1. Audit of the Payroll and Personnel Cycle
Chapter 20

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

3. 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.

4. Accounts in the Payroll and Personnel Cycle
Accrued Wages, Salaries,
Bonuses, and Commissions
Direct
Labor
Payment
Beginning
balance
Cash in Bank
Payment for
salaries
Earned wages,
salaries, etc.
Payment for
payroll taxes
Ending balance
Withheld Income Taxes
and Other Deductions
Payment
Beginning
balance
Payroll
withholding
Ending balance

5. Accounts in the Payroll and Personnel Cycle
Withheld Income Taxes
and Other Deductions
Payment
Beginning
balance
Cash in Bank
Payment for
salaries
Payroll
withholding
Payment for
payroll taxes
Ending balance
Accrued Payroll
Tax Expense
Payroll Tax Expense
Payment
Beginning
balance
Payroll
tax expense
Ending balance

6. 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.

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

8. Business Functions in the Cycle and Related Documents and Records
The payroll and personnel cycle….
Begins
Hiring of personnel
Ends
Payments

9. Personnel and Employment
Personnel records
Deduction authorization form
Rate authorization form

10. Timekeeping and Payroll Preparation
Time Card
Job Time Ticket
Payroll Transaction File
Payroll Journal
Timekeeping and
Payroll Preparation

11. 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.

12. Payment of Payroll
Payroll check
Payroll bank account reconciliation

13. Preparation of Payroll Tax Returns and Payment of Taxes
W-2 Form
Payroll tax returns

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

15. Methodology for Designing Controls and Substantive Tests
Understand internal control – payroll and personnel
Assess planned control risk – payroll and personnel
Determine extent of testing controls
Design tests of controls and
substantive tests of transactions
for payroll and personnel to meet
transaction-related audit objectives
Audit procedures
Sample size
Items to select
Timing

16. Understand Internal Control –Payroll and Personnel Cycle
Adequate separation of duties
Proper authorization
Adequate documents and records
Physical control over assets and records
Independent checks on performance

17. Payroll Tax Forms and Payments
Preparation of payroll tax forms
Timely payment of the payroll taxes
withheld and other withholdings

18. Inventory and Fraudulent Payroll Considerations
Relationship between payroll
and inventory valuation
Tests for nonexistent employees

19. Methodology for Designing Tests of Balances for Payroll Liabilities
Identify client business
risks affecting
payroll liability accounts
Phase I
Set tolerable misstatement
and assess inherent risk
for payroll liability accounts
Phase I
Assess control risk for the
payroll and personnel cycle
Phase I

20. Methodology for Designing Tests of Balances for Payroll Liabilities
Design and perform
tests of controls and
substantive tests
of transactions
for the payroll and
personnel cycle
Phase II

21. Methodology for Designing Tests of Balances for Payroll Liabilities
Design and perform
analytical procedures
for the payroll and
personnel cycle
Phase III
Phase III
Design tests of
details of payroll
accounts balances
to satisfy
balance-related
audit objectives
Audit procedures
Sample size
Items to select
Timing

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

23. Analytical Procedures for the Payroll and Personnel Cycle
Possible misstatement
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

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

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

26. Two Major Balance-related Audit Objectives
1. Accruals in the trial balance
are stated at the correct
amounts (accuracy).
2. Transactions in the payroll and
personnel cycle are recorded
in the proper period (cutoff).

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

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

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

30. Types of Audit Tests for the Payroll and Personnel Cycle
Cash in
Bank
Payroll
Liabilities
Direct Labor and
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

31. End of Chapter 20