chapter 13

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chapter 13
AUDITING
CHAPTER 14
Control & Substantive Tests in
Personnel & Payroll
By
David N. Ricchiute
TOPICS
Nature personnel, payroll functions
Controls over personnel, payroll
activities
Auditor’s consideration of controls
Substantive tests of payroll accounts
Earnings manipulation in payroll,
postretirement benefits
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GBW 8th ed., Ch. 14
NATURE OF PERSONNEL,
PAYROLL CYCLE
Resources (services) acquired in
exchange for obligations to pay
Obligations to employees are paid
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PERSONNEL, PAYROLL
DOCUMENTS
Personnel records
Time record
Payroll register
Employee earnings
record
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PERSONNEL RECORDS
Salary or wage rates
Payroll deductions
Employee signatures
Job classification
Performance evaluation
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INTERNAL CONTROL
OBJECTIVES
Authorization
Execution
Recording
Access to assets
Segregation of duties
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AUTHORIZATION:
Objective, Errors, Procedure
Objective
Error
Procedure
Employees
hired
according to
criteria
Compensation
deductions
according to
authorization
Excessive training,
relocation costs;
equal opportunity
Clear hiring policies,
procedures;
updated records
Adjustments
authorized
Increased pay,
overstated labor
costs
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Excessive labor
Updated listings pay
costs; violation union rates, deductions;
contracts; inaccurate review, approval
accruals
GBW 8th ed., Ch. 14
Clear adjustment
policies, procedures
EXECUTION:
Objective, Errors, Procedure
Objective
Error
Procedure
Payroll,
personnel
procedures
authorized
Misappropriated cash
from paychecks for
terminated, fictitious
employees
All payroll
disbursements
for recognized
liability
Misappropriated cash,
overstated labor costs
Personnel, payroll
procedures manual
Periodically verify
employee
assignments
Prenumber, control
time records,
paychecks,
adjustment forms;
dual signatures
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RECORDING:
Objective, Errors, Procedure
Objective
Amounts due
employees at
proper
amounts, time
periods,
classification
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Error
Procedure
Payroll costs
inaccurate;
misstated
expenses;
details do not
agree
Document account
distribution
procedures;
reconcile ledgers,
journals; physical
barriers unused
documents, forms
GBW 8th ed., Ch. 14
ACCESS:
Objective, Errors, Procedure
Objective
Access to
personnel,
payroll
records,
forms,
documents
restricted to
authorized
personnel
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Error
Records,
forms,
documents
misused;
unauthorized
labor costs
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Procedure
Prenumber, control
forms, documents;
Segregate
authorizing,
executing, recording
maintain listings
authorized
signatories
CONSIDERING INTERNAL
CONTROL: Payroll
Obtain understanding




Preliminary review
Document system
Perform transaction walkthrough
Determine whether controls are
potentially reliable in assessing
control risk below maximum
 Test controls
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TESTS OF CONTROLS:
Personnel & Payroll
Obtain payroll register

Verify mathematical accuracy
Obtain payroll summary, labor distribution


Verify accuracy of summaries; compare totals to
payroll register
Trace totals to GL & cost accounting records
Select random sample employees & obtain
personnel file


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Examination for completeness, authorization
Compare pay rates, deductions
Trace from register to employee records
GBW 8th ed., Ch. 14
TESTS OF CONTROLS:
Distribution Paychecks
Obtain sample canceled payroll checks


Trace details to payroll register
Compare endorsements to signatures in file
Personally distribute checks to properly
identified employees
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ASSESS CONTROL RISK
Review system documentation
Review results of controls tests
Determine whether existing controls are


Effective
Can be relied upon to
 Assess control risk below maximum
 Assess detection risk above minimum
 Restrict substantive tests of payroll
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SUBSTANTIVE TESTS:
Payroll
Obligations, Valuation

Determine by analytical procedures,
reasonableness
Obligations, Valuation, Completeness

Determine reasonableness of accruals
Presentation & Disclosure

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Review to determine classification, adequate
disclosures
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ANALYTICAL PROCEDURES:
Payroll & Accruals
Compare ratios




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Total payroll expenses & accrued
expense with prior years; & adjusted
for pay rate changes
Direct labor to budgets, sales, prior
years
Commissioned sales payroll: sales X
average commission rates
Payroll tax expense to payroll with
prior years
GBW 8th ed., Ch. 14
MANIPULATED EARNINGS:
Capitalized Costs at Safety-Kleen
CEO, CFO, others capitalized payroll costs
to “unrealized contingent-contract
claims” to understate period expenses
Board investigation reduced income for
1997 – 1999 by $534 million
SEC filed suit alleging management
falsely represented financial statements
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POST RETIREMENT BENEFITS:
Health Care
Benefits based on estimates


Off-balance sheet financing
Pay-as-you-go system
Management incentives to minimize for
little earnings effect
Auditor incentives to ensure fair
presentation
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AUDIT JUDGMENT
Required for


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Postretirement benefits other
than pensions
Health care obligations
GBW 8th ed., Ch. 14

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