Audit of the Payroll
and Personnel Cycle
Chapter 20
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
20 - 1
Learning Objective 1
Identify the accounts and
transactions in the payroll
and personnel cycle.
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Accounts in the Payroll and
Personnel Cycle
The overall objective in the audit of the payroll
and personnel cycle is to evaluate whether the
account balances affected by the cycle are
fairly stated in accordance with generally
accepted accounting principles.
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Accounts in the Payroll and
Personnel Cycle
Cash in Bank
Payment for
salaries
Accrued Wages, Salaries,
Bonuses, and Commissions
Payment Beginning
balance
Direct
Labor
Earned wages,
salaries, etc.
Ending balance
Payment for
payroll taxes
Withheld Income Taxes
and Other Deductions
Payment Beginning
balance
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Payroll
withholding
Ending balance
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Accounts in the Payroll and
Personnel Cycle
Cash in Bank
Payment for
salaries
Withheld Income Taxes
and Other Deductions
Payment Beginning
balance
Payroll
withholding
Ending balance
Payment for
payroll taxes
Payroll Tax Expense
Accrued Payroll
Tax Expense
Payment Beginning
balance
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Payroll
tax expense
Ending balance
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Accounts in the Payroll and
Personnel Cycle
In most systems the accrued wages and
salaries account is used only at the
end of an accounting period.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
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Learning Objective 2
Describe the business functions
and the related documents and
records in the payroll and
personnel cycle.
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Business Functions in the Cycle
and Related Documents and
Records
The payroll and personnel cycle….
Begins
Hiring of personnel
Ends
Payments
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Personnel and Employment
 Personnel records
 Deduction authorization form
 Rate authorization form
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Timekeeping and Payroll
Preparation
Time Card
Job Time Ticket
Payroll Transaction File
Payroll Journal
Timekeeping and
Payroll Preparation
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Payroll Master File
A payroll master file is used for
recording each payroll transaction
for each employee and maintaining total
employee wages paid for the year to date.
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Payment of Payroll
 Payroll check
 Payroll bank account reconciliation
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Preparation of Payroll Tax Returns
and Payment of Taxes
 W-2 Form
 Payroll tax returns
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Learning Objective 3
Understand internal control and
design and perform tests of
controls and substantive tests
of transactions for the payroll
and personnel cycle.
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Methodology for Designing Controls
and Substantive Tests
Understand internal control – payroll and personnel
Assess planned control risk – payroll and personnel
Determine extent of testing controls
Audit procedures
Design tests of controls and
Sample size
substantive tests of transactions
for payroll and personnel to meet
Items to select
transaction-related audit objectives
Timing
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Understand Internal Control –
Payroll and Personnel Cycle

Adequate separation of duties

Proper authorization

Adequate documents and records

Physical control over assets and records

Independent checks on performance
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Payroll Tax Forms and
Payments
 Preparation of payroll tax forms
 Timely payment of the payroll taxes
withheld and other withholdings
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Inventory and Fraudulent
Payroll Considerations
 Relationship between payroll
and inventory valuation
 Tests for nonexistent employees
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Methodology for Designing Tests
of Balances for Payroll Liabilities
Identify client business
risks affecting
payroll liability accounts
Phase I
Set tolerable misstatement
and assess inherent risk Phase I
for payroll liability accounts
Assess control risk for the
Phase I
payroll and personnel cycle
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Methodology for Designing Tests
of Balances for Payroll Liabilities
Design and perform
tests of controls and
substantive tests
Phase II
of transactions
for the payroll and
personnel cycle
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20 - 20
Methodology for Designing Tests
of Balances for Payroll Liabilities
Design and perform
analytical procedures
Phase III
for the payroll and
personnel cycle
Design tests of
Audit procedures
details of payroll
Sample size
accounts balances
to satisfy
Items to select
balance-related
Timing
audit objectives
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Phase III
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Learning Objective 4
Design and perform analytical
procedures for the payroll
and personnel cycle.
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Analytical Procedures for the
Payroll and Personnel Cycle
Analytical procedure
Possible misstatement
Compare payroll expense
account balances with
previous years
Misstatement of payroll
expense accounts
Compare direct labor as a
percentage of sales with
previous years
Misstatement of direct
labor and inventory
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Analytical Procedures for the
Payroll and Personnel Cycle
Analytical procedure
Possible misstatement
Compare commission expense Misstatement of
as a percentage of sales with
commission expense
previous years
and commission liability
Compare payroll tax expense
Misstatement of payroll
as a percentage of salaries and tax expense and payroll
wages with previous years
tax liability
Compare accrued payroll tax
accounts with previous years
Misstatement of accrued
payroll taxes and expense
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Learning Objective 5
Design and perform tests of
details of balances for accounts
in the payroll and personnel cycle.
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Two Major Balance-related
Audit Objectives
1. Accruals in the trial balance
are stated at the correct
amounts (accuracy).
2. Transactions in the payroll and
personnel cycle are recorded
in the proper period (cutoff).
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Tests of Details of Balances
for Liability Accounts
 Amounts
withheld from employees’ pay
 Accrued
salaries and wages
 Accrued
commissions
 Accrued
bonuses
 Accrued
vacation pay, sick pay, or other benefits
 Accrued
payroll taxes
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Tests of Details of Balances
for Expense Accounts

Officers’ compensation

Commissions

Payroll tax expense

Total payroll

Contract labor
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Presentation and Disclosure
Objectives
 Required disclosures are not extensive
 Some complex transactions require
footnote disclosure
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Types of Audit Tests for the
Payroll and Personnel Cycle
Payroll
Liabilities
Cash in
Bank
Direct Labor and
Payroll Expenses
Payments
Expenses
Audited by
TOC, STOT, and AP
Audited by
TOC, STOT, and AP
Ending
balance
Ending
balance
Audited by AP and TDB
TOC + STOT + AP + TDB
= Sufficient appropriate evidence per GAAS
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End of Chapter 20
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
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