2. AUDITING
BUSINESS PROCESSES
Part Five

3. CHAPTER 12
AUDITING THE HUMAN RESOURCE MANAGEMENT PROCESS
Chapter 12

4. 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.

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

6. 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

7. 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.

8. FUNCTIONS Personnel Supervision Timekeeping Payroll processing
Disbursement
General ledger

9. 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.

10. 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.

11. 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

12. 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.

13. 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.

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

15. 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).

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

17. 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.

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

19. CHAPTER 12
AUDITING THE HUMAN RESOURCE MANAGEMENT PROCESS
Chapter 12