Auditing Chapt 17

Audit of the Payroll and Personnel Cycle
Chapter 17
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
17 - 1
Learning Objective 1 Identify the accounts and transactions in the payroll and personnel cycle.
17 - 2
Accounts and Transactions 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.
17 - 3

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
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 4
Direct Labor

Cash in Bank Payment for salaries Payment for payroll taxes Payroll Tax Expense Withheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance Accrued Payroll Tax Expense Payment Beginning balance Payroll tax expense Ending balance
Separate operating accounts for payroll also normally include officers salaries and bonuses, office salaries, sales salaries and commissions, and indirect manufacturing labor.
17 - 6
These accounts have the same relationship to accrued wages and withheld taxes and other deductions that is shown for direct labor.
17 - 7
Learning Objective 2 Describe the business functions and the related documents and records in the payroll and personnel cycle.
Business Functions in the Cycle and Related Documents and Records
The payroll and personnel cycle begins with the hiring of personnel and ends with payment to the employees for the services performed and to the government and other institutions for the withheld and accrued payroll taxes and benefits.
Personnel and Employment

Personnel records
Deduction authorization form Rate authorization form

Timekeeping and Payroll Preparation

Time Card Job Time Ticket Payroll Transaction File
Payroll Journal
Payroll Master File
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
Learning Objective 3 Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle.
Methodology for Designing Tests of Balances Accounts Receivable

Understand internal control payroll and personnel. Assess planned control risk payroll and personnel. Evaluate cost-benefit of testing controls.

Design tests of details 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
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
Payroll Tax Forms and Payments
Preparation of payroll tax forms
Payment of the payroll taxes withheld and other withholdings on a timely basis
Inventory and Fraudulent Payroll Considerations

Relationship between payroll and inventory valuation
Tests for nonexistent payroll


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.


Design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle. 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.
Audit procedures Sample size Items to select Timing
Learning Objective 4 Design and perform analytical procedures for the payroll and personnel cycle.
Analytical Procedures for the Payroll and Personnel Cycle

Analytical Procedure
Compare payroll expense account balance with previous years. Compare direct labor as a percentage of sales with previous years. Compare commission expense as a percentage of sales with previous years.
Possible Misstatement
Misstatement of payroll expense accounts
Misstatement of direct labor and inventory

Misstatement of commission expense and commission liability
Analytical Procedures for the Payroll and Personnel Cycle

Analytical Procedure
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 payroll tax expense and payroll tax liability Misstatement of accrued payroll taxes and payroll tax expense
Learning Objective 5 Design and perform tests of details of balances for accounts in the payroll and personnel cycles.
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

Tests of Details of Balances for Expense Accounts

Officers compensation
Commissions
Payroll tax expense

Total payroll Contract labor
Types of Audit Tests for the Payroll and Personnel Cycle

Cash in Bank Payments
Audited by TOC, STOT, and AP
Payroll Liabilities
Direct Labor and Payroll Expenses Expenses
Audited by TOC, STOT, and AP
Ending balance
Audited by AP and TDP
Ending balance
Audited by AP and TDP
TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS

End of Chapter 17

Auditing Chapt 17

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Auditing Chapt 17

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Audit of the Payroll and Personnel Cycle

Accounts and Transactions in the Payroll and Personnel Cycle

Accounts and Transactions in the Payroll and Personnel Cycle

Accounts and Transactions in the Payroll and Personnel Cycle

Accounts and Transactions in the Payroll and Personnel Cycle

Accounts and Transactions in the Payroll and Personnel Cycle

Business Functions in the Cycle and Related Documents and Records

Personnel and Employment

Deduction authorization form Rate authorization form

Timekeeping and Payroll Preparation

Payroll Master File

Preparation of Payroll Tax Returns and Payment of Taxes

W-2 Form Payroll Tax Returns

Methodology for Designing Tests of Balances Accounts Receivable

Methodology for Designing Tests of Balances Accounts Receivable

Understand Internal Control Payroll and Personnel Cycle

Payroll Tax Forms and Payments

Preparation of payroll tax forms

Inventory and Fraudulent Payroll Considerations

Tests for nonexistent payroll

Methodology for Designing Tests of Balances Accounts Receivable

Assess control risk for the payroll and personnel cycle.

Methodology for Designing Tests of Balances Accounts Receivable

Methodology for Designing Tests of Balances Accounts Receivable

Audit procedures Sample size Items to select Timing

Analytical Procedures for the Payroll and Personnel Cycle

Misstatement of direct labor and inventory

Analytical Procedures for the Payroll and Personnel Cycle

Tests of Details of Balances for Liability Accounts

Accrued payroll taxes

Tests of Details of Balances for Expense Accounts

Payroll tax expense

Types of Audit Tests for the Payroll and Personnel Cycle

Direct Labor and Payroll Expenses Expenses

Audited by TOC, STOT, and AP

TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS

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