Auditing and assurance services 14e by arens chapter 20

Audit of the Payroll
and Personnel Cycle
Chapter 20
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Learning Objective 1
Identify the accounts and transactions in
the payroll and personnel cycle.

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Accounts in the Payroll and
Personnel Cycle
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.

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

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Accounts in the Payroll and
Personnel Cycle
Cash in Bank
Payment for
salaries

Accrued Wages, Salaries,
Bonuses, and Commissions
Payment Beginning
balance

Direct
Labor

Earned wages,
salaries, etc.
Ending balance

Payment for
payroll taxes

Withheld Income Taxes
and Other Deductions
Payment Beginning
balance
Payroll
withholding
Ending balance
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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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.

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

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Learning Objective 2
Describe the business functions and the
related documents and records in the
payroll and personnel cycle.

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

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Business Functions in the Cycle
and Related Documents and
Records
The payroll and personnel cycle….
Begins

Personnel
Hiring

Ends

Payments

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Personnel and Employment
 Personnel records
 Deduction authorization form
 Rate authorization form

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Timekeeping and Payroll
Preparation
Time Card
Job Time Ticket
Payroll Transaction File
Payroll Journal

Timekeeping and
Payroll Preparation

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Payroll Master File
A payroll master file is used for
recording each payroll transaction
for each employee and maintaining total
employee wages paid for the year to date.

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Payment of Payroll
 Payroll check
 Payroll bank account reconciliation

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Preparation of Payroll Tax Returns
and Payment of Taxes

 W-2 Form
Payroll tax returns

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

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Learning Objective 3
Understand internal control and design and
perform tests of controls and substantive
tests of transactions for the payroll and
personnel cycle.

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

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Methodology for Designing Controls
and Substantive Tests
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
Items to select

transaction-related audit
Timing
objectives
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Understand Internal Control –
Payroll and Personnel Cycle






Adequate separation of duties
Proper authorization
Adequate documents and records
Physical control over assets and records
Independent checks on performance

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Payroll Tax Forms and
Payments
 Preparation of payroll tax forms

 Timely payment of the payroll taxes
withheld and other withholdings

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Inventory and Fraudulent
Payroll Considerations
 Relationship between payroll
and inventory valuation
 Tests for nonexistent employees

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Methodology for Designing Tests
of Balances for Payroll Liabilities
Identify client business
risks affecting
payroll liability accounts

Phase I

Set tolerable misstatement
and assess inherent risk Phase I
for payroll liability accounts

Assess control risk for the
Phase I
payroll and personnel cycle
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Methodology for Designing Tests
of Balances for Payroll Liabilities
Design and perform
tests of controls and
substantive tests
Phase II
of transactions
for the payroll and
personnel cycle

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

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Methodology for Designing Tests
of Balances for Payroll Liabilities
Design and perform
analytical procedures
Phase III
for the payroll and
personnel cycle

Design tests of
Audit procedures
details of payroll
Sample size
accounts balances
to satisfy
Items to select
balance-related
Timing
audit objectives
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Phase III

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Learning Objective 4
Design and perform analytical procedures
for the payroll and personnel cycle.

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Analytical Procedures for the
Payroll and Personnel Cycle
Analytical procedure

Possible misstatement

Compare payroll expense
account balances with
previous years

Misstatement of payroll
expense accounts

Compare direct labor as a
percentage of sales with
previous years

Misstatement of direct
labor and inventory

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Analytical Procedures for the
Payroll and Personnel Cycle
Analytical procedure

Possible misstatement

Compare commission
expense as a % of
sales with previous years

Misstatement of
commission expense
and commission liability

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

Misstatement of payroll
tax expense and payroll
tax liability

Compare accrued payroll
tax accounts with prior year

Misstatement of accrued
payroll taxes and expense

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

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Learning Objective 5
Design and perform tests of details of
balances for accounts in the payroll and
personnel cycle.

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Two Major Balance-related
Audit Objectives
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).

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