S9 - Auditing Payroll CH12 Flashcards
What is the main concern of the auditor regarding the human resource management process?
The payroll transactions once an employee has been hired
What are the steps of the payroll transaction?
- Employee performs job and record the time on a time sheet
- Time sheet is sent to supervisor who approves it
- The data is forwarded to the payroll department for review
- It’s then sent to the IT department for processing
- The payment is made to the employee’s bank account
What are the 2 types of transactions processed through the human resource management process?
- Payments to employees for services rendered
- Accrual and payment of payroll-related liabilities arising from employee service (EI,CPP)
What accounts are affected by payroll transactions?
- Cash
- Inventory
- Direct and indirect labour expenses
- Various payroll-related liability and expense accounts
What accounts are affected by accrued payroll liability transactions?
- Cash
- Various accruals (payroll taxes and pension costs)
Type of Document and Record
What are personnel records, including wage-rate or salary authorization?
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
Type of Document and Record
What are T-4, TD1, and other deduction authorization forms?
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
Type of Document and Record
What are time care / time sheet
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
Type of Document and Record
What are Payroll check / direct deposit records
Records indicating the amount paid to employees (gross pay less deductions)
Type of Document and Record
What is the payroll register?
It summarizes all payroll payments issued to employees. Includes gross pay, deductions, and net pay
Also referred as payroll journal
Type of Document and Record
What is the payroll master file?
The computer file maintaining all of the entity’s record about payroll.
Info on employee includes name, SIN, pay rate, and authorized deductions
Type of Document and Record
What is the payroll master file changes report
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
Type of Document and Record
What are the periodic payroll reports?
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
Type of Document and Record
What are various tax reports and forms?
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
What are the factors the auditor may want to consider when assessing inherent risk?
- Economic conditions
- Supply of skilled workers
- Employee turnover (higher means higher risk)
- Presence of labor contracts and legislation
Generally, when would inherent risk be considered low?
And when wouldn’t it be?
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
What are the three major steps in setting control risk for HR management process?
- Understanding and documenting the HR management process, based on a reliance strategy
- Plan and perform the Tests of Controls on the payroll transactions
- Set and document the control risk for the HR management process
Regarding the understanding and documenting of the HR management process, how should it be documented?
By using flowcharts, internal control questionnaires, and memoranda
Control Activities and Tests of Controls - Payroll Transactions
What is the occurence of payroll transactions
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
Control Activities and Tests of Controls - Payroll Transactions
What does the authorization of payroll transactions state?
The entity must have controls for:
- hiring and terminating employees
- setting pay rates
- making withholdings
- awarding benefits
- issuing payroll checks.
Control Activities and Tests of Controls - Payroll Transactions
What does the accuracy of payroll transactions states?
The auditor’s main concern is that the employee’s gross pay and payroll deductions are determined correctly.
Control Activities and Tests of Controls - Payroll Transactions
What does the classification of payroll transactions state?
If payroll expense is charged to the wrong accounts, the financial statement may be misstated. If payroll expense is not properly classified between direct and indirect labor, inventory, and cost of goods sold may not be valued properly.
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?
The use of an adequate chart of accounts helps prevent missclassification.
Control Activities and Tests of Controls - Payroll Transactions
What does the presentation of payroll transactions state?
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.
What are some examples of substantive analytical procedures that can be used for auditing payroll accounts
- 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
What are some examples of substantive analytical procedures that can be used for auditing payroll-related accruals
- Comparison: Current and prior years’ balances in payroll related accounts (after adjusting for changes)
- Test the reasonableness of the accrual balances
When is additional testing required for payroll expense accounts?
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.
Which accounts are affected by payroll transactions (5)?
- Manufacturing expenses (direct and indirect)
- General and administrative salaries
- Sale salaries
- Commissions
- Payroll tax expenses
Additional testing is necessary only when control weaknesses exist.
What audit procedures are deemed sufficient evidence? (4)
- Understanding of internal controls
- Test of controls
- Substantive tests of transactions
- Substantive analytical procedures
What are some examples of accrued payroll liabilities a firm may have? (5)
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
What are the 5 audit assertions the auditor is concerned about, when auditing accrued payroll liabilities.
- Existence
- Completeness
- Valuation
- Cutoff
- Presentation
How can the auditor verify the accrued payroll liabilities, when the control risk is low or the accounts are relatively small
Through substantive analytical procedures
How can the auditor verify the accrued payroll liabilities, when the accounts’ amounts are material, or control risk is high?
They can obtain a detailed account analysis schedule.
Accrued Payroll Liabilities - Cutoff
What provides evidence that the payroll-related liabilities have been recorded in the right period?
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
Accrued Payroll Liabilities - Existence, Accuracy, and Valuation
How can the auditor verify the existence, accuracy, and valuation of a payroll-related liability?
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
Accrued Payroll Liabilities - Completeness and Presentation
What are the normal payroll-related taxes the auditor should be aware of?
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.
Accrued Payroll Liabilities - Completeness and Presentation
What must the auditor ensures regarding completeness for the HR management process?
The auditor must ensure that all necessary financial statement disclosures for the human resource management process are made.
Accrued Payroll Liabilities - Completeness and Presentation
What are 5 examples of disclosure items for the HR management process?
- Pension benefits
- Post retirement benefits
- Stock-based compensation
- Profit-sharing plans
- Deferred compensation arrangements
