1 CHAPTER 16 Audit of the Payroll and Personnel Cycle.
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Transcript of 1 CHAPTER 16 Audit of the Payroll and Personnel Cycle.
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CHAPTER 16Audit of the Payroll and
Personnel Cycle
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- receipt of employee services and payment for those services
What What classes of transactionsclasses of transactions occur occur in the payroll and personnel cycle?in the payroll and personnel cycle?
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In the audit of payroll andpersonnel, transactions are far
more significant than relatedbalance sheet accounts.
Why?
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In the audit of payroll andpersonnel, transactions are far
more significant than relatedbalance sheet accounts.
Related balance sheetaccounts are less signifi-
cant than the volumeof transactions.
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1. An employee is hired; person- nel records are accumulated.
What is the What is the sequence of business sequence of business functionsfunctions that occurs in the payroll that occurs in the payroll
and personnel cycle?and personnel cycle?
PERSONNEL
FILE
Tom Taylor
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1. An employee is hired; person- nel records are accumulated.
Tom Taylor
Ace CompanyApplication for Employment
Name: Tom Taylor Employment history:__________________
Education:
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1. An employee is hired; person- nel records are accumulated.
Tom Taylor
Ace CompanyApplication for Employment
Name: Tom Taylor Employment history:__________________
Education:
Ace CompanyPersonnel Investigation
Employee Candidate: Tom Taylor Comments of References:
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1. An employee is hired; person- nel records are accumulated.
Tom Taylor
Ace CompanyApplication for Employment
Name: Tom Taylor Employment history:__________________
Education:
Ace CompanyPersonnel Investigation
Employee Candidate: Tom Taylor Comments of References:
Ace CompanyPay Rate Authorization
Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization:
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1. An employee is hired; person- nel records are accumulated.
Tom Taylor
Ace CompanyApplication for Employment
Name: Tom Taylor Employment history:__________________
Education:
Ace CompanyPersonnel Investigation
Employee Candidate: Tom Taylor Comments of References:
Ace CompanyPay Rate Authorization
Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization:
Form W-4Authorization for FederalIncome Tax Withholding
Employee name:
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2. The employee works for the company; labor hours are accumulated.
Possibly throughuse of a time
clock andresulting
time cards
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2. The employee works for the company; labor hours are accumulated.
In each department,management may accumulate
labor charged to jobs,processes, activities,
or cost centers.
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3. Labor hours are entered into the payroll journal and pay is calculated.
timecards
payroll journal description net payNov.2, 19x9Tom Taylor 328.61
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payroll master fileemployee _ $$ _Tom Taylor 11/2 net 328.61 y-t-d net 753.12
timecards
payroll journal description net payNov.2, 19x9Tom Taylor 328.61
3. Labor hours are entered into the payroll journal and pay is calculated. This information is then used to update the pay- roll master file.
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payroll master fileemployee _ $$ _Tom Taylor 11/2 net 328.61 y-t-d net 753.12
timecards
payroll journal description net payNov.2, 19x9Tom Taylor 328.61
SummaryPayrollReport
This report sum-marizes payrollfor a period.
3. Labor hours are entered into the payroll journal and pay is calculated. This information is then used to update the pay- roll master file. Periodically, a summary payroll report is prepared.
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4. The employee is paid through an imprest payroll account. The check is signed by the treasurer.
Ace Payroll
Jane Treasurer
Tom Taylor
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5. At year-end, payroll accounting prepares federal W-2 forms and payroll tax returns.
payrollaccounting
W-2 formT.Taylorearned$21996.32in 19x9.
PayrollTax Return
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How does an auditor How does an auditor design tests of design tests of controls and controls and
substantive tests of substantive tests of transactions for transactions for
payroll and payroll and personnel?personnel?
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Understand controlsas they relate to pay-
roll and personnel
As discussedin chapter 9
How does an auditor How does an auditor design tests of design tests of controls and controls and
substantive tests of substantive tests of transactions for transactions for
payroll and payroll and personnel?personnel?
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Assess the plannedcontrol risk related to payroll and personnel
How does an auditor How does an auditor design tests of design tests of controls and controls and
substantive tests of substantive tests of transactions for transactions for
payroll and payroll and personnel?personnel?
Understand controlsas they relate to pay-
roll and personnel
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In assessing control In assessing control risk, the auditor risk, the auditor should consider:should consider:
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
??
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In assessing control In assessing control risk, the auditor risk, the auditor should consider:should consider:
- adequate separation of duties- proper authorization- adequate documents and records- use of prenumbered documents- use of an imprest payroll account
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
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How does an auditor How does an auditor design tests of design tests of controls and controls and
substantive tests of substantive tests of transactions for transactions for
payroll and payroll and personnel?personnel?
Understand controlsas they relate to pay-
roll and personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
Evaluate cost-benefit of test-
ing controls
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Will substantivetests be reduced
sufficiently to justify the cost ofperforming tests
of controls?
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
Evaluate cost-benefit of test-
ing controls
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How does an auditor How does an auditor design tests of design tests of controls and controls and
substantive tests of substantive tests of transactions for transactions for
payroll and payroll and personnel?personnel?
Evaluate cost-benefit of test-
ing controls
Design tests of controls and substantive tests of transactions related to payroll and personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
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In designing In designing payroll and payroll and
personnel tests, personnel tests, the auditor the auditor
should consider:should consider:
Do allemployees
actuallyexist?
Evaluate cost-benefit of test-
ing controls
Design tests of controls and substantive tests of transactions related to payroll and personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
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Isrecorded
laboraccurate?
In designing In designing payroll and payroll and
personnel tests, personnel tests, the auditor the auditor
should consider:should consider:Evaluate cost-benefit of test-
ing controls
Design tests of controls and substantive tests of transactions related to payroll and personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
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Havepersonnel actions
and wage ratechanges beenauthorized?
In designing In designing payroll and payroll and
personnel tests, personnel tests, the auditor the auditor
should consider:should consider:Evaluate cost-benefit of test-
ing controls
Design tests of controls and substantive tests of transactions related to payroll and personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
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Are payrolltransactions
properly includedin the master file
and correctlysummarized?
In designing In designing payroll and payroll and
personnel tests, personnel tests, the auditor the auditor
should consider:should consider:Evaluate cost-benefit of test-
ing controls
Design tests of controls and substantive tests of transactions related to payroll and personnel
Assess the plannedcontrol risk related to payroll and personnel
Understand controlsas they relate to pay-
roll and personnel
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Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, W-4 form,deduction authorizations).
Using the same sample, cross-reference information from personnel to related information in payroll accounting.
How does an auditor interpretHow does an auditor interpretthe results of this test?the results of this test?
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, W-4 form,deduction authorizations).
Using the same sample, cross-reference information from personnel to related information in payroll accounting.
Employees with activepersonnel files are being paid.
How does an auditor interpretHow does an auditor interpretthe results of this test?the results of this test?
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Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, W-4 form,deduction authorizations).
Using the same sample, cross-reference information from personnel to related information in payroll accounting.
Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll checks.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll checks.
when examining cancelled pay- checks, note signature of treasurer and endorsement of the employee
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Ace Payroll
Jane Treasurer
Compare endorsement to employee signature on W-2
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Select a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Employeesbeing paid have
active personnel files.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
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This procedure addresses theThis procedure addresses theauditor’s concern regardingauditor’s concern regarding
nonexistent employeesnonexistent employees..
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit ProceduresSelect a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.
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Observe employee and management use of time clock and time cards.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Trace a sample of time cards to payrollaccounting records for those employees.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
payrollaccounting
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Trace a sample of time cards to payrollaccounting records for those employees.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
payrollaccounting
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Trace a sample of time cards to payrollaccounting records for those employees.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Employees who turnedin a clock card were
paid. Pay was accurate.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
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payrollaccounting
Trace a sample of payroll accounting records to employee time cards.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Trace a sample of payroll accounting records to employee time cards.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
payrollaccounting
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Trace a sample of payroll accounting records to employee time cards.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
Recorded paymentswere for work actually
performed by existing employees.
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Compare total time card labor to totallabor charged to jobs, processes, activi-ties, cost centers.
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Compare total time card labor to totallabor charged to jobs, processes, activi-ties, cost centers.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
job cost sheet
labor 43.6 hr
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Compare total time card labor to totallabor charged to jobs, processes, activi-ties, cost centers.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
The hours for whichemployees were paid were
charged to production.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?
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Perform a surprise payroll payoff, where-by employees must pick up and sign fortheir checks in the presence of a super-visor and the auditor. Investigate un-claimed checks.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
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Perform a surprise payroll payoff, where-by employees must pick up and sign fortheir checks in the presence of a super-visor and the auditor. Investigate un-claimed checks.
Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures
Those claiming paychecks arethe appropriate employees.
How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?