1. Audit of the Payroll and Personnel Cycle Chapter 202012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley5-5

2. Learning Objective 1 Identify the accounts and transactions in the payroll and personnel cycle.2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 2 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.2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 3 4. Accounts in the Payroll and Personnel Cycle Cash in Bank Payment for salariesAccrued Wages, Salaries, Bonuses, and Commissions Payment Beginning balanceDirect LaborEarned wages, salaries, etc. Ending balancePayment for payroll taxesWithheld Income Taxes and Other Deductions Payment Beginning balance Payroll withholding Ending balance 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 4 5. 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.2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 5 6. Learning Objective 2 Describe the business functions and the related documents and records in the payroll and personnel cycle.2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 6 7. Business Functions in the Cycle and Related Documents and Records The payroll and personnel cycle. BeginsPersonnel HiringEndsPayments2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 7 8. Personnel and Employment Personnel records Deduction authorization form Rate authorization form2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 8 9. Timekeeping and Payroll Preparation Time Card Job Time Ticket Payroll Transaction File Payroll JournalTimekeeping and Payroll Preparation2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 9 10. 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.2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 10 11. Payment of Payroll Payroll check Payroll bank account reconciliation2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 11 12. Preparation of Payroll Tax Returns and Payment of Taxes W-2 Form Payroll tax returns2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 12 13. Learning Objective 3 Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle.2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 13 14. 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 Audit procedures substantive tests of transactions Sample size for payroll and personnel to meet Items to select transaction-related audit Timing objectives 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 14 15. 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 performance2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 15 16. Payroll Tax Forms and Payments Preparation of payroll tax forms Timely payment of the payroll taxes withheld and other withholdings2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 16 17. Inventory and Fraudulent Payroll Considerations Relationship between payroll and inventory valuation Tests for nonexistent employees2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 17 18. Methodology for Designing Tests of Balances for Payroll Liabilities Identify client business risks affecting payroll liability accountsPhase ISet tolerable misstatement and assess inherent risk Phase I for payroll liability accounts Assess control risk for the Phase I payroll and personnel cycle 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 18 19. Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform tests of controls and substantive tests Phase II of transactions for the payroll and personnel cycle2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 19 20. Methodology for Designing Tests of Balances for Payroll Liabilities Design and perform analytical procedures Phase III for the payroll and personnel cycle Design tests of Audit procedures details of payroll Sample size accounts balances to satisfy Items to select balance-related Timing audit objectives 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/BeasleyPhase III20 - 20 21. Learning Objective 4 Design and perform analytical procedures for the payroll and personnel cycle.2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 21 22. Analytical Procedures for the Payroll and Personnel Cycle Analytical procedurePossible misstatementCompare payroll expense account balances with previous yearsMisstatement of payroll expense accountsCompare direct labor as a percentage of sales with previous yearsMisstatement of direct labor and inventory2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 22 23. Analytical Procedures for the Payroll and Personnel Cycle Analytical procedurePossible misstatementCompare commission expense as a % of sales with previous yearsMisstatement of commission expense and commission liabilityCompare payroll tax expense as a % of salaries and wages with prior yearMisstatement of payroll tax expense and payroll tax liabilityCompare accrued payroll Misstatement of accrued tax accounts with prior year payroll taxes and expense 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 23 24. Learning Objective 5 Design and perform tests of details of balances for accounts in the payroll and personnel cycle.2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 24 25. 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).2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 25 26. 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 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 26 27. Tests of Details of Balances for Expense Accounts Officers compensation Commissions Payroll tax expense Total payroll Contract labor 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 27 28. Presentation and Disclosure Objectives Required disclosures are not extensive Some complex transactions require footnote disclosure2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 28 29. Types of Audit Tests for the Payroll and Personnel Cycle Payroll LiabilitiesCash in BankDirect Labor and Payroll ExpensesPaymentsExpensesAudited by TOC, STOT, and APAudited by TOC, STOT, and APEnding balanceEnding balanceAudited by AP and TDBTOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley20 - 29 30. End of Chapter 202012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley5-5