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TOPIC 8
AUDIT OF PAYROLL CYCLE

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TYPES OF TRANSACTIONS

 Payments to employees for services rendered.

 Accrual and payment of payroll-related liabilities
arising from employees' services.

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FINANCIAL STATEMENT ACCOUNTS

 Payroll transactions:
 Cash.
 Inventory.
 Direct and indirect labor expense.
 Various payroll-related liability and expense
accounts.
 Accrued payroll liability transactions:
 Cash.
 Various accruals

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DOCUMENTS AND RECORDS

 Personnel records, including wage rates or salary

authorizations (maintain in the hr department).
 Deduction authorization forms (i.e EPF ).
 Time card-start and stop work-fills or time record
 Payroll check (gross pay less deductions).
 Payroll register (payroll journal).
 Payroll master file (all payroll records).
 Payroll master file changes report (any changes).
 Periodic payroll reports (monthly record depend
on organizations).
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 Various tax reports and forms. © 2000 The McGraw-Hill Companies, Inc.,
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FUNCTIONS IN THE PAYROLL CYCLE

 Personnel-authorization of hiring, firing, wage-

rate and salary adjustments, salaries and payroll
deductions
 Supervision-review attendance, monitoring
workers
 Timekeeping-process attendance and time info
 Payroll processing-processing salary
 Disbursement-pay compensation and benefits-
oversees the preparation and distribution of
payroll cheques
 General ledger-accumulation, classification, and
summarization of payroll in general ledger
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SEGREGATION OF DUTIES

 The supervision function should be segregated from

the personnel records and payroll processing
functions.
 The disbursement function should be segregated from
the personnel records, supervision, and payroll-
processing functions.
 The payroll-processing function should be segregated
from the general ledger function.

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INHERENT RISK ASSESSMENT

 Generally, there are few inherent risk factors that

affect the payroll cycle and its related accounts.
 The effect of economic conditions on payroll costs,
the supply of skilled workers, and frequency of
employee turnover should be considered.
 The presence of labor contracts and legislation.
 However assess the inherent risk as low due to few
inherent risks.

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CONTROL RISK ASSESSMENT

Understanding and documenting

the payroll internal control system based
on the planned level of control risk

Planning and performing tests of controls

on payroll cycle transactions

Assessing and documenting the

control risk for the payroll cycle

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TESTS OF CONTROLS

See Appendix 8C page 365

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RELATING THE ASSESSED LEVEL

OF CONTROL RISK TO
SUBSTANTIVE TESTING
 The results of the auditor's testing of internal control for
the payroll cycle have a direct impact on detection risk
and the level of substantive testing for the accounts
affected by the cycle.
 When the results of the tests of controls support the
planned assessed level of control risk, the auditor can
conduct the substantive tests of these accounts at the
planned level.
 However, if the results of the tests of controls do not
support the planned assessed level of control risk,
detection risk will have to be set lower-therefore the
substantive test should be increased

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AUDITING PAYROLL-
RELATED ACCOUNTS
 Substantive tests of transactions
 Analytical procedures
 Tests of account balances

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SUBSTANTIVE TESTS OF
TRANSACTIONS

Substantive tests of transactions are tests conducted

on the individual transactions processed through the
payroll cycle. The intended objective of such tests is
to detect monetary misstatements.

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ANALYTICAL PROCEDURES

Analytical procedures are useful audit tests for

examining the fairness of payroll expense and
payroll-related accrual accounts.

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TESTS OF ACCOUNT BALANCES

Focuses on
1) Tests of payroll expense accounts
-all expense account should be audited
2) Accrued payroll liabilities
-such as EPF, income tax, medical, insurance,
pension and others. Concerned with validity,
completeness, valuation, cutoff, disclosure.

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