Auditing Arens Chapter 20

(1)

5 - 5

Audit

Audit of the

of the P

Payroll

ayroll

Audit

of the

P

ayroll

and Personnel Cycle

Chapter 20

(2)

(3)

©2012 Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley Arens/Elder/Beasley Arens/Elder/Beasley 20 -20 -20 -20 -2222

L

Learning Objective

earning Objective 1

1 L

L

earning Objective

1

Identify the accounts and transactions

in the payroll and personnel cycle.

(4)

©2012 Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley Arens/Elder/Beasley Arens/Elder/Beasley 20 -20 -20 -20 -3333

he overall objective

in the audit of the pa

yrol

and personnel cycle is to evaluate !hether th

account balances a"ected by the

cycle are

fairly stated in accordance !ith generally

accepted accounting principles.

Accounts in the Payroll and

Personnel Cycle

(5)

Accounts in the Payroll and

Personnel Cycle

Accrued Wages, Salaries,

Bonuses, and Commissions

Payment Beginning

balance

Earned wages,

salaries, etc.

Ending balance

Direct

Labor

Cash in Bank

Payment or

salaries

Payment or

!ayroll ta"es

Withheld #ncome $a"es

and %ther Deductions

Payment Beginning

balance

Payroll

withholding

(6)

Accounts in the Payroll and

Personnel Cycle

In #ost syste#s the accrued !ages and

salaries account is used only at the

(7)

Learning Objective 2

$escribe the business functions and

the related docu#ents and records in

the payroll and personnel cycle.

(8)

%usiness &unctions in the

Cycle and 'elated

$ocu#ents and 'ecords

he payroll and personnel cycle(.

%egins

Personnel

)iring

(9)

Personnel and *#ploy#ent

 Personnel records

 $eduction authori+ation for#



'ate authori+ation for#

(10)

i#e,eeping and Payroll

Preparation

$ime Card

&ob $ime $icket

Payroll $ransaction 'ile

Payroll &ournal

i#e,eeping and

Payroll Preparation

(11)

Payroll -aster &ile

A payroll #aster le is used for

recording each payroll transaction

for each e#ployee and #aintaining total

e#ployee !ages paid for the year to date.

(12)

Pay#ent of Payroll

 Payroll chec,

(13)

Preparation of Payroll a/

'eturns and Pay#ent of a/es



2 &or#

(14)

Learning Objective 

3nderstand internal control and design

and perfor# tests of controls and

substantive tests of transactions for

the payroll and personnel cycle.

(15)

-ethodology for $esigning

Controls and 4ubstantive ests

(nderstand internal control ) !ayroll and !ersonnel

Audit !rocedures

Sam!le si*e

#tems to select

$iming

Assess !lanned control risk ) !ayroll and !ersonnel

Determine e"tent o testing controls

Design tests o controls and

substanti+e tests o transactions

or !ayroll and !ersonnel to meet

transactionrelated audit

ob-ecti+es

(16)

3nderstand Internal Control

5Payroll and Personnel Cycle



_{Ade6uate separation of duties}



_{Proper authori+ation}



_{Ade6uate docu#ents and records}



_{Physical control over assets and records}



_{Independent chec,s on perfor#ance}

(17)

Payroll a/ &or#s and

Pay#ents

 Preparation of payroll ta/ for#s

 i#ely pay#ent of the payroll ta/es

!ithheld and other !ithholdings

(18)

Inventory and &raudulent

Payroll Considerations



'elationship bet!een payroll

and inventory valuation

(19)

Identify client business

ris,s a"ecting

payroll liability accounts

-ethodology for $esigning ests

of %alances for Payroll Liabilities

4et tolerable #isstate#ent

and assess inherent ris,

for payroll liability accounts

Assess control ris, for the

payroll and personnel cycle

Phase I

(20)

-ethodology for $esigning ests

of %alances for Payroll Liabilities

$esign and perfor#

tests of controls and

substantive tests

of transactions

for the payroll and

personnel cycle

(21)

i#ing

Ite#s to select

4a#ple si+e

Audit procedures

-ethodology for $esigning ests

of %alances for Payroll Liabilities

$esign and perfor#

analytical procedures

for the payroll and

personnel cycle

$esign tests of

details of payroll

accounts balances

to satisfy

balancerelated

audit objectives

Phase III

(22)

Learning Objective 7

$esign and perfor# analytical

procedures for the payroll and

personnel cycle.

(23)

Ana yt ca Proce ures or

na yt ca roce ures or

the Payroll and Personnel

Cycle

Com!are direct labor as a

!ercentage o sales with

!re+ious years

isstatement o direct

labor and in+entory

Analytical !rocedure

Com!are !ayroll e"!ense

account balances with

!re+ious years

isstatement o !ayroll

e"!ense accounts

(24)

Ana yt ca Proce ures or

na yt ca roce ures or

the Payroll and Personnel

Cycle

Analytical !rocedure

Com!are commission

e"!ense as a / o

sales with !re+ious years

isstatement o

commission e"!ense

and commission liabilit

Com!are !ayroll ta"

e"!ense as a / o salaries

and wages with !rior year

isstatement o !ayroll

ta" e"!ense and !ayroll

ta" liability

Possible misstatement

Com!are accrued !ayroll

ta" accounts with !rior year

isstatement o accrue

!ayroll ta"es and e"!en

(25)

Learning Objective 8

$esign and perfor# tests of details of

balances for accounts in the payroll

and personnel cycle.

(26)

!o -ajor %alancerelated

Audit Objectives

1. Accruals in the trial balance

are stated at the correct

a#ounts 9accuracy:.

2. ransactions in the payroll and

personnel cycle are recorded

in the proper period 9cuto":.

(27)

ests of $etails of %alances

for Liability Accounts



_{A#ounts !ithheld fro# e#ployees; pay}



_{Accrued salaries and !ages}



_{Accrued co##issions}



Accrued bonuses



_{Accrued vacation pay< sic, pay< or other bene}



_{Accrued payroll ta/es}

(28)

ests of $etails of %alances

for */pense Accounts



_{O=cers; co#pensation}



_Co##issions



_{Payroll ta/ e/pense}



_{otal payroll}

(29)

Presentation and $isclosure

Objectives



'e6uired disclosures are not e/tensive



4o#e co#ple/ transactions re6uire

(30)

ypes of Audit ests for the

Payroll and Personnel Cycle

$%C 0 S$%$ 0 AP 0 $DB

1 Su2cient a!!ro!riate e+idence !er 3AAS

Cash in

Bank

Liabilities

Payroll

Payroll E"!enses

Direct Labor and

Payments

E"!enses

Audited by

$%C, S$%$, and AP

Ending

balance

Ending

Audited by AP and $DB

Audited by