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Copyright 2003 Pearson Education Canada I nc.

CHAPTER 15
Audit of the
Payroll and
Personnel Cycle
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What classes of transactions occur
in the payroll and personnel cycle?
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- receipt of
employee
services and
payment for
those
services
What classes of transactions occur
in the payroll and personnel cycle?
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In the audit of payroll and
personnel, transactions are far
more significant than related
balance sheet accounts.
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In the audit of payroll and
personnel, transactions are far
more significant than related
balance sheet accounts.
Why?
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In the audit of payroll and
personnel, transactions are far
more significant than related
balance sheet accounts.
Related balance sheet
accounts are less signifi-
cant than the volume
of transactions.
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What is the sequence of business
functions that occurs in the payroll
and personnel cycle?
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1. An employee is hired; person-
nel records are accumulated.
What is the sequence of business
functions that occurs in the payroll
and personnel cycle?
Tom Taylor
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1. An employee is hired; person-
nel records are accumulated.
Tom Taylor
Ace Company
Application for Employment
Name:
Employment history:__________________

Education:
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Copyright 2003 Pearson Education Canada I nc.
1. An employee is hired; person-
nel records are accumulated.
Tom Taylor
Ace Company
Application for Employment
Name:
Employment history:__________________

Education:
Ace Company
Personnel Investigation
Employee Candidate: Tom Taylor
Comments of References:



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Copyright 2003 Pearson Education Canada I nc.
1. An employee is hired; person-
nel records are accumulated.
Tom Taylor
Ace Company
Application for Employment
Name:
Employment history:__________________

Education:
Ace Company
Personnel Investigation
Employee Candidate: Tom Taylor
Comments of References:



Ace Company
Pay Rate Authorization
Employee: Tom Taylor
Date: 10/25/04
Authorized rate: $7.70/hr
Authorization:
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Copyright 2003 Pearson Education Canada I nc.
1. An employee is hired; person-
nel records are accumulated.
Tom Taylor
Ace Company
Application for Employment
Name:
Employment history:__________________

Education:
Ace Company
Personnel Investigation
Employee Candidate: Tom Taylor
Comments of References:



Ace Company
Pay Rate Authorization
Employee: Tom Taylor
Date: 10/25/x9
Authorized rate: $7.70/hr
Authorization:
Form TD1
Authorization for
Income Tax Withholding
Employee name:
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2. The employee works for the
company; labour hours are
accumulated.
Possibly through
use of a time
clock and
resulting
time cards
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2. The employee works for the
company; labour hours are
accumulated.
In each department,
management may accumulate
labour charged to jobs,
processes, activities,
or cost centers.
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Copyright 2003 Pearson Education Canada I nc.
3. Labour hours are entered into the payroll
journal and pay is calculated.
time
card
s
payroll journal
description net pay
Nov.2, 2004
Tom Taylor 328.61

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payroll master file
employee _ $$ _
Tom Taylor
11/2 net 328.61
y-t-d net 753.12
time
cards
payroll journal
description net pay
Nov.2, 2004
Tom Taylor 328.61

3. Labor hours are entered into the pay-roll
journal and pay is calculated. This
information is then used to update the
payroll master file.
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payroll master file
employee _ $$ _
Tom Taylor
11/2 net 328.61
y-t-d net 753.12
time
cards
payroll journal
description net pay
Nov.2, 2004
Tom Taylor 328.61

Summary
Payroll
Report
This report sum-
marizes payroll
for a period.
3. Labor hours are entered into the payroll
journal and pay is calculated. This informa-
tion is then used to update the payroll
master file. Periodically, a summary payroll
report is prepared.
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4. The employee is paid through an
imprest payroll account. The
cheque is signed by the treasurer.
Ace Payroll
Jane Treasurer
Tom Taylor
Bank of Montreal
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5. At year-end, payroll accounting
prepares T4 slips and
T4 summary.
payroll
accounting
T4 slips
T.Taylor
earned
$21,996.32
in 2004.
T4 Summary
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How does an auditor
design tests of
controls for payroll
and personnel?
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Understand controls
as they relate to pay-
roll and personnel
As discussed
in chapter 9
How does an auditor
design tests of
controls for payroll
and personnel?
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Assess the planned
control risk related to
payroll and personnel How does an auditor
design tests of
controls for payroll
and personnel?
Understand controls
as they relate to pay-
roll and personnel
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In assessing control
risk, the auditor
should consider:
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
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Copyright 2003 Pearson Education Canada I nc.
In assessing control
risk, the auditor
should consider:
- adequate segregation
of duties
- proper authorization
- adequate documents
and records
- use of prenumbered
documents
- use of an imprest
payroll account
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
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Copyright 2003 Pearson Education Canada I nc.
How does an auditor
design tests of
controls for payroll
and personnel?
Understand controls
as they relate to pay-
roll and personnel
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
Evaluate cost-
benefit of test-
ing controls
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Copyright 2003 Pearson Education Canada I nc.
Will substantive
tests be reduced
sufficiently to
justify the cost of
performing tests
of controls?
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
Evaluate cost-
benefit of test-
ing controls
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Copyright 2003 Pearson Education Canada I nc.
How does an auditor
design tests of
controls for payroll
and personnel?
Evaluate cost-
benefit of test-
ing controls
Design tests of controls
related to payroll and
personnel
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
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Copyright 2003 Pearson Education Canada I nc.
In designing
payroll and
personnel tests,
the auditor
should consider:
Do all
employees
actually
exist?
Evaluate cost-
benefit of test-
ing controls
Design tests of controls
related to payroll and
personnel
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
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Copyright 2003 Pearson Education Canada I nc.
Is
recorded
labour
accurate?
In designing
payroll and
personnel tests,
the auditor
should consider:
Evaluate cost-
benefit of test-
ing controls
Design tests of controls
related to payroll and
personnel
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
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Copyright 2003 Pearson Education Canada I nc.
Have
personnel actions
and wage rate
changes been
authorized?
In designing
payroll and
personnel tests,
the auditor
should consider:
Evaluate cost-
benefit of test-
ing controls
Design tests of controls
related to payroll and
personnel
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
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Copyright 2003 Pearson Education Canada I nc.
Are payroll
transactions
properly included
in the master file
and correctly
summarized?
In designing
payroll and
personnel tests,
the auditor
should consider:
Evaluate cost-
benefit of test-
ing controls
Design tests of controls
related to payroll and
personnel
Assess the planned
control risk related to
payroll and personnel
Understand controls
as they relate to pay-
roll and personnel
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Copyright 2003 Pearson Education Canada I nc.
Select a sample of employee files from
personnel. Determine whether files are
complete (job application, references,
wage rate authorizations, TD1 forms,
deduction authorizations).
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Select a sample of employee files from
personnel. Determine whether files are
complete (job application, references,
wage rate authorizations, TD1 form,
deduction authorizations).

Using the same sample, cross-reference
information from personnel to related
information in payroll accounting.
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Select a sample of employee files from
personnel. Determine whether files are
complete (job application, references,
wage rate authorizations, TD1 form,
deduction authorizations).

Using the same sample, cross-reference
information from personnel to related
information in payroll accounting.
How does an auditor interpret
the results of this test?
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Select a sample of employee files from
personnel. Determine whether files are
complete (job application, references,
wage rate authorizations, TD1 form,
deduction authorizations).

Using the same sample, cross-reference
information from personnel to related
information in payroll accounting.
Employees with active
personnel files are being paid.
How does an auditor interpret
the results of this test?
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Copyright 2003 Pearson Education Canada I nc.
Select a sample of employee files from
personnel. Determine whether files are
complete (job application, references,
wage rate authorizations, TD1 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 cheques.
Payroll & Personnel Audit Procedures
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Ace Payroll
Jane Treasurer
Using the same sample, recalculate pay,
trace net pay to payroll journal, and
cancelled payroll cheques.
when
examining
cancelled pay-
cheques, note
signature of
treasurer and
endorsement of
the employee
Payroll & Personnel Audit Procedures
Bank of Montreal
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Copyright 2003 Pearson Education Canada I nc.
Using the same sample, recalculate pay,
trace net pay to payroll journal, and
cancelled payroll cheques.
when
examining
cancelled pay-
cheques, note
signature of
treasurer and
endorsement of
the employee
Payroll & Personnel Audit Procedures
Ace Payroll
Jane Treasurer
Compare endorsement to
employee signature on TD1
Bank of Montreal
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Copyright 2003 Pearson Education Canada I nc.
Select a sample of employee files from
payroll accounting. Cross-reference this
information to related files in personnel.
payroll
accounting
personnel
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Select a sample of employee files from
payroll accounting. Cross-reference this
information to related files in personnel.
payroll
accounting
personnel
Payroll & Personnel Audit Procedures
How does an auditor interpret
the results of this test?
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Copyright 2003 Pearson Education Canada I nc.
Select a sample of employee files from
payroll accounting. Cross-reference this
information to related files in personnel.
Payroll & Personnel Audit Procedures
Employees
being paid have
active personnel files.
How does an auditor interpret
the results of this test?
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Copyright 2003 Pearson Education Canada I nc.
This procedure addresses the
auditors concern regarding
nonexistent employees.
Payroll & Personnel Audit Procedures
Select a sample of employee files from
payroll accounting. Cross-reference this
information to related files in personnel.
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Observe employee and management
use of time clock and time cards.
Payroll & Personnel Audit Procedures
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Trace a sample of time cards to payroll
accounting records for those employees.
Payroll & Personnel Audit Procedures
payroll
accounting
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Trace a sample of time cards to payroll
accounting records for those employees.
How does an auditor interpret
the results of this test?
payroll
accounting
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Trace a sample of time cards to payroll
accounting records for those employees.
Payroll & Personnel Audit Procedures
Employees who turned
in a clock card were
paid. Pay was accurate.
How does an auditor interpret
the results of this test?
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payroll
accounting
Trace a sample of payroll accounting
records to employee time cards.
Payroll & Personnel Audit Procedures
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Trace a sample of payroll accounting
records to employee time cards.
How does an auditor interpret
the results of this test?
payroll
accounting
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Trace a sample of payroll accounting
records to employee time cards.
Payroll & Personnel Audit Procedures
How does an auditor interpret
the results of this test?
Recorded payments
were for work actually
performed by
existing employees.
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Compare total time card labour to total
labour charged to jobs, processes, activi-
ties, cost centres.
job cost sheet




labor 43.6 hr
job cost sheet




labor 43.6 hr
job cost sheet




labor 43.6 hr
job cost sheet




labour 43.6 hr
Payroll & Personnel Audit Procedures
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Compare total time card labour to total
labour charged to jobs, processes, activi-
ties, cost centres.
How does an auditor interpret
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




labour 43.6 hr
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Compare total time card labour to total
labour charged to jobs, processes, activi-
ties, cost centers.
Payroll & Personnel Audit Procedures
The hours for which
employees were paid were
charged to production.
How does an auditor interpret
the results of this test?
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Perform a surprise payroll payoff, where-
by employees must pick up and sign for
their cheques in the presence of a super-
visor and the auditor. Investigate un-
claimed cheques.
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Perform a surprise payroll payoff, where-
by employees must pick up and sign for
their cheques in the presence of a super-
visor and the auditor. Investigate un-
claimed cheques.
How does an auditor interpret
the results of this test?
Payroll & Personnel Audit Procedures
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Copyright 2003 Pearson Education Canada I nc.
Perform a surprise payroll payoff, where-
by employees must pick up and sign for
their cheques in the presence of a super-
visor and the auditor. Investigate un-
claimed cheques.
Payroll & Personnel Audit Procedures
Those claiming paycheques are
the appropriate employees.
How does an auditor interpret
the results of this test?