Topic 10 audit of payroll cycle (1)
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This document discusses the audit of a company's payroll cycle. It provides an overview of the key accounts, transactions, and internal controls related to payroll. These include maintaining separation of duties between payroll processing and cheque distribution, requiring proper authorization of hours worked and pay rates, and independently verifying payroll computations. The document also outlines substantive audit tests an auditor would perform, such as reconciling payroll tax forms and records to prevent unpaid tax liabilities. The objective of auditing the payroll cycle is to evaluate whether payroll accounts and expenses are fairly presented according to accounting principles.
Topic 10 audit of payroll cycle (1)
- 1. TOPIC 10: AUDIT OF PAYROLL CYCLE References: Chapter 10 AUD390 2011
- 2. Overview of the accounts & classes of transactions Business functions & documents Financial report assertions Major internal control & related audit procedures Substantive tests for payroll account AUD390 2011
- 3. Objective to audit: › To evaluate whether the account affected by the cycle are fairly presented in accordance with generally accepted accounting principles Differences between this cycle and the other cycles: › There is only 1 class of transactions for payroll › Transactions are far more significant than related balance sheet accounts › Internal control over payroll are effective for almost all companies AUD390 AUDITING DIA
- 4. AUD390 AUDITING DIA CLASSES OF TRANSACTIONS ACCOUNTS BUSINESS FUNCTIONS DOCUMENTS & RECORDS Payroll Payroll cash All payroll expense accounts All payroll withholding accounts All payroll accrual accounts 1. Personnel & employment 2. Timekeeping & payroll preparation 3. Payment of payroll 4. Preparation of payroll tax returns & payment of taxes Personnel records Deduction authorization form Rate authorization form Time card Job time card Payroll transaction listing Payroll journal or listing Payroll master file Payroll cheque Payroll bank account reconciliation W-2 form Payroll tax return
- 5. 1. Adequate separation of duties 2. Proper authorization 3. Adequate documents & records 4. Physical control over assets and records 5. Independent check on performance 6. Preparation of Payroll Tax Forms 7. Payment of the Payroll Taxes Withheld and Other Withholdings on a timely basis AUD390 AUDITING DIA
- 6. Purpose: To prevent overpayments and payments to nonexistent employees Therefore, Human Resource Department should be independent of the payroll function E.g. Payroll processing (include authorizing for addition and termination of employees, changes in pay rates & deductions) should be separate from the custody of signed payroll cheque AUD390 AUDITING DIA
- 7. Purpose: To ensure that the payroll payment are for authorized purposes E.g. The hours worked by each employee, especially overtime, should be authorized by the employee’s supervisor Evidence of approval maybe noted on all time cards AUD390 AUDITING DIA
- 8. Purpose: To ensure adequate number of documents & records represent the transactions E.g. The existence of time card or punch card to verify the attendance of employee to work AUD390 AUDITING DIA
- 9. Purpose: To ensure payroll cheques are being used for authorized transactions only E.g. Access to unsigned cheques should be restricted Cheque should be signed by an independent person AUD390 AUDITING DIA
- 10. E.g. Payroll cheque should be distributed by someone independent of the payroll and timekeeping functions Any unclaimed cheques should be returned for redeposit Access to the cheque signed-machine should be restricted AUD390 AUDITING DIA
- 11. Purpose: To ensure payroll transaction are monitored accordingly by responsible person E.g. Payroll computations should be independently verified, including comparison of batch totals to summary report AUD390 AUDITING DIA
- 12. Purpose: To prevent a potential liability for unpaid taxes, penalty and interest if the client fails to prepare the tax forms properly E.g. Perform detailed reconciliation of the information on the tax forms and the payroll records AUD390 AUDITING DIA
- 13. Indication of potential misstatements: The payment of penalties and interest in the past for improper payments New personnel in the department responsible for the preparation of returns Lack of internal verification of the information The existence of serious cash flow problems for the client AUD390 AUDITING DIA
- 14. Purpose: To ensure the payment of the payroll taxes withheld & other withholdings on a timely basis E.g. Determine the client’s requirements for submitting the payments by referring to sources such as laws, union contracts & agreements with employees AUD390 AUDITING DIA