AUDIT PAYROLL CYCLE

BUSINESS FUNCTION & DOCUMENTS

PERSONNEL AND EMPLOYMENT Personnel records
Deduction authorization form
Rate authorization form
TIMEKEEPING & PAYROLL PREPARATION Time Card
Job Time Ticket
Payroll transaction file
Payroll journal or listing
Payroll master file
PAYMENT OF PAYROLL Payroll check
Payroll bank account reconciliation
PAYROLL TAX FORMS AND PAYMENTS W-2 Form
Payroll Tax Return





To evaluate whether the account
balances affected by the cycle are fairly
stated in accordance with generally
accepted accounting principles.

METHODOLOGY


AUDIT OBJECTIVES, TEST OF CONTROL & SUBSTANTIVE PROCEDURES
OCCURRENCE Examine time record Examine cancelled checks
for proper endorsement
COMPLETENESS Discuss with employees &
observe reconciliation
Prove the bank
reconciliation
ACCURACY Examine indication of
internal verification
Recomputed hours worked
from time records
POSTING &
SUMMARIZATION
Examine initialed summary
total reports indicating that
comparisons have been
made
Test clerical accuracy by
footing the payroll journal
& tracing posting to the GL
& payroll master file
CLASSIFICATION Review chart of account Compare classification with
chart of accounts /
procedures manual
TIMING Examine procedures
manual & observe when
recording takes place
Compare date of recorded
payment in the payroll
journal with date on
cancelled check/direct
deposit & time record




INTERNAL CONTROL
Adequate separation of duties
Proper authorization
Adequate documents and records
Physical control over assets and records
Independent checks on performance

ANALYTICAL PROCEDURES
ANALYTICAL PROCEDURES 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

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








Tests of details of balances for expenses accounts
>Officers Compensation
*Common to verify whether the total compensation of High level
Officer is the amount authorized by the board of directors
>Commissions
*Auditors can verify commissions expense with relative ease if the commission rate is
the same for each type of sale and the necessary sales information is available in the
accounting records
>Payroll Tax expense payroll
*Can be tested by first reconciling the total payroll on each payroll tax
form with the total payroll for the entire year
>Total payroll
*A closely related test to the one for payroll taxes is the reconciliation of total payroll
expense in the general ledger with the payroll tax returns and the EA forms
>Contract Labor
*To reduce payroll costs, many organizations contract with outside organizations to
provide staffing.




Presentations and Disclosure Objective
>Required disclosures for payroll and personnel cycle transactions
and balances are not extensive
>Some complex transactions, such as stock options and other executive officer
compensations plans may require footnote disclosure