15 - 1 Copyright 2003 Pearson Education Canada Inc. CHAPTER 15 Audit of the Payroll and Personnel...

15 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 15Audit of the Payroll and

Personnel Cycle


What What classes of transactionsclasses of transactions occur occur in the payroll and personnel cycle?in the payroll and personnel cycle?


- 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?


In the audit of payroll andpersonnel, transactions are far

more significant than relatedbalance sheet accounts.




Why?




Related balance sheetaccounts are less signifi-

cant than the volumeof transactions.


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?


1. An employee is hired; personnel 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?

PERSONNE

L

FILE

Tom Taylor



Tom Taylor

Ace CompanyApplication for Employment

Name: Tom Taylor Employment history:__________________

Education:



Tom Taylor



Education:

Ace CompanyPersonnel Investigation

Employee Candidate: Tom Taylor Comments of References:



Tom Taylor



Education:



Ace CompanyPay Rate Authorization

Employee: Tom Taylor Date: 10/25/04Authorized rate: $7.70/hr Authorization:



Tom Taylor



Education:



Ace CompanyPay Rate Authorization

Employee: Tom Taylor Date: 10/25/x9 Authorized rate: $7.70/hr Authorization:

Form TD1Authorization for

Income Tax WithholdingEmployee name:


2. The employee works for the company; labour hours are accumulated.

Possibly throughuse of a time

clock andresulting

time cards


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.


3. Labour hours are entered into the payroll journal and pay is calculated.

timecards

payroll journal description net payNov.2, 2004Tom Taylor 328.61


payroll master fileemployee _ $$ _Tom Taylor 11/2 net 328.61 y-t-d net 753.12

timecards


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.


payroll master fileemployee _ $$ _Tom Taylor 11/2 net 328.61 y-t-d net 753.12

timecards


SummaryPayrollReport

This report sum-marizes payrollfor 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.


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


5. At year-end, payroll accounting prepares T4 slips and T4 summary.

payrollaccounting

T4 slipsT.Taylorearned$21,996.32in 2004.T4 Summary


How does an auditor How does an auditor design tests of design tests of

controls for payroll controls for payroll and personnel?and personnel?


Understand controlsas they relate to pay-

roll and personnel

As discussedin chapter 9




Assess the plannedcontrol risk related to payroll and personnelHow does an auditor How does an auditor

design tests of design tests of controls for payroll controls for payroll

and personnel?and personnel?


roll and personnel


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


roll and personnel

??


In assessing control In assessing control risk, the auditor risk, the auditor should consider:should consider:

- adequate segregation of duties- proper authorization- adequate documents and records- use of prenumbered documents- use of an imprest payroll account



roll and personnel





roll and personnel



roll and personnel

Evaluate cost-benefit of test-

ing controls


Will substantivetests be reduced

sufficiently to justify the cost ofperforming tests

of controls?



roll and personnel


ing controls





ing controls

Design tests of controls related to payroll and

personnel



roll and personnel


In designing In designing payroll and payroll and

personnel tests, personnel tests, the auditor the auditor

should consider:should consider:

Do allemployees

actuallyexist?


ing controls


personnel



roll and personnel


Isrecorded

labouraccurate?



should consider:should consider:Evaluate cost-benefit of test-

ing controls


personnel



roll and personnel


Havepersonnel actions

and wage ratechanges beenauthorized?




ing controls


personnel



roll and personnel


Are payrolltransactions

properly includedin the master file

and correctlysummarized?




ing controls


personnel



roll and personnel


Select a sample of employee files frompersonnel. Determine whether files arecomplete (job application, references,wage rate authorizations, TD1 forms,deduction authorizations).

Payroll & Personnel Audit ProceduresPayroll & Personnel Audit Procedures


Select a sample of employee files frompersonnel. Determine whether files arecomplete (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 interpretHow does an auditor interpretthe results of this test?the results of this test?





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?




Using the same sample, recalculate pay, trace net pay to payroll journal, and cancelled payroll cheques.



Ace Payroll

Jane Treasurer


when examining cancelled paycheques, note signature of treasurer and endorsement of the employee


Bank of Montreal



when examining cancelled paycheques, note signature of treasurer and endorsement of the employee


Ace Payroll

Jane Treasurer

Compare endorsement to employee signature on TD1

Bank of Montreal


Select a sample of employee files frompayroll accounting. Cross-reference thisinformation to related files in personnel.

payrollaccounting personnel




payrollaccounting personnel


How does an auditor interpret How does an auditor interpret the results of this test?the results of this test?




Employeesbeing paid have

active personnel files.



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.


Observe employee and management use of time clock and time cards.



Trace a sample of time cards to payrollaccounting records for those employees.


payrollaccounting




payrollaccounting





Employees who turnedin a clock card were

paid. Pay was accurate.



payrollaccounting

Trace a sample of payroll accounting records to employee time cards.





payrollaccounting






Recorded paymentswere for work actually

performed by existing employees.


Compare total time card labour to totallabour 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



Compare total time card labour to totallabour 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



Compare total time card labour to totallabour charged to jobs, processes, activi-ties, cost centers.


The hours for whichemployees were paid were

charged to production.



Perform a surprise payroll payoff, where-by employees must pick up and sign fortheir cheques in the presence of a super-visor and the auditor. Investigate un-claimed cheques.









Those claiming paycheques arethe appropriate employees.


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