Control & Substantive Tests in
Personnel & Payroll
By
David N. Ricchiute

Nature personnel, payroll functions
Controls over personnel, payroll activities
Auditor’s consideration of controls
Substantive tests of payroll accounts
Earnings manipulation in payroll, postretirement benefits
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Resources (services) acquired in exchange for obligations to pay
Obligations to employees are paid
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Personnel records
Time record
Payroll register
Employee earnings record
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Salary or wage rates
Payroll deductions
Employee signatures
Job classification
Performance evaluation
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Authorization
Execution
Recording
Access to assets
Segregation of duties
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Objective, Errors, Procedure
Objective Error
Employees hired according to criteria
Excessive training, relocation costs; equal opportunity
Compensation deductions according to authorization
Excessive labor costs; violation union contracts; inaccurate accruals
Procedure
Clear hiring policies, procedures; updated records
Updated listings pay rates, deductions; review, approval
Adjustments authorized
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Increased pay, overstated labor costs
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Clear adjustment policies, procedures

Objective, Errors, Procedure
Objective Error
Payroll, personnel procedures authorized
Misappropriated cash from paychecks for terminated, fictitious employees
All payroll disbursements for recognized liability
Misappropriated cash, overstated labor costs
Procedure
Personnel, payroll procedures manual
Periodically verify employee assignments
Prenumber, control time records, paychecks, adjustment forms; dual signatures
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Objective, Errors, Procedure
Objective
Amounts due employees at proper amounts, time periods, classification
Error Procedure
Payroll costs inaccurate; misstated expenses; details do not agree
Document account distribution procedures; reconcile ledgers, journals; physical barriers unused documents, forms
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Objective, Errors, Procedure
Objective
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Access to personnel, payroll records, forms, documents restricted to authorized personnel
Error
Records, forms, documents misused; unauthorized labor costs
Procedure
Prenumber, control forms, documents;
Segregate authorizing, executing, recording; maintain listings authorized signatories
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Obtain understanding


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Preliminary review
Document system
Perform transaction walkthrough
Determine whether controls are potentially reliable in assessing control risk below maximum
 Test controls
GBW 8th ed., Ch. 14

Obtain payroll register

Verify mathematical accuracy
Obtain payroll summary, labor distribution


Verify accuracy of summaries; compare totals to payroll register
Trace totals to GL & cost accounting records
Select random sample employees & obtain personnel file
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Examination for completeness, authorization
Compare pay rates, deductions
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Trace from register to employee records
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Obtain sample canceled payroll checks
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
Trace details to payroll register
Compare endorsements to signatures in file
Personally distribute checks to properly identified employees
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Review system documentation
Review results of controls tests
Determine whether existing controls are


Effective
Can be relied upon to
 Assess control risk below maximum
 Assess detection risk above minimum
 Restrict substantive tests of payroll
GBW 8th ed., Ch. 14

Obligations, Valuation

Determine by analytical procedures, reasonableness
Obligations, Valuation, Completeness

Determine reasonableness of accruals
Presentation & Disclosure
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Review to determine classification, adequate disclosures
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Compare ratios
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Total payroll expenses & accrued expense with prior years; & adjusted for pay rate changes
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Direct labor to budgets, sales, prior years
Commissioned sales payroll: sales X average commission rates
Payroll tax expense to payroll with prior years
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Capitalized Costs at Safety-Kleen
CEO, CFO, others capitalized payroll costs to “unrealized contingent-contract claims” to understate period expenses
Board investigation reduced income for
1997 – 1999 by $534 million
SEC filed suit alleging management falsely represented financial statements
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Health Care
Benefits based on estimates
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
Off-balance sheet financing
Pay-as-you-go system
Management incentives to minimize for little earnings effect
Auditor incentives to ensure fair presentation
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Required for
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Postretirement benefits other than pensions
Health care obligations
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