AUDITING BUSINESS PROCESSES Part Five

CHAPTER 12 AUDITING THE HUMAN RESOURCE MANAGEMENT PROCESS Chapter 12

OVERVIEW OF THE HUMAN RESOURCE MANAGEMENT PROCESS Figure 12-1 presents a flowchart of a human resources management process that serves as a framework for discussing control procedures and tests of controls.

TYPES OF TRANSACTIONS Payments to employees for services rendered. Accrual and payment of payroll-related liabilities arising from employees' services.

FINANCIAL STATEMENT ACCOUNTS Payroll transactions: Cash. Inventory. Direct and indirect labor expense. Various payroll-related liability and expense accounts. Accrued payroll liability transactions: Various accruals

DOCUMENTS AND RECORDS Personnel records, including wage rates or salary authorizations. W-4 and other deduction authorization forms. Time card. Payroll check / direct deposit. Payroll register. Payroll master file. Payroll master file changes report. Periodic payroll reports. Various tax reports and forms.

FUNCTIONS Personnel Supervision Timekeeping Payroll processing Disbursement General ledger

SEGREGATION OF DUTIES The supervision function should be segregated from the personnel records and payroll processing functions. The disbursement function should be segregated from the personnel records, supervision, and payroll-processing functions. The payroll-processing function should be segregated from the general ledger function.

INHERENT RISK ASSESSMENT Generally, there are few inherent risk factors that affect the human resource management process and its related accounts. The effect of economic conditions on payroll costs, the supply of skilled workers, and frequency of employee turnover should be considered. The presence of labor contracts and legislation such as the Occupational Safety and Health Act may affect inherent risk.

CONTROL RISK ASSESSMENT Understanding and documenting the human resource management process based on the planned level of control risk Planning and performing tests of controls on payroll transactions Assessing and documenting the control risk for the human resource management process

CONTROL PROCEDURES AND TESTS OF CONTROLS - PAYROLL TRANSACTIONS Table 12-5 provides a summary of the internal control objectives, possible misstatements, internal control procedures, and tests of controls for payroll transactions.

RELATING THE ASSESSED LEVEL OF CONTROL RISK TO SUBSTANTIVE TESTING The results of the auditor's testing of internal control for the human resource management process have a direct impact on detection risk and the level of substantive testing for the accounts affected by the process. When the results of the tests of controls support the planned assessed level of control risk, the auditor can conduct the substantive tests of these accounts at the planned level. However, if the results of the tests of controls do not support the planned assessed level of control risk, detection risk will have to be set lower.

AUDITING PAYROLL-RELATED ACCOUNTS Substantive tests of transactions Analytical procedures Tests of account balances

SUBSTANTIVE TESTS OF TRANSACTIONS Substantive tests of transactions are tests conducted on the individual transactions processed through the payroll cycle. The intended objective of such tests is to detect monetary misstatements (see Table 12-7).

ANALYTICAL PROCEDURES Analytical procedures are useful audit tests for examining the fairness of payroll expense and payroll-related accrual accounts (see Table 12-8).

TESTS OF ACCOUNT BALANCES Table 12-9 presents a summary of audit objectives and tests of account balances for payroll expense accounts and accrued payroll liabilities.

EVALUATING THE AUDIT FINDINGS - PAYROLL-RELATED ACCOUNTS Compare total projected misstatement to tolerable misstatement. Analyze misstatements for causes of errors.

CHAPTER 12 AUDITING THE HUMAN RESOURCE MANAGEMENT PROCESS Chapter 12