Audit of the Payroll

and Personnel Cycle

Chapter 20
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2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5

 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 20 - 2

 Accounts in the Payroll and
Personnel Cycle
The overall objective in the audit of the payrol
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 20 - 3

 Accounts in the Payroll and
Personnel Cycle
Accrued Wages, Salaries, Direct
Bonuses, and Commissions Labor
Payment Beginning
Cash in Bank balance
Payment for Earned wages,
salaries salaries, etc.
Payment for Ending balance
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 20 - 4
 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 20 - 5

 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 20 - 6

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

Personnel
Begins
Hiring

Ends Payments

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 7

 Personnel and Employment

Personnel records

Deduction authorization form

Rate authorization form

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 8

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

Timekeeping and
Payroll Preparation

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 9

 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.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 10

 Payment of Payroll

Payroll check

Payroll bank account reconciliation

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 11

 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 20 - 12

 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 20 - 13

 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
transaction-related audit Items to select
objectives Timing
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 14
 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

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 15

 Payroll Tax Forms and
Payments
Preparation of payroll tax forms

Timely payment of the payroll taxes

withheld and other withholdings

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 16

 Inventory and Fraudulent
Payroll Considerations

Relationship between payroll

and inventory valuation

Tests for nonexistent employees

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 17

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

Set tolerable misstatement

and assess inherent risk Phase I
for payroll liability accounts

Assess control risk for the

Phase I
payroll and personnel cycle
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 18
 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 20 - 19

 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
accounts balances Sample size
Phase III
to satisfy Items to select
balance-related
audit objectives Timing
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 20
 Learning Objective 4

Design and perform analytical

procedures for the payroll and
personnel cycle.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 21

 Analytical Procedures for
the Payroll and Personnel
Cycle
Analytical procedure Possible misstatement

Compare payroll expense Misstatement of payroll

account balances with expense accounts
previous years

Compare direct labor as a Misstatement of direct

percentage of sales with labor and inventory
previous years

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 22

 Analytical Procedures for
the Payroll and Personnel
Cycle
Analytical procedure Possible misstatement

Compare commission Misstatement of

expense as a % of commission expense
sales with previous years and commission liability

Compare payroll tax Misstatement of payroll

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

Compare accrued payroll Misstatement of accrued

tax accounts with prior yearpayroll taxes and expens

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 23

 Learning Objective 5

Design and perform tests of details of

balances for accounts in the payroll
and personnel cycle.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 24

 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).

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 25

 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 benefi
Accrued payroll taxes

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 26

 Tests of Details of Balances
for Expense Accounts
Officers compensation
Commissions
Payroll tax expense
Total payroll
Contract labor

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 27

 Presentation and Disclosure
Objectives

Required disclosures are not extensive

Some complex transactions require

footnote disclosure

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 28

 Types of Audit Tests for the
Payroll and Personnel Cycle
Cash in Payroll Direct Labor and
Bank Liabilities Payroll Expenses
Payments Expenses
Audited by Audited by
TOC, STOT, and AP TOC, STOT, and AP

Ending Ending
balance balance
Audited by AP and TDB

TOC + STOT + AP + TDB

= Sufficient appropriate evidence per GAAS
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 20 - 29
 End of Chapter 20

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5