Chapter 21

Audit of the
Payroll and
Personnel Cycle

Copyright 2014 Pearson Education

Identify the accounts and transactions in the

payroll and personnel cycle.
Describe the business functions and the
related documents and records in the payroll
and personnel cycle.

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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Design and perform analytical procedures

for the payroll and personnel cycle.

Design and perform tests of details of

balances for accounts in the payroll and
personnel cycle.

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1
Identify the accounts and transactions in the
payroll and personnel cycle.

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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 applicable
accounting standards.

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In most systems, the accrued wages and

salaries account is used only at the
end of an accounting period.

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2
Describe the business functions and the
related documents and records in the payroll
and personnel cycle.

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The payroll and personnel cycle.

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Begins

Personnel
Hiring

Ends

Payments

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 Human Resource records

Deduction authorization form
Rate authorization form

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Time Record
Job Time Ticket
Payroll Transaction File
Payroll Journal

Timekeeping and
Payroll Preparation

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A payroll master file is used for

recording payroll transactions for each
employee and maintaining total
employee wages paid for the year to date.

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 Payroll check
Payroll bank account reconciliation

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 W-2 Form
Payroll tax returns

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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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Understand internal control payroll and personnel

Assess planned control risk payroll and personnel
Determine extent of testing controls
Design tests of controls and
substantive tests of transactions
for payroll and personnel to meet
transaction-related audit
objectives
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Audit procedures
Sample size
Items to select
Timing
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Adequate separation of duties

Proper authorization

Adequate documents and records

Physical control over assets and records

Independent checks on performance

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 Preparation of payroll tax forms

Timely payment of the payroll taxes
withheld and other withholdings

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 Relationship between payroll

and inventory valuation
Tests for nonexistent employees

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Identify client business

risks affecting
payroll liability accounts

Phase I

Set performance materiality

and assess inherent risk Phase I
for payroll liability accounts
Assess control risk for the
Phase I
payroll and personnel cycle
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Design and perform

tests of controls and
substantive tests
Phase II
of transactions
for the payroll and
personnel cycle

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Design and perform

analytical procedures
Phase III
for the payroll and
personnel cycle
Design tests of
Audit procedures
details of payroll
Sample size
accounts balances
to satisfy
Items to select
balance-related
Timing
audit objectives
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Phase III

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4
Design and perform analytical procedures for
the payroll and personnel cycle.

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Analytical procedure

Possible misstatement

Compare payroll expense

account balances with
previous years

Misstatement of payroll
expense accounts

Compare direct labor as a

percentage of sales with
previous years

Misstatement of direct
labor and inventory

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Analytical procedure

Possible misstatement

Compare commission
expense as a % of
sales with previous years

Misstatement of
commission expense
and commission liability

Compare payroll tax

expense as a % of salaries
and wages with prior year

Misstatement of payroll
tax expense and payroll
tax liability

Compare accrued payroll

tax accounts with prior year

Misstatement of accrued
payroll taxes and expense

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5
Design and perform tests of details of balances
for accounts in the payroll and personnel
cycle.

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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 (cutoff).

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 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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Officers compensation

Commissions

Payroll tax expense

Total payroll

Contract labor

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 Required disclosures are not extensive

Some complex transactions require
footnote disclosure

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Payroll
Liabilities

Cash in
Bank

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 TDB

TOC + STOT + AP + TDB

= Sufficient appropriate evidence
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Copyright

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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