Audit of the Payroll and Personnel Cycle

1. CHAPTER 7:
Auditing the Payroll and Personnel
Cycle
Prepared by :
Nur Ellina Bt Shamsuri (2014270102)
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2. 1. Description of Payroll and Personnel Cycle
The overall objective in the audit of the
payroll & personnel cycle is to evaluate
whether the account balances affected by
the cycle are fairly stated in accordance
with Generally Accepted Accounting
Principles (GAAP).
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3. Figure 1
Payroll Transactions
Accrued Wages, Salaries,
Bonuses, and Commissions Direct Labor
Payment Beginning balance
Cash in Bank Earned wages, salaries, etc.
Payment for Ending balance
salaries
Payment for Withheld Income Taxes
payroll tax and Other Deductions
Payment Beginning balance
Payroll withholding
Ending balance
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4. Withheld Income Taxes
and Other Deductions
Cash in Bank Payment Beginning balance
Payment for Payroll withholding
salaries Ending balance
Payment for
payroll taxes Accrued Payroll
Tax Expense
Payroll Tax Expense Payment Beginning balance
Payroll tax expense
Ending balance
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5. 2. Understanding the Internal Control
Structure
The payroll and personnel cycle.....
Begins
Followed by
Personnel
Hiring
Payment to
Employees
Ends
Termination of
Employment
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6. Documents and Activities Related to Payroll
Transactions
Document Activity
1. Personnel file Records in file data related to employees.
2. Deduction form Authorises payroll deduction for MPF contribution.
3. Rate form Authorises rate of pay.
4. Timecard Records employees starts and stop work during a pay period.
5. Payroll cheque Prepares a cheque in the name of an employees.
6. Payroll register Records amount paid to employees during each pay period.
7. Employees earning record Record details of an employees pay for whole financial year.
8. Labour cost distribution Identify gross factory earning for various account classifications.
9. Payroll tax return Prepare tax form for submission to relevant government agency.
10. Group certificate Prepare document to give to an employee for filing with Malaysia.
11. Control card Prepares a control card showing total payroll for the period.
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7. Flowchart Payroll and
Personnel Cycle
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8. Figure 2 Authorising Employment
Personnel Department
To payroll department
Hire new employees & set
up personnel file
Personnel file
Rate & deduction
authorizedPersonnel record
with rate &
deduction authorized
A
1. Responsible for hiring,
promoting, transfer and
termination of employees.
2. It maintains personnel file
for every employee hired.
3. A copy approved pay rate &
authorised deductions should
be transmitted to payroll
personnel.
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9. Figure 3 Timekeeping
To payroll department
Time cards Job time ticket
Matched, reviewed,
approved by
Supervisor
1. Important in the case
of employees paid by
the hour; proper
records of hours
worked are needed to
ensure accurate
accounting for payroll.
2. Time clock is a good
physical measure.
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10. Figure 4 Preparation of Payroll
To treasurer
From personnel
department
From time
keeping
department
Rate and deduction
authorization
Time cards
Job time tickets
Posts to employee
earning record &
prepares payroll
summary & cheques
Time cards
Job time tickets
Rates & Deductions
Payroll summary 2
Payroll summary 1
Payroll register 2
Payroll register 1
Payroll cheques
Employee earning
record
A
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11. Payroll Preparation
1. Maintains an earnings
record for every
employees.
2. The payroll cheques and
payroll register are sent to
the treasurer.
3. It is necessary to prepare
MPF contribution & file
them on time to avoid
penalties.
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12. Figure 5 Payment of Payroll
Treasurer
From payroll department
Payroll register
Payroll cheques
Review payroll
register & sign
cheques
Payroll register
Payroll cheques
Distribute
to
employees
Payroll distribution
involves reviewing
payroll register & signing
payroll cheques, which
are then distributed to
employees.
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13. Internal Control Objectives and Control
Procedures
ASSERTIONS INTERNAL CONTROL
PROCEDURES
1. Occurrence Recorded payroll transaction are for services.
2. Completeness All payroll transaction are properly recorded.
3. Accuracy Payroll transaction are recorded at the proper
amount.
4. Cut-off Payroll transaction are recorded in the correct
accounting period.
5. Classification Payroll transaction are recorded in proper
account.
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14. 3. Preliminary Assessment of Control Risk
1. For the financial report
assertions related to
the cycle transaction
and account balance.
2. Evaluates the
effectiveness of an
entity’s ICS in
preventing and
correcting material
misstatements.
3. Use flowcharts and
internal control
questionnaires to documents
the auditor understanding of
the ICS and assessment
control risk.
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15. 4. Tests of Control for Payroll Transactions
A random sample of
transaction normally chosen
for tests of control.
It happen since payroll
transaction can be quite
extensive and detailed.
When testing payroll, auditors usually
use persuasive audit evidence rather
than substantive procedures because it
is internally generated.
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16. Control Objective and Related Assertions
ASSERTIONS TEST OF CONTROL
1. Occurrence There should be segregation of duties of personnel,
timekeeping and personnel payments.
2. Completeness Payroll cheques should be pre-numbered and
accounted for.
3. Accuracy There should be internal verification entries, including
review of approved rates and timecard.
4. Cut-off Compare the procedures dates on payroll cheques and
entry date in payroll register.
5. Classification Procedures for classifying payroll costs should be
reviewed.
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17. 5. Review of Preliminary Assessment of
Control Risk
If the audit evidence are a
result of control failure:
 The auditor need to
modify the nature, timing
and extent of planned
substantive procedures to
be performed.
 To reduce detection risk.
If the audit evidence indicates
that the control policies &
procedures are operating
effectively:
 The assessed level of
control risk may be
lowered.
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Based on Test of Control...
Therefore, audit risk to an
acceptable level.
Therefore, substantive test may
be reduced accordingly.

18. 6. Substantive Audit Procedures
Substantive Tests of
Payroll Transactions
Substantive Tests of
Payroll Balances
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19. Substantive Tests of Payroll
Transactions
 To be performed if a review of the
preliminary assessment of control risk is
high.
Eg :-
1) Prepare a reconciliation of payroll
bank statement with payroll
register payments.
2) Recalculate the gross pay, net pay
and payroll deductions for a
sample of employees.
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20. Substantive Tests of Payroll
Balances
 An audit procedure that examine
the FS & supporting document if
there is an error.
 These test are needed as evidence
to support the assertion that the
FR of the entity are complete,
valid & accurate.
Eg :-
1) Review the payroll accounts for
the date that payroll was last
paid and recalculate accrued
wages.
2) Trace total accrued payroll to
payroll records.
3) Perform analytical procedures.
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21. End of this chapter. Goodluck! 
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