it's very importance for auditing the human resource management process in our business and firms

1. 12-1
Chapter 12
Auditing the
Human Resource
Management
Process
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. 12-2
Overview of the Human Resource
Management Process
The human resource process starts with the
establishment of sound policies for hiring, training,
evaluating, counseling, promoting, compensating,
and taking remedial actions for employees.
The main concern of the auditor involves payroll
transactions once an employee has been hired.
LO# 1

3. 12-3
Type of Transaction Account Affected
Payroll transactions Cash
Inventory
Direct and indirect labor expense accounts
Various payroll-related liabilitiy and expense accounts
Accrued payroll liability Cash
transactions Various accruals (such as payroll taxes and pension costs)
LO# 2
Types of Transactions and Financial
Statement Accounts Affected
Two types of transactions are typically processed through the
human resource management process.

4. 12-4
Types of Documents and Records
▪Personnel records, including wage-rate or salary authorizations.
▪W-4 and other deduction authorization forms.
▪Time card/time sheet.
▪Payroll check/direct deposit records.
▪Payroll register.
▪Payroll master file.
▪Payroll master file changes report.
▪Periodic payroll reports.
▪Various tax reports and forms.
LO# 3

5. 12-5
The Major Functions
Human Resources
Authorization of hiring, firing, wage-rate and salary
adjustments, salaries, and payroll deductions.
Supervision
Review and approval of employees' attendance and
time information; monitoring of employee scheduling,
productivity, and payroll cost variances.
Timekeeping
Processing of employees' attendance and time
information and coding of account distribution.
Payroll
processing
Computation of gross pay, deductions, and net pay;
recording and summarization of payments and
verification of account distribution.
Disbursement Payment of employees' compensation and benefits.
General ledger
Proper accumulation, classification, and
summarization of payroll in the general ledger.
LO# 4

6. 12-6
Segregation of Duties
LO# 5
Payroll Function Operating
Human
Resource
Time-
keeping Payroll IT Treasurer
Initiation of wage or salary changes X
Initiation of employee hiring and firing X
Approval of wage and salary changes X
Updating of personnel records X
Updating of payroll records X
Approval of time sheets and job classification X
Review of time data and payroll distribution X
Preparation of payroll X X
Preparation and signing of payroll checks X
Distribution of payroll checks X
Updating of general ledger for payroll X
Comparison of payroll expense to budget X
Calculation and recording of payroll taxes X

7. 12-7
Inherent Risk Assessment
In assessing inherent risk, the auditor may want to
consider the effect of economic conditions on payroll
costs, the supply of skilled workers, and the
frequency of employee turnover. The auditor should
be familiar with any existing labor contracts and the
impact of regulation on the company.
The inherent risk
associated with non-officers
of the company is
generally considered low.
The inherent risk associated with
officers of the company may not
be considered low because of the
ability to take advantage of their
high position.
LO# 6

8. 12-8
Control Risk Assessment
Understand and document the human resource
management process based on a reliance
approach.
Set and document the control risk for the
human resource management process.
Plan and perform tests of controls on payroll
transactions.
LO# 7

9. 12-9
Control Activities and Test of
Controls – Payroll Transactions
Occurrence of Payroll Transactions
LO# 8
Authorization of Payroll Transactions
Accuracy of Payroll Transactions
Classification of Payroll Transactions

10. 12-10
Relating the Assessed Level of Control
Risk to Substantive Procedures
If the results of the tests of controls for the payroll
system support the planned level of control risk, the
auditor conducts substantive procedures of payroll-
related accounts at the assessed level. If the tests
do not support the level of control risk, the nature
and extent of substantive testing will be increased.
LO# 9

11. 12-11
Auditing Payroll-Related
Accounts
Substantive Analytical Procedures
Payroll Expense Accounts:
Compare current year with prior years' payroll expense accounts
Compare current and prior years' payroll costs as percent of sales and industry data
Compare labor utilization rates and statistics with industry data
Compare budgeted payroll expenses with actual payroll expenses
Estimate sales commissions with formulas and recorded sales
Payroll-Related Accrual Accounts:
Compare current and prior years' balances in payroll related accounts
Test reasonableness of accrual balances
LO# 10

12. 12-12
Tests of Detail of Transactions,
Account Balances, and Disclosures
Assertions about Transactions Substantive Tests of Transaction
Occurrence
Trace a sample of payroll checks to the master
employee list to verify validity.
Completeness
Trace a sample of time sheets to the payroll register.
Authorization
Test a sample of payroll checks for proper
authorization.
Accuracy
Recompute a sample of payroll checks for gross pay,
deductions, and net pay.
Cutoff
Trace a sample of time sheets before and after period
end to the appropriate payroll report.
Classification
Examine a sample of payroll checks for proper
classification into expense accounts.
LO#
11 & 12

13. 12-13
Tests of Detail of Transactions,
Account Balances, and Disclosures
Assertions about Account
Balances at Period End Tests of Details of Account Balances
Existence
Vouch selected amounts from account schedules for
accruals to supporting documents (payroll tax returns,
corporate benefit policies, etc.).
Rights and obligations
Review supporting documentation to determne that
the entity is legally obligated to pay the liability.
Completeness Search for unrecorded liabilities.
Valuation and Allocation
Obtain an account analysis schedule for accrued
payroll liabilites; foot schedules for accrued payroll
liabilities. Compare amounts accrued to supporting
documentation, such as payroll tax returns.
LO#
11 & 12

14. 12-14
Tests of Detail of Transactions,
Account Balances, and Disclosures
Assertions about
Presentation and
Disclosure Tests of Details of Disclosures
Occurrence, and rights and
obligations
Inquire about accruals to ensure that they are properly
disclosed.
Completeness
Complete financial reporting checklist to ensure that
all financial statement disclosures related to payroll
expense have been made.
Classification and
understandability
Review accrued payroll liabilities for proper short-
term/long-term classification.
Accuracy and valuation
Review benefit contracts for proper disclosure of
pension and postretirement benefits. Read footnotes
and other information to ensure that the information is
accurate and properly presented at the appropriate
amounts.
LO#
11 & 12

15. 12-15
Accrued Payroll Liabilities
Presentation and Disclosure Completeness Assertion
LO#
11 & 12
Sample Disclosure Items for the Human Resource
Management Process
Pension disclosures required by FASB Nos. 87, 132R, 158
Postretirement benefit disclosures required by FASB Nos. 106, 132
Stock-based compensation disclosure required by FASB Nos. 123R,
148
Profit-sharing plans
Deferred Compensation arrangements

16. 12-16
Evaluating the Audit Findings –
Payroll-Related Accounts
If the likely misstatement is less than the tolerable
misstatement, the auditor may accept
the accounts as fairly presented.
If the likely misstatement is greater than the
tolerable misstatement, the auditor must
conclude that the accounts are not fairly presented.
LO# 13

17. 12-17
End of Chapter 12
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin