CHAPTER 7:

Auditing the Payroll and Personnel

Cycle

Prepared by :

Nur Ellina Bt Shamsuri (2014270102)

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1. Description of Payroll and Personnel Cycle

The overall objective in the audit of the

payroll & personnel cycle is to evaluate

whether the account balances affected by

the cycle are fairly stated in accordance

with Generally Accepted Accounting

Principles (GAAP).

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Figure 1

Payroll TransactionsAccrued Wages, Salaries,

Bonuses, and Commissions Direct Labor

Payment Beginning balance

Cash in Bank Earned wages, salaries, etc.

Payment for Ending balance

salaries

Payment for Withheld Income Taxes

payroll tax and Other Deductions

Payment Beginning balance

Payroll withholding

Ending balance

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Withheld Income Taxes

and Other Deductions

Cash in Bank Payment Beginning balance

Payment for Payroll withholding

salaries Ending balance

Payment for

payroll taxes Accrued Payroll

Tax Expense

Payroll Tax Expense Payment Beginning balance

Payroll tax expense

Ending balance

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2. Understanding the Internal Control

Structure

The payroll and personnel cycle.....

Begins

Followed by

Personnel

Hiring

Payment to

Employees

EndsTermination of

Employment

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Documents and Activities Related to Payroll

TransactionsDocument Activity

1. Personnel file Records in file data related to employees.

2. Deduction form Authorises payroll deduction for MPF contribution.

3. Rate form Authorises rate of pay.

4. Timecard Records employees starts and stop work during a pay period.

5. Payroll cheque Prepares a cheque in the name of an employees.

6. Payroll register Records amount paid to employees during each pay period.

7. Employees earning record Record details of an employees pay for whole financial year.

8. Labour cost distribution Identify gross factory earning for various account classifications.

9. Payroll tax return Prepare tax form for submission to relevant government agency.

10. Group certificate Prepare document to give to an employee for filing with Malaysia.

11. Control card Prepares a control card showing total payroll for the period.

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Flowchart Payroll and

Personnel Cycle

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Figure 2 Authorising Employment

Personnel Department

To payroll department

Hire new employees & set

up personnel file

Personnel file

Rate & deduction

authorizedPersonnel record

with rate &

deduction authorized

A

1. Responsible for hiring,

promoting, transfer and

termination of employees.

2. It maintains personnel file

for every employee hired.

3. A copy approved pay rate &

authorised deductions should

be transmitted to payroll

personnel.

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Figure 3 Timekeeping

To payroll department

Time cards Job time ticket

Matched, reviewed,

approved by

Supervisor

1. Important in the case

of employees paid by

the hour; proper

records of hours

worked are needed to

ensure accurate

accounting for payroll.

2. Time clock is a good

physical measure.

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Figure 4 Preparation of Payroll

To treasurer

From personnel

department

From time

keeping

department

Rate and deduction

authorization

Time cards

Job time tickets

Posts to employee

earning record &

prepares payroll

summary & cheques

Time cards

Job time tickets

Rates & Deductions

Payroll summary 2

Payroll summary 1

Payroll register 2

Payroll register 1

Payroll cheques

Employee earning

record

A

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Payroll Preparation

1. Maintains an earnings

record for every

employees.

2. The payroll cheques and

payroll register are sent to

the treasurer.

3. It is necessary to prepare

MPF contribution & file

them on time to avoid

penalties.

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Figure 5 Payment of Payroll

Treasurer

From payroll department

Payroll register

Payroll cheques

Review payroll

register & sign

cheques

Payroll register

Payroll cheques

Distribute

to

employees

Payroll distribution

involves reviewing

payroll register & signing

payroll cheques, which

are then distributed to

employees.

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Internal Control Objectives and Control

ProceduresASSERTIONS INTERNAL CONTROL

PROCEDURES

1. Occurrence Recorded payroll transaction are for services.

2. Completeness All payroll transaction are properly recorded.

3. Accuracy Payroll transaction are recorded at the proper

amount.

4. Cut-off Payroll transaction are recorded in the correct

accounting period.

5. Classification Payroll transaction are recorded in proper

account.

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3. Preliminary Assessment of Control Risk

1. For the financial report

assertions related to

the cycle transaction

and account balance.

2. Evaluates the

effectiveness of an

entity’s ICS in

preventing and

correcting material

misstatements.

3. Use flowcharts and

internal control

questionnaires to documents

the auditor understanding of

the ICS and assessment

control risk.

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4. Tests of Control for Payroll Transactions

A random sample of

transaction normally chosen

for tests of control.

It happen since payroll

transaction can be quite

extensive and detailed.

When testing payroll, auditors usually

use persuasive audit evidence rather

than substantive procedures because it

is internally generated.

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Control Objective and Related Assertions

ASSERTIONS TEST OF CONTROL

1. Occurrence There should be segregation of duties of personnel,

timekeeping and personnel payments.

2. Completeness Payroll cheques should be pre-numbered and

accounted for.

3. Accuracy There should be internal verification entries, including

review of approved rates and timecard.

4. Cut-off Compare the procedures dates on payroll cheques and

entry date in payroll register.

5. Classification Procedures for classifying payroll costs should be

reviewed.

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5. Review of Preliminary Assessment of

Control Risk

If the audit evidence are a

result of control failure:

The auditor need to

modify the nature, timing

and extent of planned

substantive procedures to

be performed.

To reduce detection risk.

If the audit evidence indicates

that the control policies &

procedures are operating

effectively:

The assessed level of

control risk may be

lowered.

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Based on Test of Control...

Therefore, audit risk to an

acceptable level.

Therefore, substantive test may

be reduced accordingly.

6. Substantive Audit Procedures

Substantive Tests of

Payroll Transactions

Substantive Tests of

Payroll Balances

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Substantive Tests of Payroll

Transactions

To be performed if a review of the

preliminary assessment of control risk is

high.

Eg :-

1) Prepare a reconciliation of payroll

bank statement with payroll

register payments.

2) Recalculate the gross pay, net pay

and payroll deductions for a

sample of employees.

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Substantive Tests of Payroll

Balances

An audit procedure that examine

the FS & supporting document if

there is an error.

These test are needed as evidence

to support the assertion that the

FR of the entity are complete,

valid & accurate.

Eg :-

1) Review the payroll accounts for

the date that payroll was last

paid and recalculate accrued

wages.

2) Trace total accrued payroll to

payroll records.

3) Perform analytical procedures.

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End of this chapter. Goodluck! 21