1. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 1 Audit of the Payroll and Personnel Cycle Chapter 17

2. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 2 Learning Objective 1 Identify the accounts and transactions in the payroll and personnel cycle.

3. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 3 Accounts and Transactions 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 4 Accounts and Transactions in the Payroll and Personnel Cycle Accrued Wages, Salaries, Bonuses, and Commissions PaymentBeginning balance Earned wages, salaries, etc. Ending balance Cash in Bank Payment for salaries Payment for payroll taxes Direct Labor Withheld Income Taxes and Other Deductions PaymentBeginning balance Payroll withholding Ending balance

5. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 5 Accounts and Transactions in the Payroll and Personnel Cycle Withheld Income Taxes and Other Deductions PaymentBeginning balance Payroll withholding Ending balance Accrued Payroll Tax Expense PaymentBeginning balance Payroll tax expense Ending balance Cash in Bank Payment for salaries Payment for payroll taxes Payroll Tax Expense

6. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 6 Accounts and Transactions in the Payroll and Personnel Cycle Separate operating accounts for payroll also normally include officers’ salaries and bonuses, office salaries, sales salaries and commissions, and indirect manufacturing labor.

7. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 7 Accounts and Transactions in the Payroll and Personnel Cycle These accounts have the same relationship to accrued wages and withheld taxes and other deductions that is shown for direct labor.

8. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 8 Learning Objective 2 Describe the business functions and the related documents and records in the payroll and personnel cycle.

9. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 9 Business Functions in the Cycle and Related Documents and Records The payroll and personnel cycle begins with the hiring of personnel and ends with payment to the employees for the services performed and to the government and other institutions for the withheld and accrued payroll taxes and benefits.

10. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 10 Personnel and Employment Personnel records Deduction authorization form Rate authorization form

11. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 11 Timekeeping and Payroll Preparation Time Card Job Time Ticket Payroll Transaction File Payroll Journal Payroll Master File

12. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 12 Payment of Payroll Payroll check Payroll bank account reconciliation

13. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 13 Preparation of Payroll Tax Returns and Payment of Taxes W-2 Form Payroll Tax Returns

14. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 15 Methodology for Designing Tests of Balances – Accounts Receivable Understand internal control – payroll and personnel. Assess planned control risk – payroll and personnel. Evaluate cost-benefit of testing controls.

16. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 16 Methodology for Designing Tests of Balances – Accounts Receivable Design tests of details 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

17. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 17 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 Adequate separation of duties Proper authorization Adequate documents and records Physical control over assets and records Independent checks on performance

18. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 18 Payroll Tax Forms and Payments Payment of the payroll taxes withheld and other withholdings on a timely basis Preparation of payroll tax forms

19. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 19 Inventory and Fraudulent Payroll Considerations Relationship between payroll and inventory valuation Tests for nonexistent payroll

20. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 20 Methodology for Designing Tests of Balances – Accounts Receivable Identify client business risks affecting payroll liability accounts. Set tolerable misstatement and assess inherent risk for payroll liability accounts. Assess control risk for the payroll and personnel cycle.

21. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 21 Methodology for Designing Tests of Balances – Accounts Receivable Design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle. Design and perform analytical procedures for the payroll and personnel cycle.

22. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 22 Methodology for Designing Tests of Balances – Accounts Receivable Design tests of details of payroll accounts balances to satisfy balance-related audit objectives. Audit procedures Sample size Items to select Timing

23. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 23 Learning Objective 4 Design and perform analytical procedures for the payroll and personnel cycle.

24. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 24 Analytical Procedures for the Payroll and Personnel Cycle Analytical ProcedurePossible Misstatement Compare payroll expenseMisstatement of payroll account balance with expense accounts previous years. Compare direct labor as aMisstatement of direct percentage of sales withlabor and inventory previous years. Compare commissionMisstatement of expense as a percentage of commission expense and sales with previous years.commission liability

25. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 25 Analytical Procedures for the Payroll and Personnel Cycle Analytical ProcedurePossible Misstatement Compare payroll tax expenseMisstatement of payroll as a percentage of salaries andtax expense and payroll wages with previous years.tax liability Compare accrued payroll taxMisstatement of accrued accounts with previous years.payroll taxes and payroll tax expense

26. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 26 Learning Objective 5 Design and perform tests of details of balances for accounts in the payroll and personnel cycles.

27. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 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. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 28 Tests of Details of Balances for Expense Accounts Officers’ compensation Commissions Payroll tax expense Total payroll Contract labor

29. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 29 Types of Audit Tests for the Payroll and Personnel Cycle Cash in Bank Payroll Liabilities Direct Labor and Payroll Expenses PaymentsExpenses Ending balance Ending balance TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS Audited by TOC, STOT, and AP Audited by AP and TDP Audited by TOC, STOT, and AP Audited by AP and TDP

30. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 30 End of Chapter 17