Auditing Arens Chapter 20

Audit of the Payroll and Personnel Cycle Chapter 20

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

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

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Accounts in the Payroll and Personnel Cycle  he overall objective in the audit of the payrol payrol 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.

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

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Accounts in the Payroll and Personnel Cycle Accrued Wages, Salaries, Bonuses, and Commissions Cash in Bank  Payment or salaries Payment or !ayroll ta"es

Direct Labor

Payment Beginning balance Earned wages, salaries, etc. Ending balance Withheld #ncome $a"es and %ther Deductions Payment Beginning balance Payroll withholding Ending balance

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Accounts in the Payroll and Personnel Cycle In #ost syste#s the accrued !ages and salaries account is used only at the end of an accounting period.

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

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Learning Objective 2 $escribe the business functions and the related docu#ents and records in the payroll and personnel cycle.

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

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%usiness &unctions in the Cycle and 'elated $ocu#ents and 'ecords  he payroll and personnel cycle(. %egins

Personnel )iring

*nds

Pay#ents

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Personnel and *#ploy#ent  Personnel  $eduction  'ate

records authori+ation for#

authori+ation for#

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 i#e,eeping and Payroll Preparation $ime Card  &ob $ime $icket Payroll $ransaction 'ile Payroll &ournal

 i#e,eeping and Payroll Preparation

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Payroll -aster &ile &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.

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

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Pay#ent of Payroll  Payroll

chec,

 Payroll

ban, account reconciliation

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Preparation of Payroll a/ 'eturns and Pay#ent of a/es  2

&or#

Payroll

ta/ returns

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Learning Objective  3nderstand internal control and design and perfor# 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 14/e, Arens/Elder/Beasley

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-ethodology for $esigning Controls and 4ubstantive ests (nderstand internal control ) !ayroll and !ersonnel Assess !lanned control risk ) !ayroll and !ersonnel Determine e"tent o testing controls Design tests o controls and Audit !rocedures substanti+e tests o transactions Sam!le si*e or !ayroll and !ersonnel to meet #tems to select transactionrelated audit $iming ob-ecti+es ©2012 Prentice Hall Business Publishing,  Auditing 14/e, Arens/Elder/Beasley 14/e, Arens/Elder/Beasley

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3nderstand Internal Control 5Payroll and Personnel Cycle 

Ade6uate separation of duties



Proper authori+ation

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Ade6uate docu#ents and records



Physical control over assets and records



Independent chec,s on perfor#ance

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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

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

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Inventory and &raudulent Payroll Considerations 

'elationship bet!een payroll and inventory valuation



ests for none/istent e#ployees

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-ethodology for $esigning ests of %alances for Payroll Liabilities Identify client business ris,s a"ecting Phase I payroll liability accounts 4et tolerable #isstate#ent and assess inherent ris, Phase I for payroll liability accounts Assess control ris, for the Phase I payroll and personnel cycle ©2012 Prentice Hall Business Publishing,  Auditing 14/e, Arens/Elder/Beasley 14/e, Arens/Elder/Beasley

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-ethodology for $esigning ests of %alances for Payroll Liabilities $esign and perfor# 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 14/e, Arens/Elder/Beasley

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-ethodology for $esigning ests of %alances for Payroll Liabilities $esign and perfor# analytical procedures Phase III for the payroll and personnel cycle $esign tests of  Audit procedures details of payroll 4a#ple si+e accounts balances to satisfy Ite#s to select balancerelated  i#ing audit objectives ©2012 Prentice Hall Business Publishing,  Auditing 14/e, Arens/Elder/Beasley 14/e, Arens/Elder/Beasley

Phase III

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Learning Objective 7 $esign and perfor# analytical procedures for the payroll and personnel cycle.

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

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na yt ca Proce roce ures or Ana the Payroll and Personnel Cycle Analytical !rocedure

Possible misstatement

Com!are !ayroll e"!ense account balances with !re+ious years

isstatement o !ayroll e"!ense accounts

Com!are direct labor as a !ercentage o sales with !re+ious years

isstatement o direct labor and in+entory

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

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na yt ca Proce roce ures or Ana the Payroll and Personnel Cycle Analytical !rocedure

Possible misstatement

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" isstatement o !ayroll e"!ense as a / o salaries ta" e"!ense and !ayroll and wages with !rior year ta" liability Com!are accrued !ayroll isstatement o accrue ta" accounts with !rior year!ayroll ta"es and e"!en ©2012 Prentice Hall Business Publishing,  Auditing 14/e, Arens/Elder/Beasley 14/e, Arens/Elder/Beasley

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Learning Objective 8 $esign and perfor# tests of details of balances for accounts in the payroll and personnel cycle.

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 !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":.

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 ests of $etails of %alances for Liability Accounts  A#ounts !ithheld fro# e#ployees; pay

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 Accrued salaries and !ages

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 Accrued co##issions

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 Accrued bonuses



 Accrued vacation pay< sic, pay< or other bene



 Accrued payroll ta/es



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 ests of $etails of %alances for */pense Accounts  O=cers; co#pensation



 Co##issions



 Payroll ta/ e/pense



 otal payroll



 Contract labor



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Presentation and $isclosure Objectives  'e6uired

disclosures are not e/tensive

 4o#e

co#ple/ transactions re6uire footnote disclosure

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

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 ypes of Audit ests for the Payroll and Personnel Cycle Payroll Liabilities

Cash in Bank 

Direct Labor and Payroll E"!enses

Payments

E"!enses

Audited by $%C, S$%$, and AP

Audited by $%C, S$%$, and AP

Ending balance

Ending balance

Audited by AP and $DB

$%C 0 S$%$ 0 AP 0 $DB 1 Su2cient a!!ro!riate e+idence !er 3AAS ©2012 Prentice Hall Business Publishing,  Auditing 14/e, Arens/Elder/Beasley 14/e, Arens/Elder/Beasley

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