Audit of the Payroll and Personnel Cycle

Transcription

1 Audit of the Payroll and Personnel Cycle Chapter Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-1

2 Learning Objective 1 Identify the accounts and transactions in the payroll and personnel cycle Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-2

3 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 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-3

4 Accounts in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Payment for payroll taxes Accrued Wages, Salaries, Bonuses, and Commissions Payment Beginning balance Earned wages, salaries, etc. Ending balance Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance Direct Labor 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-4

5 Accounts in the Payroll and Personnel Cycle Cash in Bank Payment for salaries Payment for payroll taxes Payroll Tax Expense Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Accrued Payroll Tax Expense Payment Ending balance Beginning balance Payroll tax expense Ending balance 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-5

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 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-6

7 Learning Objective 2 Describe the business functions and the related documents and records in the payroll and personnel cycle Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-7

8 Business Functions in the Cycle and Related Documents and Records The payroll and personnel cycle. Begins Ends Hiring of personnel Payments 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-8

9 Personnel and Employment Personnel records Deduction authorization form Rate authorization form 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-9

10 Timekeeping and Payroll Preparation Time Card Job Time Ticket Payroll Transaction File Payroll Journal Timekeeping and Payroll Preparation 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-10

11 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 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-11

12 Payment of Payroll Payroll check Payroll bank account reconciliation 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-12

13 Preparation of Payroll Tax Returns and Payment of Taxes W-2 Form Payroll tax returns 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-13

14 Learning Objective 3 Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-14

15 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 substantive tests of transactions for payroll and personnel to meet transaction-related audit objectives Audit procedures Sample size Items to select Timing 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-15

16 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 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-16

17 Payroll Tax Forms and Payments Preparation of payroll tax forms Timely payment of the payroll taxes withheld and other withholdings 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-17

18 Inventory and Fraudulent Payroll Considerations Relationship between payroll and inventory valuation Tests for nonexistent employees 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-18

19 Methodology for Designing Tests of Balances for Payroll Liabilities Identify client business risks affecting payroll liability accounts Set tolerable misstatement and assess inherent risk for payroll liability accounts Assess control risk for the payroll and personnel cycle Phase I Phase I Phase I 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-19

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 Phase II 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-20

21 Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform analytical procedures for the payroll and personnel cycle Design tests of details of payroll accounts balances to satisfy balance-related audit objectives Phase III Audit procedures Sample size Items to select Timing Phase III 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-21

22 Learning Objective 4 Design and perform analytical procedures for the payroll and personnel cycle Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-22

23 Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Compare payroll expense account balances with previous years Compare direct labor as a percentage of sales with previous years Possible misstatement Misstatement of payroll expense accounts Misstatement of direct labor and inventory 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-23

24 Analytical Procedures for the Payroll and Personnel Cycle Analytical procedure Compare commission expense as a percentage of sales with previous years Compare payroll tax expense as a percentage of salaries and wages with previous years Compare accrued payroll tax accounts with previous years Possible misstatement Misstatement of commission expense and commission liability Misstatement of payroll tax expense and payroll tax liability Misstatement of accrued payroll taxes and expense 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-24

25 Learning Objective 5 Design and perform tests of details of balances for accounts in the payroll and personnel cycle Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-25

26 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) Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-26

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 Accrued payroll taxes 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-27

28 Tests of Details of Balances for Expense Accounts Officers compensation Commissions Payroll tax expense Total payroll Contract labor 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-28

29 Presentation and Disclosure Objectives Required disclosures are not extensive Some complex transactions require footnote disclosure 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-29

30 Types of Audit Tests for the Payroll and Personnel Cycle Cash in Bank Payroll Liabilities Direct Labor and Payroll Expenses Payments Audited by TOC, STOT, and AP Expenses Audited by TOC, STOT, and AP Ending balance Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-30

31 End of Chapter Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 18-31