1 chapter 16 audit of the payroll and personnel cycle

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CHAPTER 16Audit of the Payroll and

Personnel Cycle

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- receipt of employee services and payment for those services

What What classes of transactionsclasses of transactions occur occur in the payroll and personnel cycle?in the payroll and personnel cycle?

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In the audit of payroll andpersonnel, transactions are far

more significant than relatedbalance sheet accounts.

Why?

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In the audit of payroll andpersonnel, transactions are far

more significant than relatedbalance sheet accounts.

Related balance sheetaccounts are less signifi-

cant than the volumeof transactions.

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1. An employee is hired; personnel records are accumulated.

What is the What is the sequence of business sequence of business functionsfunctions that occurs in the payroll that occurs in the payroll

and personnel cycle?and personnel cycle?

PERSONNEL

FILE

Tom Taylor

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Tom Taylor

Ace CompanyApplication for Employment

Name: Tom Taylor Employment history:__________________

Education:

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Tom Taylor



Education:

Ace CompanyPersonnel Investigation

Employee Candidate: Tom Taylor Comments of References:

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Tom Taylor



Education:



Ace CompanyPay Rate Authorization

Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization:

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Tom Taylor



Education:



Ace CompanyPay Rate Authorization

Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization:

Form W-4Authorization for FederalIncome Tax Withholding

Employee name:

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2. The employee works for the company; labor hours are accumulated.

Possibly throughuse of a time

clock andresulting

time cards

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2. The employee works for the company; labor hours are accumulated.

In each department,management may accumulate

labor charged to jobs,processes, activities,

or cost centers.

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3. Labor hours are entered into the payroll journal and pay is calculated.

timecards

payroll journal description net payNov.2, 19x9Tom Taylor 328.61

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payroll master fileemployee _ $$ _Tom Taylor 11/2 net 328.61 y-t-d net 753.12

timecards


3. Labor hours are entered into the payroll journal and pay is calculated. This information is then used to update the payroll master file.

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payroll master fileemployee _ $$ _Tom Taylor 11/2 net 328.61 y-t-d net 753.12

timecards


SummaryPayrollReport

This report sum-marizes payrollfor a period.

3. Labor hours are entered into the payroll journal and pay is calculated. This information is then used to update the payroll master file. Periodically, a summary payroll report is prepared.

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4. The employee is paid through an imprest payroll account. The check is signed by the treasurer.

Ace Payroll

Jane Treasurer

Tom Taylor

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5. At year-end, payroll accounting prepares federal W-2 forms and payroll tax returns.

payrollaccounting

W-2 formT.Taylorearned$21996.32in 19x9.

PayrollTax Return

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How does an auditor How does an auditor design tests of design tests of controls and controls and

substantive tests of substantive tests of transactions for transactions for

payroll and payroll and personnel?personnel?

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Understand controlsas they relate to pay-

roll and personnel

As discussedin chapter 9




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Assess the plannedcontrol risk related to payroll and personnel





roll and personnel

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In assessing control In assessing control risk, the auditor risk, the auditor should consider:should consider:



roll and personnel

??

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In assessing control In assessing control risk, the auditor risk, the auditor should consider:should consider:

- adequate separation of duties- proper authorization- adequate documents and records- use of prenumbered documents- use of an imprest payroll account



roll and personnel

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roll and personnel



roll and personnel

Evaluate cost-benefit of test-

ing controls

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Will substantivetests be reduced

sufficiently to justify the cost ofperforming tests

of controls?



roll and personnel


ing controls

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ing controls

Design tests of controls and substantive tests of transactions related to payroll and personnel



roll and personnel

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In designing In designing payroll and payroll and

personnel tests, personnel tests, the auditor the auditor

should consider:should consider:

Do allemployees

actuallyexist?


ing controls




roll and personnel

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Isrecorded

laboraccurate?



should consider:should consider:Evaluate cost-benefit of test-

ing controls




roll and personnel

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Havepersonnel actions

and wage ratechanges beenauthorized?




ing controls




roll and personnel

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Are payrolltransactions

properly includedin the master file

and correctlysummarized?




ing controls




roll and personnel

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Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, W-4 form,deduction authorizations).

Using the same sample, cross-reference information from personnel to related information in payroll accounting.

How does an auditor interpretHow does an auditor interpretthe results of this test?the results of this test?

Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures

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Employees with activepersonnel files are being paid.

How does an auditor interpretHow does an auditor interpretthe results of this test?the results of this test?

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Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll checks.


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Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll checks.

when examining cancelled paychecks, note signature of treasurer and endorsement of the employee


Ace Payroll

Jane Treasurer

Compare endorsement to employee signature on W-2

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Select a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.


Employeesbeing paid have

active personnel files.

How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?

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This procedure addresses theThis procedure addresses theauditor’s concern regardingauditor’s concern regarding

nonexistent employeesnonexistent employees..

Payroll & Personnel Audit ProceduresPayroll & Personnel Audit ProceduresSelect a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.

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Observe employee and management use of time clock and time cards.


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Trace a sample of time cards to payrollaccounting records for those employees.


payrollaccounting

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payrollaccounting


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Employees who turnedin a clock card were

paid. Pay was accurate.


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payrollaccounting

Trace a sample of payroll accounting records to employee time cards.


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payrollaccounting


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Recorded paymentswere for work actually

performed by existing employees.

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Compare total time card labor to totallabor charged to jobs, processes, activi-ties, cost centers.

job cost sheet

labor 43.6 hr

job cost sheet

labor 43.6 hr

job cost sheet

labor 43.6 hr

job cost sheet

labor 43.6 hr


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job cost sheet

labor 43.6 hr

job cost sheet

labor 43.6 hr

job cost sheet

labor 43.6 hr

job cost sheet

labor 43.6 hr


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The hours for whichemployees were paid were

charged to production.


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Perform a surprise payroll payoff, where-by employees must pick up and sign fortheir checks in the presence of a super-visor and the auditor. Investigate un-claimed checks.


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Perform a surprise payroll payoff, where-by employees must pick up and sign fortheir checks in the presence of a super-visor and the auditor. Investigate un-claimed checks.


Those claiming paychecks arethe appropriate employees.


1 chapter 16 audit of the payroll and personnel cycle

Documents

19x9 tom taylor

tom taylor date

personnel file tom taylor

tom taylor employment

payroll master file

audit of payroll

personnel cycle slide

rate authorization employee