Audit of The Payroll and Personnel Cycle

Chapter
Chapter21
21
Audit
Auditof
ofthe
the
Payroll
Payrolland
and
Personnel
PersonnelCycle
Cycle
Copyright © 2014 Pearson Education

Identify the accounts and transactions in the
payroll and personnel cycle.
Describe the business functions and the
related documents and records in the payroll
and personnel cycle.
Understand internal control and design and
perform tests of controls and substantive
tests of transactions for the payroll and
personnel cycle.
21-2
Design and perform analytical procedures
for the payroll and personnel cycle.
Design and perform tests of details of
balances for accounts in the payroll and
personnel cycle.
21-3
1
Identify the accounts and transactions in the
payroll and personnel cycle.
21-4
The overall objective in the audit of the payroll
and personnel cycle is to evaluate whether the
account balances affected by the cycle are
fairly stated in accordance with applicable
accounting standards.
21-5
21-6
In most systems, the accrued wages and
salaries account is used only at the
end of an accounting period.
21-7
2
Describe the business functions and the
related documents and records in the payroll
and personnel cycle.
21-8
The payroll and personnel cycle….
Personnel
Begins
Hiring
Ends Payments
21-9
 Human Resource records
 Deduction authorization form
 Rate authorization form
21-10
Time Record
Job Time Ticket
Payroll Transaction File
Payroll Journal
Timekeeping and
Payroll Preparation
21-11
A payroll master file is used for
recording payroll transactions for each
employee and maintaining total
employee wages paid for the year to date.
21-12
 Payroll check
 Payroll bank account reconciliation
21-13
 W-2 Form
Payroll tax returns
21-14
3
Understand internal control and design and
perform tests of controls and substantive tests
of transactions for the payroll and personnel
cycle.
21-15
Understand internal control – payroll and personnel
Assess planned control risk – payroll and personnel
Determine extent of testing controls
Design tests of controls and Audit procedures

substantive tests of transactions Sample size
for payroll and personnel to meet
transaction-related audit Items to select
objectives Timing
21-16
 Adequate separation of duties
 Proper authorization
 Adequate documents and records
 Physical control over assets and records
 Independent checks on performance
21-17
 Preparation of payroll tax forms
 Timely payment of the payroll taxes

withheld and other withholdings
21-18
 Relationship between payroll
and inventory valuation
 Tests for nonexistent employees
21-19
Identify client business
risks affecting Phase I
payroll liability accounts
Set performance materiality

and assess inherent risk Phase I
for payroll liability accounts
Assess control risk for the

Phase I
payroll and personnel cycle
21-20
Design and perform
tests of controls and
substantive tests
Phase II
of transactions
for the payroll and
personnel cycle
21-21
Design and perform
analytical procedures
Phase III
for the payroll and
personnel cycle
Design tests of Audit procedures
details of payroll
accounts balances Sample size
Phase III
to satisfy Items to select
balance-related
audit objectives Timing
21-22
4
Design and perform analytical procedures for
the payroll and personnel cycle.
21-23
Analytical procedure Possible misstatement
Compare payroll expense Misstatement of payroll

account balances with expense accounts
previous years
Compare direct labor as a Misstatement of direct

percentage of sales with labor and inventory
previous years
21-24
Analytical procedure Possible misstatement
Compare commission Misstatement of

expense as a % of commission expense
sales with previous years and commission liability
Compare payroll tax Misstatement of payroll

expense as a % of salaries tax expense and payroll
and wages with prior year tax liability
Compare accrued payroll Misstatement of accrued

tax accounts with prior year payroll taxes and expense
21-25
5
Design and perform tests of details of balances
for accounts in the payroll and personnel
cycle.
21-26
1. Accruals in the trial balance
are stated at the correct
amounts (accuracy).
2. Transactions in the payroll and

personnel cycle are recorded
in the proper period (cutoff).
21-27
 Amounts withheld from employees’ pay
 Accrued salaries and wages
 Accrued commissions
 Accrued bonuses
 Accrued vacation pay, sick pay, or other benefits
 Accrued payroll taxes
21-28
 Officers’ compensation
 Commissions
 Payroll tax expense
 Total payroll
 Contract labor
21-29
 Required disclosures are not extensive
 Some complex transactions require

footnote disclosure
21-30 Copyright © 2014 Pearson Education

Cash in Payroll Direct Labor and
Bank Liabilities Payroll Expenses
Payments Expenses
Audited by Audited by
TOC, STOT, and AP TOC, STOT, and AP
Ending Ending
balance balance
Audited by AP and TDB
TOC + STOT + AP + TDB

= Sufficient appropriate evidence
21-31
21-32
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stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
21-33

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Chapter

Copyright © 2014 Pearson Education

 Deduction authorization form

 Rate authorization form

 Payroll bank account reconciliation

Payroll tax returns

Assess planned control risk – payroll and personnel

Determine extent of testing controls

Design tests of controls and Audit procedures

 Timely payment of the payroll taxes

 Tests for nonexistent employees

Set performance materiality

Assess control risk for the

Compare payroll expense Misstatement of payroll

Compare direct labor as a Misstatement of direct

Compare commission Misstatement of

Compare payroll tax Misstatement of payroll

Compare accrued payroll Misstatement of accrued

2. Transactions in the payroll and

 Some complex transactions require

21-30 Copyright © 2014 Pearson Education

TOC + STOT + AP + TDB

All rights reserved. No part of this publication may be reproduced,

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