S9 - Auditing Payroll CH12

Question 1

What is the main concern of the auditor regarding the human resource management process?

Answer 1

The payroll transactions once an employee has been hired

Question 2

What are the steps of the payroll transaction?

Answer 2

1.Employee performs job and record the time on a time sheet

2.Time sheet is sent to supervisor who approves it

3.The data is forwarded to the payroll department for review

4 - It’s then sent to the IT department for processing

5 - The payment is made to the employee’s bank account

Question 3

What are the 2 types of transactions processed through the human resource management process?

Answer 3

1. Payments to employees for services rendered
2. Accrual and payment of payroll-related liabilities arising from employee service (EI,CPP)

Question 4

What accounts are affected by payroll transactions?

Answer 4

• Cash
• Inventory
• Direct and indirect labour expenses
• Various payroll-related liability and expense accounts

Question 5

What accounts are affected by accrued payroll liability transactions?

Answer 5

• Cash
• Various accruals (payroll taxes and pension costs)

Question 6

Type of Document and Record

What are personnel records, including wage-rate or salary authorization?

Answer 6

Information about employees’ work history related to human resource

Hiring date, salary or wage-rate, payroll deduction authorization form, salary or wage-rate adjustment, performance evaluations, termination notice

Question 7

Type of Document and Record

What are T-4, TD1, and other deduction authorization forms?

Answer 7

Employee must authorize deductions from their pay, so the organization should document it in sum forms

Similar forms should be used for medical insurance, retirement contribution, and other benefits

Question 8

Type of Document and Record

What are time care / time sheet

Answer 8

Record of the time worked by an employee
Can be the employee himself who fill this data, or simply swiping a card, or entering an employee specific number upon arrival

Question 9

Type of Document and Record

What are Payroll check / direct deposit records

Answer 9

Records indicating the amount paid to employees (gross pay less deductions)

Question 10

Type of Document and Record

What is the payroll register and what does it include?

Answer 10

It summarizes all payroll payments issued to employees. Includes gross pay, deductions, and net pay

Also referred as payroll journal

Question 11

Type of Document and Record

What is the payroll master file?

Answer 11

The computer file maintaining all of the entity’s record about payroll.

Info on employee includes name, SIN, pay rate, and authorized deductions

Question 12

Type of Document and Record

What is the payroll master file changes report

Answer 12

Contains a record of the changes made to the master file. Must be reviewed by HR department to ensure authorized changes have been made properly

Question 13

Type of Document and Record

What are the periodic payroll reports?

Answer 13

A summary payroll report that is made at the end of each week or month, depending on the type of organization.

e.g. Manufacturing company may have a payroll expense report to show how DL was allocated to various products

Used to monitor payroll expense variances

Question 14

Type of Document and Record

What are various tax reports and forms?

Answer 14

Requirements from both provincial and federal governments
Unemployment compensation forms must be completed periodically
Entities must provide their employees with T4 at end of year

Question 15

What are the factors the auditor may want to consider when assessing inherent risk for payroll?

Answer 15

1. Economic conditions
2. Supply of skilled workers
3. Employee turnover (higher means higher risk)
4. Presence of labor contracts and legislation

Question 16

Auditing Payroll
Generally, when would inherent risk be considered low?
And when wouldn’t it be?

Answer 16

For non-officers of the company, IR is generally low since the payroll system and its account generally contain few IR elements.

As for executive compensation, the risk is not set as low because they can have an incentive and opportunity to take advantage of their higher position to form excessive compensation. Same thing for SBC, due to the complexity in accounting and disclosures

Question 17

What are the three major steps in setting control risk for HR management process?

Answer 17

1. Understanding and documenting the HR management process, based on a reliance strategy
2. Plan and perform the Tests of Controls on the payroll transactions
3. Set and document the control risk for the HR management process

Question 18

Regarding the understanding and documenting of the HR management process, how should it be documented?

Answer 18

By using flowcharts, internal control questionnaires, and memoranda

Question 19

Control Activities and Tests of Controls - Payroll Transactions

What is the main concern for occurence of payroll transactions + what is the main control?

Answer 19

Auditors wants to make sure that the payments are made to valid employee for time actually worked

It means making sure they’re not fictitious, and ensuring employees that have been terminated are not still receiving pays

Segregation of duty is the main control

Question 20

Control Activities and Tests of Controls - Payroll Transactions

The authorization of payroll transactions states that the entity must have controls for: (5)

Answer 20

• Making withholdings
• Issuing payroll checks.
• Setting pay rates
• Hiring and terminating employees
• Awarding benefits

Question 21

Control Activities and Tests of Controls - Payroll Transactions

What does the accuracy of payroll transactions states?

Answer 21

The auditor’s main concern is that the employee’s gross pay and payroll deductions are determined correctly.

Question 22

Control Activities and Tests of Controls - Payroll Transactions

What are 2 issues with the classification of payroll transactions?

Answer 22

If payroll expense is charged to the wrong accounts, the F/S may be misstated.

If payroll expense is not properly classified between direct and indirect labor, Inventory and COGS may not be valued properly.

Question 23

Control Activities and Tests of Controls - Payroll Transactions

What is an internal control procedure that may prevent and one that may detect a payroll classification error?

Answer 23

The use of an adequate chart of accounts helps prevent missclassification.

Question 24

Control Activities and Tests of Controls - Payroll Transactions

What does the presentation of payroll transactions state?

Answer 24

Auditor’s tests of controls around management’s use of a chart of accounts, proper codes for recording payroll transactions, and the financial reporting process, including the use of a disclosure checklist, should provide adequate assurance for the presentation assertion.

Question 25

What are some examples of substantive analytical procedures that can be used for auditing payroll EXPENSE accounts

Answer 25

- Comparison: Current-year with prior years’ payroll EXPENSE ACCOUNTS - Comparison: Current and prior years’ payroll costs as PERCENT OF SALES and industry data - Comparison: Labor utilization rates and statistics with industry data - Comparison: Budgeted payroll expenses with actual payroll expenses - Estimation: Sales commissions with formulas and recorded sales

Question 26

What are some examples of substantive analytical procedures that can be used for auditing payroll-related accruals

Answer 26

- Comparison: Current and prior years’ balances in payroll related accounts (after adjusting for changes) - Test the reasonableness of the accrual balances

Question 27

When is additional testing required for payroll expense accounts?

Answer 27

Additional testing is necessary only when control weaknesses exist. If the entity’s internal control is reliable, the auditor does not need to conduct detailed tests of all these payroll expense accounts.

Question 28

Which accounts are affected by payroll transactions (5)?

Answer 28

- Manufacturing expenses (direct and indirect) - General and administrative salaries - Sale salaries - Commissions - Payroll tax expenses

Question 29

Additional testing is necessary only when control weaknesses exist. What audit procedures are deemed sufficient evidence? (4)

Answer 29

- Understanding of internal controls - Test of controls - Substantive tests of transactions - Substantive analytical procedures

Question 30

What are some examples of accrued payroll liabilities a firm may have? (5)

Answer 30

Accrued: - Wages and salary - Payroll tax - Commissions - Bonuses - Benefits such as sick and vacation days Others include medical and life insurance premiums, pensions, and other miscellaneous deductions

Question 31

What are the 5 audit assertions the auditor is concerned about, when auditing ACCRUED payroll liabilities.

Answer 31

- Existence - Completeness - Valuation - Cutoff - Presentation

Question 32

How can the auditor verify the accrued payroll liabilities, when the control risk is low or the accounts are relatively small

Answer 32

Through substantive analytical procedures

Question 33

How can the auditor verify the accrued payroll liabilities, when the accounts' amounts are material, or control risk is high?

Answer 33

They can obtain a detailed account analysis schedule.

Question 34

Accrued Payroll Liabilities - Cutoff What provides evidence that the payroll-related liabilities have been recorded in the right period?

Answer 34

An examination of supporting documentation. e.g., examining an organization's unemployment tax invoices to determine if a proper accrual for unemployment tax has been made in the current period

Question 35

Accrued Payroll Liabilities - Existence, Accuracy, and Valuation How can the auditor verify the existence, accuracy, and valuation of a payroll-related liability?

Answer 35

By tracing the amounts on the account analysis working paper, to the supporting documentation, such as the payroll tax reports. The accuracy of the amounts can generally be confirmed by a recalculation by the auditor

Question 36

Accrued Payroll Liabilities - Completeness and Presentation What are the normal payroll-related taxes the auditor should be aware of?

Answer 36

The CPP and EI: Canadian Pension Plan Employment Insurance In some instance, researching for unrecorded liabilities (CH11), may provide sufficient evidence that all the payroll-liabilities have been recorded.

Question 37

Accrued Payroll Liabilities - Completeness and Presentation What must the auditor ensure regarding completeness for the HR management process?

Answer 37

The auditor must ensure that all necessary financial statement disclosures for the human resource management process are made.

Question 38

Accrued Payroll Liabilities - Completeness and Presentation What are 5 examples of disclosure items for the HR management process?

Answer 38

- Pension benefits - Post retirement benefits - Stock-based compensation - Profit-sharing plans - Deferred compensation arrangements

Question 39

Self-Assessment What are the key segregation duties in the HR management process?

Answer 39

- Separate supervision function from personnel records and payroll processing functions - Separate the disbursement function from the personnel records, supervision, and payroll processing functions - Separate the payroll processing function from the general ledger function