Chapter 13
Auditing Human Resources
Processes: Personnel and Payroll in
Service Industries
Prepared by Richard J. Campbell
Copyright 2011, Wiley and Sons
Learning Objectives
1. Be familiar with the human resources activities in a public
accounting firm.
2. Learn the activities, transactions, risks, ICFR, and documents
related to human resources. Recognize the impact of
relevant accounting standards on the activities and
transactions.
3. Understand the general structure and activities of
outsourcing the payroll function to an outside service
provider.
4. Understand the meaning and value of both types of service
auditor (SAS 70) reports, how they may provide audit
evidence, and under what circumstances more audit
evidence is needed.
Chapter 13-1
Learning Objectives
5. Link the management assertions, purposes of specific
controls, controls, and tests of controls for human resources.
6. Describe the purposes and execution of related substantive
audit procedures for human resources accounts and
disclosures, including dual purpose tests, substantive
analytical procedures, and details of balances.
Chapter 13-2
Service Industries within Business Categories
EXHIBIT 13-1
Chapter 13 -3
Learning Objective #1
OVERVIEW
 Regardless of the industry, personnel functions include
maintaining personnel records and performing
administrative responsibilities for benefit plans.
 Payroll functions involve calculating, processing, and
posting employee compensation and other related expenses
and liabilities
Chapter 13 -4
Learning Objective #1
HUMAN RESOURCES ASPECTS OF PUBLIC ACCOUNTING
Chapter 13 -5
Learning Objective #1
HUMAN RESOURCES ASPECTS OF PUBLIC ACCOUNTING
 Hiring information is collected in the employee’s personnel
file.
 The information added to the payroll master file includes
the employee’s name, contact information identification
number, rank or staff classification, department, salary, and
deduction information.
 With this information the payroll processing system is able
to calculate and generate a salary payment for the
employee
 This information is integrated with the engagement
management system
Chapter 13 -6
Learning Objective #1
A W-2 Tax Form
Chapter 13 -7
Learning Objective #1
Public Accounting Firm Work-in-Process Record
Chapter 13 -8
Learning Objective #1
Time and Expense Report Input to Payroll
Processing
EXHIBIT 13-2
Chapter 13-9
Learning Objective #1
Time and Expense Report Input to
Engagement Management
EXHIBIT 13-3
Chapter 13-10
Learning Objective #1
BUSINESS PROCESSES, DOCUMENTS, AND INTERNAL
CONTROLS
 Management objectives related to payroll center around
paying employees accurately, paying other entities for
payroll-related liabilities as required, satisfying reporting
obligations imposed by government, and accounting for the
various transactions properly in the accounting records and
financial statements.
 In service industries, human resources expenses may be the
largest expense incurred.
 Employees document information regarding their
identification and status for taxes on W-4 forms.
Chapter 13-11
Learning Objective #2
A W-4 Tax Form
Chapter 13-12
Learning Objective #2
A Job Time Ticket
Chapter 13 -13
Learning Objective #3
A Sample Payroll Register
Chapter 13 -14
Learning Objective #2
Business Activities and Related Documents
EXHIBIT 13-4
Chapter 13 -15
Learning Objective #3
Potential Misstatements and Controls
 The major internal control concerns related to human
resources and payroll are that payments are for valid
transactions and are authorized.
 To accomplish the payroll controls objectives, the company
must have policies and procedures in place regarding
human resources.
 Check-in and check-out functions can be punching a time
clock or logging in and out on a computer terminal.
Chapter 13 -16
Learning Objective #2
USING AN OUTSIDE SERVICE PROVIDER FOR PAYROLL
 Many organizations use an outside service provider to perform the
calculations and prepare the records associated with paying employees.
 The services typically provided by external payroll processing service
organizations include:
 Updating the payroll master file
 Keeping track of current and year-to-date information by employee as well as for
the company as a whole
 Preparing documents and forms required for tax purposes such as W-2 forms and
quarterly payroll tax returns
 Submitting information for general ledger entries back to the organization
Chapter 13 - 17
Learning Objective #3
Outputs of the Service Provider
 The output can be provided in either electronic or hard-copy
form:
 Updated payroll master file
 Payroll register or journal
 Deduction exception report
 Management summary
 Labor cost report
Chapter 13 - 18
Learning Objective #3
Payroll Outsourcing Activities
EXHIBIT 13-5
Chapter 13 - 19
Learning Objective #3
User Company Controls




Employee-Related Controls
Input and Submission Controls
Controls for Correcting Processing Errors
Output-Monitoring Controls
Chapter 13 - 20
Learning Objective #3
REPORTS ON THE PROCESSING OF TRANSACTIONS BY
A SERVICE ORGANIZATION
 If the services affect any of the items in the following list, the service
provider is considered a part of the entity’s IT system.
 Classes of transactions significant to the financial statements
 Procedures of initiating, recording, processing and reporting
transactions
 Accounting records, supporting information and specific accounts
related to the entity’s transactions and financial statements
 Method of capture of events and conditions significant to the entity’s
financial statements
 The financial reporting process leading to preparation of financial
statements, including estimates and disclosures
Chapter 13 - 21
Learning Objective #4
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 22
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 23
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 24
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 25
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 26
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 27
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 28
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 29
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 30
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 31
Learning Objective #5
TESTS OF CONTROLS FOR HUMAN RESOURCES
TRANSACTIONS
EXHIBIT 13-6
Chapter 13 - 32
Learning Objective #5
DUAL PURPOSE TESTS
EXHIBIT 13-7
Chapter 13 - 33
Learning Objective #6
DUAL PURPOSE TESTS
EXHIBIT 13-7
Chapter 13 - 34
Learning Objective #6
DUAL PURPOSE TESTS
EXHIBIT 13-7
Chapter 13 - 35
Learning Objective #6
Examples of Tests of Controls for Payroll Transactions
EXHIBIT 13-8
Chapter 13 - 36
Learning Objective #6
Examples of Tests of Controls for Payroll Transactions
EXHIBIT 13-8
Chapter 13 - 37
Learning Objective #6
Examples of Tests of Controls for Payroll Transactions
EXHIBIT 13-8
Chapter 13 - 38
Learning Objective #6
SUBSTANTIVE ANALYTICAL PROCEDURES
Chapter 13 - 39
Learning Objective #6
SUBSTANTIVE ANALYTICAL PROCEDURES
EXHIBIT 13-9
Chapter 13 - 40
Learning Objective #6
TESTS OF DETAILS OF BALANCES
EXHIBIT 13-10
Chapter 13-41
Learning Objective #6
TESTS OF DETAILS OF BALANCES
EXHIBIT 13-11
Chapter 13-42
Learning Objective #6
Review Question
In which type of organization would an
auditor expend more audit effort addressing
whether payroll costs were posted to the proper
account?
(a) Not-for-profit
(b) Service
(c) Retail
(d) Manufacturing
Chapter 13-43
Review Question
Which department should control the
information on employees’ checking accounts
when the employees have provided authorization
to the employer to pay them by direct deposit?
(a) Personnel
(b) Treasurer or cashier
(c) Accounting and payroll
(d) Line department for each employee
Chapter 13-44
Review Question
Which of the following is not a service
industry?
(a) Banking
(b) Health care
(c) Textbook publishing
(d) Public accounting
Chapter 13-45
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