Audit of the Payroll
and Personnel Cycle
Chapter 17
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17 - 1
Learning Objective 1
Identify the accounts and
transactions in the payroll
and personnel cycle.
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Accounts and Transactions 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 and Transactions in the
Payroll and Personnel Cycle
Cash in Bank
Payment
for salaries
Payment for
payroll taxes
Accrued Wages, Salaries,
Bonuses, and Commissions
Payment Beginning
balance
Direct Labor
Earned wages,
salaries, etc.
Ending balance
Withheld Income Taxes
and Other Deductions
Payment Beginning
balance
Payroll withholding
Ending balance
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
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Accounts and Transactions in the
Payroll and Personnel Cycle
Cash in Bank
Payment
for salaries
Payment for
payroll taxes
Payroll Tax Expense
Withheld Income Taxes
and Other Deductions
Payment Beginning
balance
Payroll withholding
Ending balance
Accrued Payroll Tax Expense
Payment Beginning balance
Payroll tax expense
Ending balance
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Accounts and Transactions in the
Payroll and Personnel Cycle
Separate operating accounts for payroll also
normally include officers’ salaries and bonuses,
office salaries, sales salaries and commissions,
and indirect manufacturing labor.
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17 - 6
Accounts and Transactions in the
Payroll and Personnel Cycle
These accounts have the same relationship
to accrued wages and withheld taxes and
other deductions that is shown for direct labor.
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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 with
the hiring of personnel and ends with payment
to the employees for the services performed
and to the government and other institutions
for the withheld and accrued payroll taxes
and benefits.
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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
Payroll Master File
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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 Tests of
Balances – Accounts Receivable
Understand internal control –
payroll and personnel.
Assess planned control risk –
payroll and personnel.
Evaluate cost-benefit
of testing controls.
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Methodology for Designing Tests of
Balances – Accounts Receivable
Design tests of details of
controls and substantive tests
of transactions for payroll
and personnel to meet
transaction-related
audit objectives.
Audit procedures
Sample size
Items to select
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
Payment of the payroll taxes withheld
and other withholdings on a timely basis
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Inventory and Fraudulent
Payroll Considerations
Relationship between payroll
and inventory valuation
Tests for nonexistent payroll
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Methodology for Designing Tests of
Balances – Accounts Receivable
Identify client business risks
affecting payroll liability accounts.
Set tolerable misstatement
and assess inherent risk
for payroll liability accounts.
Assess control risk for the
payroll and personnel cycle.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 20
Methodology for Designing Tests of
Balances – Accounts Receivable
Design and perform tests of
controls and substantive tests
of transactions for the
payroll and personnel cycle.
Design and perform analytical
procedures for the
payroll and personnel cycle.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 17 - 21
Methodology for Designing Tests of
Balances – Accounts Receivable
Design tests of details of
payroll accounts balances
to satisfy balance-related
audit objectives.
Audit procedures
Sample size
Items to select
Timing
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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 balance with
previous years.
Compare direct labor as a
percentage of sales with
previous years.
Compare commission
expense as a percentage of
sales with previous years.
Misstatement of payroll
expense accounts
Misstatement of direct
labor and inventory
Misstatement of
commission expense and
commission liability
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Analytical Procedures for the
Payroll and Personnel Cycle
Analytical Procedure
Possible Misstatement
Compare payroll tax expense
as a percentage of salaries and
wages with previous years.
Compare accrued payroll tax
accounts with previous years.
Misstatement of payroll
tax expense and payroll
tax liability
Misstatement of accrued
payroll taxes and payroll
tax expense
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Learning Objective 5
Design and perform tests
of details of balances for
accounts in the payroll
and personnel cycles.
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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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Types of Audit Tests for the
Payroll and Personnel Cycle
Cash in
Bank
Payroll
Liabilities
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 TDP
Audited by
AP and TDP
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS
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End of Chapter 17
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