Topic 10 audit of payroll cycle (1)

1. TOPIC 10: AUDIT OF PAYROLL
CYCLE
References: Chapter 10
AUD390 2011

2.  Overview of the accounts & classes of transactions
 Business functions & documents
 Financial report assertions
 Major internal control & related audit procedures
 Substantive tests for payroll account
AUD390 2011

3.  Objective to audit:
› To evaluate whether the account affected
by the cycle are fairly presented in
accordance with generally accepted
accounting principles
 Differences between this cycle and the other
cycles:
› There is only 1 class of transactions for
payroll
› Transactions are far more significant than
related balance sheet accounts
› Internal control over payroll are effective
for almost all companies
AUD390 AUDITING DIA

4. AUD390 AUDITING DIA
CLASSES OF
TRANSACTIONS
ACCOUNTS BUSINESS FUNCTIONS DOCUMENTS &
RECORDS
Payroll Payroll cash
All payroll expense
accounts
All payroll
withholding accounts
All payroll accrual
accounts
1. Personnel &
employment
2. Timekeeping &
payroll
preparation
3. Payment of
payroll
4. Preparation of
payroll tax
returns &
payment of taxes
Personnel records
Deduction
authorization form
Rate authorization
form
Time card
Job time card
Payroll transaction
listing
Payroll journal or
listing
Payroll master file
Payroll cheque
Payroll bank account
reconciliation
W-2 form
Payroll tax return

5. 1. Adequate separation of duties
2. Proper authorization
3. Adequate documents & records
4. Physical control over assets and records
5. Independent check on performance
6. Preparation of Payroll Tax Forms
7. Payment of the Payroll Taxes Withheld and
Other Withholdings on a timely basis
AUD390 AUDITING DIA

6.  Purpose:
 To prevent overpayments and payments to
nonexistent employees
 Therefore, Human Resource Department
should be independent of the payroll
function
 E.g.
 Payroll processing (include authorizing for
addition and termination of employees,
changes in pay rates & deductions) should
be separate from the custody of signed
payroll cheque
AUD390 AUDITING DIA

7.  Purpose:
 To ensure that the payroll payment are for
authorized purposes
 E.g.
 The hours worked by each employee,
especially overtime, should be authorized
by the employee’s supervisor
 Evidence of approval maybe noted on all
time cards
AUD390 AUDITING DIA

8.  Purpose:
 To ensure adequate number of documents &
records represent the transactions
 E.g.
 The existence of time card or punch card to
verify the attendance of employee to work
AUD390 AUDITING DIA

9.  Purpose:
 To ensure payroll cheques are being used for
authorized transactions only
 E.g.
 Access to unsigned cheques should be
restricted
 Cheque should be signed by an independent
person
AUD390 AUDITING DIA

10.  E.g.
 Payroll cheque should be distributed by
someone independent of the payroll and
timekeeping functions
 Any unclaimed cheques should be returned
for redeposit
 Access to the cheque signed-machine should
be restricted
AUD390 AUDITING DIA

11.  Purpose: To ensure payroll transaction are
monitored accordingly by responsible person
 E.g.
 Payroll computations should be
independently verified, including
comparison of batch totals to summary
report
AUD390 AUDITING DIA

12.  Purpose:
 To prevent a potential liability for unpaid
taxes, penalty and interest if the client
fails to prepare the tax forms properly
 E.g.
 Perform detailed reconciliation of the
information on the tax forms and the payroll
records
AUD390 AUDITING DIA

13.  Indication of potential misstatements:
 The payment of penalties and interest in
the past for improper payments
 New personnel in the department
responsible for the preparation of returns
 Lack of internal verification of the
information
 The existence of serious cash flow
problems for the client
AUD390 AUDITING DIA

14.  Purpose:
 To ensure the payment of the payroll taxes
withheld & other withholdings on a timely
basis
 E.g.
 Determine the client’s requirements for
submitting the payments by referring to
sources such as laws, union contracts &
agreements with employees
AUD390 AUDITING DIA