Addthis Arens Chapter20

(1)

Audit of the Payroll

and Personnel Cycle

(2)

Learning Objective 1

Identify the accounts and

transactions in the payroll

(3)

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 generally

accepted accounting principles.

Accounts in the Payroll and

Personnel Cycle

(4)

Accounts in the Payroll and

Personnel Cycle

Accrued Wages, Salaries,

Bonuses, and Commissions

Payment

Beginning

Cash in Bank

Payment for

salaries

Payment for

payroll taxes

(5)

Accounts in the Payroll and

Personnel Cycle

Cash in Bank

Payment for

salaries

Payment for

payroll taxes

Withheld Income Taxes

and Other Deductions

(6)

Accounts in the Payroll and

Personnel Cycle

In most systems the accrued wages and

salaries account is used only at the

end of an accounting period.

(7)

Learning Objective 2

Describe the business functions

and the related documents and

records in the payroll and

(8)

Business Functions in the Cycle

and Related Documents and

Records

The payroll and personnel cycle….

Begins

Hiring of personnel

(9)

Personnel and Employment



_{Personnel records}



_{Deduction authorization form}

(10)

Timekeeping and Payroll

Preparation

Time Card

Job Time Ticket

Payroll Transaction File

Payroll Journal

(11)

Payroll Master File

A payroll master file is used for

recording each payroll transaction

(12)

Payment of Payroll



_{Payroll check}

(13)

Preparation of Payroll Tax Returns

and Payment of Taxes



_{W-2 Form}

(14)

Learning Objective 3

Understand internal control and

design and perform tests of

controls and substantive tests

of transactions for the payroll

(15)

Methodology for Designing Controls

and Substantive Tests

Understand internal control – payroll and personnel

Audit procedures

Sample size

Items to select

Timing

Assess planned control risk – payroll and personnel

Determine extent of testing controls

(16)

Understand Internal Control –

Payroll and Personnel Cycle



Adequate separation of duties



Proper authorization



Adequate documents and records



Physical control over assets and records

(17)

Payroll Tax Forms and

Payments



_{Timely payment of the payroll taxes}

withheld and other withholdings

(18)

Inventory and Fraudulent

Payroll Considerations



_{Tests for nonexistent employees}



_{Relationship between payroll}

(19)

Identify client business

risks affecting

payroll liability accounts

Methodology for Designing Tests

of Balances for Payroll Liabilities

Set tolerable misstatement

and assess inherent risk

for payroll liability accounts

Assess control risk for the

payroll and personnel cycle

Phase I

(20)

Methodology for Designing Tests

of Balances for Payroll Liabilities

Design and perform

tests of controls and

substantive tests

of transactions

for the payroll and

personnel cycle

(21)

Timing

Items to select

Sample size

Audit procedures

Methodology for Designing Tests

of Balances for Payroll Liabilities

Design and perform

analytical procedures

for the payroll and

personnel cycle

(22)

Learning Objective 4

Design and perform analytical

procedures for the payroll

(23)

Analytical Procedures for the

Payroll and Personnel Cycle

Compare direct labor as a

percentage of sales with

previous years

Misstatement of direct

labor and inventory

Analytical procedure

Compare payroll expense

account balances with

previous years

Misstatement of payroll

expense accounts

(24)

Analytical Procedures for the

Payroll and Personnel Cycle

Analytical procedure

Compare commission expense

as a percentage of sales with

previous years

Misstatement of

commission expense

and commission liability

Compare payroll tax expense

as a percentage of salaries and

wages with previous years

Misstatement of payroll

tax expense and payroll

tax liability

(25)

Learning Objective 5

Design and perform tests of

details of balances for accounts

(26)

Two Major Balance-related

Audit Objectives

1. Accruals in the trial balance

are stated at the correct

amounts (accuracy).

(27)

Tests of Details of Balances

for Liability Accounts



Amounts withheld from employees’ pay



Accrued salaries and wages



Accrued commissions



Accrued bonuses



Accrued vacation pay, sick pay, or other benefits

(28)

Tests of Details of Balances

for Expense Accounts



Officers’ compensation



Commissions



Payroll tax expense



Total payroll

(29)

Presentation and Disclosure

Objectives



_{Required disclosures are not extensive}



_{Some complex transactions require}

(30)

Types of Audit Tests for the

Payroll and Personnel Cycle

Cash in

Bank

Liabilities

Payroll

Payroll Expenses

Direct Labor and

Payments

Expenses

Audited by

TOC, STOT, and AP

Ending

balance

Ending

Audited by

(31)

End of Chapter 20