2. Chapter 13 Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons Auditing Human Resources Processes: Personnel and Payroll in Service Industries

3. Learning Objectives 1. Be familiar with the human resources activities in a public accounting firm. 2. Learn the activities, transactions, risks, ICFR, and documents related to human resources. Recognize the impact of relevant accounting standards on the activities and transactions. 3. Understand the general structure and activities of outsourcing the payroll function to an outside service provider. 4. Understand the meaning and value of both types of service auditor (SAS 70) reports, how they may provide audit evidence, and under what circumstances more audit evidence is needed. Chapter 13-1

4. Learning Objectives 5. Link the management assertions, purposes of specific controls, controls, and tests of controls for human resources. 6. Describe the purposes and execution of related substantive audit procedures for human resources accounts and disclosures, including dual purpose tests, substantive analytical procedures, and details of balances. Chapter 13-2

5. Service Industries within Business Categories Learning Objective #1Chapter 13 -3 EXHIBIT 13-1

6. OVERVIEW Learning Objective #1Chapter 13 -4  Regardless of the industry, personnel functions include maintaining personnel records and performing administrative responsibilities for benefit plans.  Payroll functions involve calculating, processing, and posting employee compensation and other related expenses and liabilities

7. HUMAN RESOURCES ASPECTS OF PUBLIC ACCOUNTING Chapter 13 -5Learning Objective #1

8. HUMAN RESOURCES ASPECTS OF PUBLIC ACCOUNTING Chapter 13 -6Learning Objective #1  Hiring information is collected in the employee’s personnel file.  The information added to the payroll master file includes the employee’s name, contact information identification number, rank or staff classification, department, salary, and deduction information.  With this information the payroll processing system is able to calculate and generate a salary payment for the employee  This information is integrated with the engagement management system

9. A W-2 Tax Form Chapter 13 -7Learning Objective #1

10. Public Accounting Firm Work-in-Process Record Chapter 13 -8Learning Objective #1

11. Time and Expense Report Input to Payroll Processing Learning Objective #1Chapter 13-9 EXHIBIT 13-2

12. Time and Expense Report Input to Engagement Management Learning Objective #1Chapter 13-10 EXHIBIT 13-3

13. BUSINESS PROCESSES, DOCUMENTS, AND INTERNAL CONTROLS Learning Objective #2Chapter 13-11  Management objectives related to payroll center around paying employees accurately, paying other entities for payroll-related liabilities as required, satisfying reporting obligations imposed by government, and accounting for the various transactions properly in the accounting records and financial statements.  In service industries, human resources expenses may be the largest expense incurred.  Employees document information regarding their identification and status for taxes on W-4 forms.

14. A W-4 Tax Form Learning Objective #2Chapter 13-12

15. A Job Time Ticket Chapter 13 -13Learning Objective #3

16. A Sample Payroll Register Chapter 13 -14Learning Objective #2

17. Business Activities and Related Documents Chapter 13 -15Learning Objective #3 EXHIBIT 13-4

18. Potential Misstatements and Controls Chapter 13 -16Learning Objective #2  The major internal control concerns related to human resources and payroll are that payments are for valid transactions and are authorized.  To accomplish the payroll controls objectives, the company must have policies and procedures in place regarding human resources.  Check-in and check-out functions can be punching a time clock or logging in and out on a computer terminal.

19. USING AN OUTSIDE SERVICE PROVIDER FOR PAYROLL Learning Objective #3Chapter 13 - 17  Many organizations use an outside service provider to perform the calculations and prepare the records associated with paying employees.  The services typically provided by external payroll processing service organizations include:  Updating the payroll master file  Keeping track of current and year-to-date information by employee as well as for the company as a whole  Preparing documents and forms required for tax purposes such as W-2 forms and quarterly payroll tax returns  Submitting information for general ledger entries back to the organization

20. Outputs of the Service Provider Learning Objective #3Chapter 13 - 18  The output can be provided in either electronic or hard-copy form:  Updated payroll master file  Payroll register or journal  Deduction exception report  Management summary  Labor cost report

21. Payroll Outsourcing Activities Learning Objective #3Chapter 13 - 19 EXHIBIT 13-5

22. User Company Controls Learning Objective #3Chapter 13 - 20  Employee-Related Controls  Input and Submission Controls  Controls for Correcting Processing Errors  Output-Monitoring Controls

23. REPORTS ON THE PROCESSING OF TRANSACTIONS BY A SERVICE ORGANIZATION Learning Objective #4Chapter 13 - 21  If the services affect any of the items in the following list, the service provider is considered a part of the entity’s IT system.  Classes of transactions significant to the financial statements  Procedures of initiating, recording, processing and reporting transactions  Accounting records, supporting information and specific accounts related to the entity’s transactions and financial statements  Method of capture of events and conditions significant to the entity’s financial statements  The financial reporting process leading to preparation of financial statements, including estimates and disclosures

24. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 22 EXHIBIT 13-6

25. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 23 EXHIBIT 13-6

26. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 24 EXHIBIT 13-6

27. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 25 EXHIBIT 13-6

28. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 26 EXHIBIT 13-6

29. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 27 EXHIBIT 13-6

30. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 28 EXHIBIT 13-6

31. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 29 EXHIBIT 13-6

32. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 30 EXHIBIT 13-6

33. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 31 EXHIBIT 13-6

34. TESTS OF CONTROLS FOR HUMAN RESOURCES TRANSACTIONS Learning Objective #5Chapter 13 - 32 EXHIBIT 13-6

35. DUAL PURPOSE TESTS Learning Objective #6Chapter 13 - 33 EXHIBIT 13-7

36. DUAL PURPOSE TESTS Learning Objective #6Chapter 13 - 34 EXHIBIT 13-7

37. DUAL PURPOSE TESTS Learning Objective #6Chapter 13 - 35 EXHIBIT 13-7

38. Examples of Tests of Controls for Payroll Transactions Learning Objective #6Chapter 13 - 36 EXHIBIT 13-8

39. Examples of Tests of Controls for Payroll Transactions Learning Objective #6Chapter 13 - 37 EXHIBIT 13-8

40. Examples of Tests of Controls for Payroll Transactions Learning Objective #6Chapter 13 - 38 EXHIBIT 13-8

41. SUBSTANTIVE ANALYTICAL PROCEDURES Learning Objective #6Chapter 13 - 39

42. SUBSTANTIVE ANALYTICAL PROCEDURES Learning Objective #6Chapter 13 - 40 EXHIBIT 13-9

43. TESTS OF DETAILS OF BALANCES Learning Objective #6Chapter 13-41 EXHIBIT 13-10

44. TESTS OF DETAILS OF BALANCES Learning Objective #6Chapter 13-42 EXHIBIT 13-11

45. Review Question Chapter 13-43 In which type of organization would an auditor expend more audit effort addressing whether payroll costs were posted to the proper account? (a) Not-for-profit (b) Service (c) Retail (d) Manufacturing

46. Review Question Chapter 13-44 Which department should control the information on employees’ checking accounts when the employees have provided authorization to the employer to pay them by direct deposit? (a) Personnel (b) Treasurer or cashier (c) Accounting and payroll (d) Line department for each employee

47. Review Question Chapter 13-45 Which of the following is not a service industry? (a) Banking (b) Health care (c) Textbook publishing (d) Public accounting

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