Personnel records include such data as the date of employment, personnel investigations, rates of pay, authorized deductions, performance evaluations and termination of employment.
This form is used to authorize payroll deductions including the number of exemptions for withholding income taxes.
The rate form is used to authorize the rate of pay.
Adequate controls are necessary to prevent misstatements in the following activities:
Prepare time records by employee
Summarize and calculate gross pay
Payment of payroll
Prepare payroll records
The payroll master file is a computer file used for recording payroll transactions for each employee and maintaining total employee wages paid for the year.
Payments may be made by check but are usually deposited directly into an employee’s individual bank account.
The W-2 form is sent to each employee and summarizes the employee's earning for the calendar year.
The payroll tax returns are forms submitted to local state and federal units of government to show payment of withheld taxes and the employer’s tax.
Internal control for payroll is normally highly structured and well-controlled to manage cash disbursed to minimize employee complaints and dissatisfaction to minimize payroll fraud.
Tests of controls and substantive tests of transactions are the most important means of verifying account balances in the payroll and personnel cycle.
These tests are emphasized because of the lack of independent third party evidence.
Segregation of duties is necessary in the payroll cycle to prevent overpayments and payments to nonexistent employees.
Only the human resources department should be authorized to add and delete employees from the payroll or change pay rates and deductions.
The appropriate documents and records depend on the nature of the payroll system. Time records are necessary for hourly employees but not for salaried employees.
Access to unsigned payroll checks should be restricted.
Payroll computations should be independently verified including comparison of batch totals to summary reports.
As part of understanding internal control, the auditor should review the preparation of at least one of each type of payroll tax form that the client files.
When labor is a material part of the inventory valuation, auditors should emphasize testing internal controls over proper classification of payroll transactions.
Consistency from period to period is essential for classification.
Significant business risks affecting payroll are unlikely for most companies. However, risks may exist for complex compensation arrangements including bonus and stock option plans and other deferred compensation arrangements.
Inherent risk is typically low for all balance related audit objectives.
Tests of accrued payroll expenses are ordinarily straightforward if internal controls are operating effectively.
Two major balance-related audit objectives in testing payroll liabilities are:
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.
Discuss how the auditor might test the above accrued payroll related accounts.