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Chapter 7 Payroll & Personnel Cycle
- 1. CHAPTER 7: Auditing the Payroll and Personnel Cycle Prepared by : Nur Ellina Bt Shamsuri (2014270102) 1
- 2. 1. Description of Payroll and Personnel Cycle The overall objective in the audit of the payroll & personnel cycle is to evaluate whether the account balances affected by the cycle are fairly stated in accordance with Generally Accepted Accounting Principles (GAAP). 2
- 3. Figure 1 Payroll Transactions Accrued Wages, Salaries, Bonuses, and Commissions Direct Labor Payment Beginning balance Cash in Bank Earned wages, salaries, etc. Payment for Ending balance salaries Payment for Withheld Income Taxes payroll tax and Other Deductions Payment Beginning balance Payroll withholding Ending balance 3
- 4. Withheld Income Taxes and Other Deductions Cash in Bank Payment Beginning balance Payment for Payroll withholding salaries Ending balance Payment for payroll taxes Accrued Payroll Tax Expense Payroll Tax Expense Payment Beginning balance Payroll tax expense Ending balance 4
- 5. 2. Understanding the Internal Control Structure The payroll and personnel cycle..... Begins Followed by Personnel Hiring Payment to Employees Ends Termination of Employment 5
- 6. Documents and Activities Related to Payroll Transactions Document Activity 1. Personnel file Records in file data related to employees. 2. Deduction form Authorises payroll deduction for MPF contribution. 3. Rate form Authorises rate of pay. 4. Timecard Records employees starts and stop work during a pay period. 5. Payroll cheque Prepares a cheque in the name of an employees. 6. Payroll register Records amount paid to employees during each pay period. 7. Employees earning record Record details of an employees pay for whole financial year. 8. Labour cost distribution Identify gross factory earning for various account classifications. 9. Payroll tax return Prepare tax form for submission to relevant government agency. 10. Group certificate Prepare document to give to an employee for filing with Malaysia. 11. Control card Prepares a control card showing total payroll for the period. 6
- 7. Flowchart Payroll and Personnel Cycle 7
- 8. Figure 2 Authorising Employment Personnel Department To payroll department Hire new employees & set up personnel file Personnel file Rate & deduction authorizedPersonnel record with rate & deduction authorized A 1. Responsible for hiring, promoting, transfer and termination of employees. 2. It maintains personnel file for every employee hired. 3. A copy approved pay rate & authorised deductions should be transmitted to payroll personnel. 8
- 9. Figure 3 Timekeeping To payroll department Time cards Job time ticket Matched, reviewed, approved by Supervisor 1. Important in the case of employees paid by the hour; proper records of hours worked are needed to ensure accurate accounting for payroll. 2. Time clock is a good physical measure. 9
- 10. Figure 4 Preparation of Payroll To treasurer From personnel department From time keeping department Rate and deduction authorization Time cards Job time tickets Posts to employee earning record & prepares payroll summary & cheques Time cards Job time tickets Rates & Deductions Payroll summary 2 Payroll summary 1 Payroll register 2 Payroll register 1 Payroll cheques Employee earning record A 10
- 11. Payroll Preparation 1. Maintains an earnings record for every employees. 2. The payroll cheques and payroll register are sent to the treasurer. 3. It is necessary to prepare MPF contribution & file them on time to avoid penalties. 11
- 12. Figure 5 Payment of Payroll Treasurer From payroll department Payroll register Payroll cheques Review payroll register & sign cheques Payroll register Payroll cheques Distribute to employees Payroll distribution involves reviewing payroll register & signing payroll cheques, which are then distributed to employees. 12
- 13. Internal Control Objectives and Control Procedures ASSERTIONS INTERNAL CONTROL PROCEDURES 1. Occurrence Recorded payroll transaction are for services. 2. Completeness All payroll transaction are properly recorded. 3. Accuracy Payroll transaction are recorded at the proper amount. 4. Cut-off Payroll transaction are recorded in the correct accounting period. 5. Classification Payroll transaction are recorded in proper account. 13
- 14. 3. Preliminary Assessment of Control Risk 1. For the financial report assertions related to the cycle transaction and account balance. 2. Evaluates the effectiveness of an entity’s ICS in preventing and correcting material misstatements. 3. Use flowcharts and internal control questionnaires to documents the auditor understanding of the ICS and assessment control risk. 14
- 15. 4. Tests of Control for Payroll Transactions A random sample of transaction normally chosen for tests of control. It happen since payroll transaction can be quite extensive and detailed. When testing payroll, auditors usually use persuasive audit evidence rather than substantive procedures because it is internally generated. 15
- 16. Control Objective and Related Assertions ASSERTIONS TEST OF CONTROL 1. Occurrence There should be segregation of duties of personnel, timekeeping and personnel payments. 2. Completeness Payroll cheques should be pre-numbered and accounted for. 3. Accuracy There should be internal verification entries, including review of approved rates and timecard. 4. Cut-off Compare the procedures dates on payroll cheques and entry date in payroll register. 5. Classification Procedures for classifying payroll costs should be reviewed. 16
- 17. 5. Review of Preliminary Assessment of Control Risk If the audit evidence are a result of control failure: The auditor need to modify the nature, timing and extent of planned substantive procedures to be performed. To reduce detection risk. If the audit evidence indicates that the control policies & procedures are operating effectively: The assessed level of control risk may be lowered. 17 Based on Test of Control... Therefore, audit risk to an acceptable level. Therefore, substantive test may be reduced accordingly.
- 18. 6. Substantive Audit Procedures Substantive Tests of Payroll Transactions Substantive Tests of Payroll Balances 18
- 19. Substantive Tests of Payroll Transactions To be performed if a review of the preliminary assessment of control risk is high. Eg :- 1) Prepare a reconciliation of payroll bank statement with payroll register payments. 2) Recalculate the gross pay, net pay and payroll deductions for a sample of employees. 19
- 20. Substantive Tests of Payroll Balances An audit procedure that examine the FS & supporting document if there is an error. These test are needed as evidence to support the assertion that the FR of the entity are complete, valid & accurate. Eg :- 1) Review the payroll accounts for the date that payroll was last paid and recalculate accrued wages. 2) Trace total accrued payroll to payroll records. 3) Perform analytical procedures. 20
- 21. End of this chapter. Goodluck! 21