exploring the components of
the receivables process as well as the procedures.

ACCT3044 Advanced Auditing – UNIT 6  87

 SSession 6.3

Audit of Receivables Cycle

Introduction
In the previous session, the inventory and the warehousing cycle as well as the
related audit procedures were explored. Note that the inventory cycle is related to
the receivables cycle in that, the items sold on credit from the inventory forms the
balances which are owing to the client, in other words, the receivables. The audit
of receivables take into consideration the sales, bad debts, trade receivables and
prepayment transactions and balances. Generally, receivables are material to an audit
and the auditor must be familiar with the standard audit procedures most appropriate
for this area. In this session, the components of receivables in a financial statement
will be discussed as well as the audit procedures to obtain sufficient appropriate audit
evidence. The assertions related to this area will also be highlighted in the design of
the audit procedures.

The Components of Receivables

Accounting Coach, an online accounting information source, defines accounts
receivables as “The money a company has the right to receive because it had provided
customers with goods and/or services. Though this definition is simple and correct,
it can be added that a receivable amount could also be paid in advance of using or
receiving a service and or goods as in the case of prepayments.

Generally, a receivable is initiated when the client makes a sale on credit. The auditor
would be interested in the terms of the credit sale as it affects the classification assertion
related to the receivable balance. Some receivables are short term while others are
not and each type must be classified appropriately in the financial statements. As a
result of a credit sale in the normal course of the client’s business, a trade receivable
is recorded. A list of all trade receivables constitutes what is known as an account
receivable aging. This generally details, the creditor, the amount of credit and the
credit period. This schedule is key in the audit of accounts receivables.

In most cases where there is a creditor, the client does not have a lien on the customers’
personal items or hold as security items of value belonging to the customer, therefore,
there is no guarantee that the creditor will repay the debt. This can give rise to what is
called bad debt. The auditor is interested in bad debts because, if they are included in

88  ACCT3044 Advanced Auditing – UNIT 6

 the receivables balance this could be a material misstatement to the financial statement.
The financial statements would be depicting an amount collectable when in reality, the
amount will never be collected.

There are instances where the client has to pay in advance before utilizing certain
services or goods such as rent, subscription for a magazine, or guaranteeing the
production of a product by paying an advance. At the end of the financial period, all
prepayments are assets of the company and must be recorded as such.

Audit Procedures
Review Diagram 6.1 in Session 6.1 for the methodology used to design audit procedures.
This diagram is applicable to the receivables cycle as well.

External Audit Confirmation of Receivables Balance

Before any confirmation requesting customers to confirm the amount of money they
owe the client is prepared, the auditor must first receive an aged receivables schedule
from the client and perform procedures to test its accuracy and completeness. These
procedures include:
• Tracing the balance of the aged receivables listing/schedule to the general
ledger.
• Agree balances from the aged receivables listing/schedule to the individual
sales ledger accounts.
• Casting the aged receivables listing/schedule to verify mathematical accuracy.

If the auditor believes it is reasonable to expect the creditors to respond to the

confirmation, they are required to send them. The auditor selects a sample of the credit
balances and sends out the confirmation. The confirmation should ideally be sent
immediately after the year-end or three months prior to the year-end. It is key to note
in the confirmation that the purpose is not to solicit payment but rather to confirm the
balance owed.

Follow-up Procedures on External Confirmations

Provided that the auditor receives all the confirmations sent and they have confirmed
what the client had recorded, sufficient appropriate evidence would have been obtained.
However, this perfect situation is not the norm. There are events when only some of
the creditors respond. If a material sum of the receivable balance is unconfirmed, or
the figures confirmed are different than the client’s records, additional procedures
must be performed to obtain sufficient evidence.

These procedures include:

• Obtaining proof of credit sale and vouching it.
• Comparing amounts owed to the customer to the amount the customer owes the
client and netting off the amounts to determine the true debt of the customer.

ACCT3044 Advanced Auditing – UNIT 6  89

 • Obtaining a list of payments received after the year end to determine if the customer
paid prior to the year-end but the payment was recorded subsequently.
• Investigating the possibility of the payment by the customer being posted to the
wrong account.

The auditor must think about all the possibilities based on the controls identified and
the nature of the client’s operations and design procedures to test the possibilities. A
follow-up procedure might be to investigate a possible fraud in this regard.

Investigate Bad Debt

From the aged account receivables listing/schedule, the auditor will select a sample
of the overdue debts. These balances are investigated to determine if they are
recoverable. Information in the media could also indicate whether a company was
declared bankrupt and therefore, unable to repay the client. In this event the client
should ensure that the debts from that company are included in the classification of
bad debts. Bad debts can be verified by:
• Examining the creditors file to assess whether a provision should be made for the
debt.
• Reviewing payments received after the year-end to determine if the debt at the
year-end was collected.
• Examining credit notes issued to creditors after the year end to determine the
valuation of the debt.
• Assessing the provisions made by the client for bad debts to determine if the
provision is reasonable. This can be done by comparing prior year provision to
actual results as well as checking the factors included in the computation and
redoing the computation. The provision should also be assessed by determining if
the debts already confirmed as bad were provided for.

Test the Existence, Accuracy, Completeness and Valuation of Prepayments

Analytical procedures are generally used to test prepayments. The auditor:
• Verifies prepayments by tracing payments to invoices, receipts, cash book or other
correspondents.
• Re-performs the calculations done by the client to check its accuracy.
• Reviews prior year prepayments and compare to current provision and inquire
about exclusions and added prepayments.

Session 6.3 Summary

In the preceding session the components of receivables were discussed as well as the
main procedures the auditor uses to test the respective components. The management
assertions related to receivables were also highlighted. As we continue to learn about
the audit cycles we will proceed with the Payroll Cycle. The payroll related documents
and the related audit procedures will be detailed.

90  ACCT3044 Advanced Auditing – UNIT 6

 SSession 6.4

Audit of Payroll Cycle

Introduction
The receivables cycle and how it is generally audited was explored in the previous
session. Though generally unrelated to the payroll cycle, there are instances in which
both cycles could be linked. Take for example if the amount receivable is as a result of
an overpayment of salaries. This would suggest that there is a weakness inherent in
the payroll cycle which could create the opportunity for fraud. Therefore, the auditor
places effort on understanding the controls over the process, testing the controls,
performing analytics on the balances as well as conducting a test of details. This
session will focus on the audit procedures commonly used to determine if the payroll
balances are reasonably stated as well as if the controls are effective.

Payroll Documents Generally Audited

In the payroll process there are records which are generated to protect the employees’
interest as well as the client’s interest. The employee is interested in being paid as
per the employment contract. He/she wants to be sure that any deduction from his/
her pay has been authorized by him/her. The client would like the payroll expense
to include only approved payments to legitimate employees. Therefore, the auditor
incorporates the documents in support of both employees and client’s interest into the
audit tests.

Upon employment the employee and employer signs a contract detailing rate of pay
and job functions. There are incidents when the employee authorizes deductions from
their pay. A deduction letter signed by the employee is generally generated in support
of the deduction. All these documents are kept in a personnel file along with any
other matters documented about the employee’s tenure with the organization and
termination.

Proof of attendance can be found in the form of a manual signature or time clock. Jobs
cards detail which functions were performed by the employees over a period of time.

The hours worked as well as deductions inclusive of taxes and voluntary deductions
are accumulated and a net pay arrived at and the information printed. This is known
as the payroll register. Employees may receive payment by way of cheque or direct
bank transfer. The client generally is able to provide a listing of cheques and bank
transfers.

ACCT3044 Advanced Auditing – UNIT 6  91

 Audit Procedures
Make reference to Diagram 6.1 in Session 6.1 for the methodology used to design audit
procedures.

The auditor selects a sample of employees from the payroll register after verifying
that it was approved by a senior manager. The activities of the employees selected
are traced from the initial stage of the process to payment. Refer to the table below
for a walk through of the audit procedures used to verify the accuracy of the payroll
register.
Table 6.2 Verifying the Accuracy of the Payroll Register

Audit Procedures
1. Verify employee rate of pay by tracing to latest employment contract.
2. Verify hours worked by employee by obtaining time card and comparing
hours worked to hours paid for. Obtain and verify explanation for any
difference noted.
3. Obtain letter signed by employee authorizing any voluntary deduction noted
in the payroll register.
4. Re-compute net pay by using applicable statutory rates. Compare results to
payroll register and note differences.
5 a. Obtain bank transfer letter and verify it was authorized by senior management.

b. Ensure total per bank transfer letter is same as total net pay per payroll
register.

c. Trace employee salary to bank transfer letter. Note any differences.

6 a. Obtain cheque payment list and agree net pay as per the payroll register to
it.

b. Obtain bank statements subsequent to the cheque listing date and note date
the cheque cleared the bank.

c. In the event that a cheque is not seen on subsequent bank statements,

determine if the cheque is stale. If stale, determine if journal entry was done
to write back cheque amount to the general ledger.

d. If cheque is not stale dated, trace to cheque stub.

The auditor also performs analytical procedures to test the reasonableness of the
payroll expense.

The auditor generally checks to determine if the client returns statutory deductions
by tracing to receipts. The receipts are examined to determine if the payment amount
is as per the total on the payroll register summary and the payment was made on or
before the date specified by legislation.

92  ACCT3044 Advanced Auditing – UNIT 6

 LEARNING ACTIVITY 6.3
Audit of the Payroll Cycle

1. Use the information below to develop an expectation of what the

payroll expense should be:

a. Prior year expense was $3,000,000.

b. Two new employees were hired in June 2015 each being

paid at a rate of $12,000 per month.

c. All employees received a 10% increase in monthly salary in

July 2015.

d. There were no terminations nor resignations.

e. All employees were given a bonus of 4% of their annual

salary.

2. Outline four possible ways the payroll balance could be misstated

and design the audit procedures deemed appropriate to identify
such misstatements.
Post your responses to the discussion forum and critically assess the
response of at least one of your peers.

Session 6.4 Summary

In this session the documents generally audited in the payroll process were discussed.
The audit procedures used to verify the payroll cycle were also outlined. The learning
activities were designed for you to gain a basic understanding of analytics done in the
payroll cycle as well as other audit procedures.

Unit 6 Summary

In unit six, the cash and bank, inventory receivables and payroll cycles were explored.
The related assertions were also linked to various audit procedures commonly
performed by the auditor. The various documents generated with each cycle were
explained as well as how the auditor uses those documents. In unit 7 the review of
audit evidence and assumptions made by the auditor based on the evidence obtained
will be covered.

ACCT3044 Advanced Auditing – UNIT 6  93

 References
Accounting Coach. The Definition of Accounts Receivables. Retrieved from:
http://www.accountingcoach.com/blog/what-is-accounts-receivable

94  ACCT3044 Advanced Auditing – UNIT 6