2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 1
Identify the accounts and
transactions in the payroll
and personnel cycle.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Accounts in the Payroll

and Personnel Cycle
Accrued Wages, Salaries,
Bonuses, and Commissions
Cash in Bank
Payment for
salaries

Payment

Payment for
payroll taxes

Direct
Labor

Beginning
balance
Earned wages,
salaries, etc.
Ending balance

Withheld Income Taxes

and Other Deductions
Payment

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

Beginning
balance
Payroll
withholding
Ending balance

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Accounts in the Payroll

and Personnel Cycle
Withheld Income Taxes
and Other Deductions
Cash in Bank
Payment for
salaries

Payment

Payment for
payroll taxes
Payroll Tax Expense

Beginning
balance
Payroll
withholding
Ending balance

Accrued Payroll
Tax Expense
Payment

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

Beginning
balance
Payroll
tax expense
Ending balance

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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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 2
Describe the business functions
and the related documents and
records in the payroll and
personnel cycle.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Business Functions in the

Cycle and Related
Documents and Records
The payroll and personnel cycle.
Begins

Hiring of personnel

Ends

Payments

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Personnel and Employment

Personnel records
Deduction authorization form
Rate authorization form

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Timekeeping and Payroll

Preparation
Time Card
Job Time Ticket
Payroll Transaction File
Payroll Journal

Timekeeping and
Payroll Preparation

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Payment of Payroll
Payroll check
Payroll bank account reconciliation

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Preparation of Payroll Tax

Returns and Payment of
W-2 Form
Taxes
Payroll tax returns

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 3
Understand internal control and
design and perform tests of
controls and substantive tests
of transactions for the payroll
and personnel cycle.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Methodology for Designing

Controls and Substantive
Tests internal control payroll and personnel
Understand
Assess planned control risk payroll and personnel
Determine extent of testing controls
Audit procedures
Design tests of controls and
Sample size
substantive tests of transactions
for payroll and personnel to meet
Items to select
transaction-related audit objectives
Timing
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Understand Internal
Control Payroll and
Adequate separation of duties
Personnel Cycle

Proper authorization
Adequate documents and records
Physical control over assets and records
Independent checks on performance

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Payroll Tax Forms and

Payments
Preparation of payroll tax forms
Timely payment of the payroll taxes
withheld and other withholdings

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Inventory and Fraudulent

Payroll Considerations
Relationship between payroll
and inventory valuation
Tests for nonexistent employees

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Methodology for Designing

Tests
of Balances
Identify
client business for Payroll
risks affecting
Phase I
Liabilities

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
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Methodology for Designing

Tests
of and
Balances
for Payroll
Design
perform
tests
of controls and
Liabilities
substantive tests
of transactions
for the payroll and
personnel cycle

Phase II

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Methodology for Designing

Tests
of and
Balances
for Payroll
Design
perform
analytical
procedures
Liabilities
Phase III
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

Phase III

Timing

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 4
Design and perform analytical
procedures for the payroll
and personnel cycle.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Analytical Procedures
for the Payroll and
Analytical
procedure
Possible misstatement
Personnel
Cycle
Compare payroll expense
account balances with
previous years

Misstatement of payroll
expense accounts

Compare direct labor as a

percentage of sales with
previous years

Misstatement of direct
labor and inventory

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Analytical Procedures
for the Payroll and
Analytical
procedure
Possible misstatement
Personnel
Cycle
Compare commission expense Misstatement of
as a percentage of sales with
commission expense
previous years
and commission liability
Compare payroll tax expense
Misstatement of payroll
as a percentage of salaries and tax expense and payroll
wages with previous years
tax liability
Compare accrued payroll tax
accounts with previous years

Misstatement of accrued
payroll taxes and expense

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 5
Design and perform tests of
details of balances for accounts
in the payroll and personnel cycle.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Two Major Balancerelated

1. Accruals
in the trial balance
Audit
Objectives
are stated at the correct
amounts (accuracy).

2. Transactions in the payroll and

personnel cycle are recorded
in the proper period (cutoff).

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Tests of Details of
Balances
Amounts
withheld from employees
pay
for Liability
Accounts
Accrued salaries and wages
Accrued commissions
Accrued bonuses
Accrued vacation pay, sick pay, or other benefits
Accrued payroll taxes

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Presentation and
Disclosure Objectives
Required disclosures are not extensive
Some complex transactions require
footnote disclosure

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Types of Audit Tests for

the Payroll and
Payroll
Direct Labor and
CashPersonnel
in
Cycle
Bank
Liabilities
Payroll Expenses
Payments

Expenses

Audited by
TOC, STOT, and AP

Audited by
TOC, STOT, and AP

Ending
balance

Ending
balance

Audited by AP and TDB

TOC + STOT + AP + TDB

= Sufficient appropriate evidence per GAAS
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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