Audit Ch.20 Payroll Cycle

Front 1

Internal controls over payroll are effective for almost all companies (even small ones) –why?

Back 1

Strict federal and state regulations encourage effective controls for withholding and paying payroll taxes

Employees are focused on their pay –morale problems will ensue if employees are not paid or are underpaid

Front 2

Can you think of when this cycle becomes complicated and is tested extensively?

Back 2

Stock compensation

Front 3

Transaction-related audit objectives

Back 3

OCCURRENCE

COMPLETENESS

ACCURACY

POSTING & SUMMARIZATION

CLASSIFICATION

TIMING

Front 4

OCCURRENCE

Back 4

Recorded payroll payments are for work actually performed by existing employees

Front 5

COMPLETENESS

Back 5

Existing payroll transactions are recorded

Front 6

ACCURACY

Back 6

Recorded payroll transactions are for the amount of time actually worked and are at the proper pay rates; with holdings are correctly calculated

Front 7

POSTING & SUMMARIZATION

Back 7

Payroll transactions are correctly included in the payroll master file and are correctly summarized

Front 8

CLASSIFICATION

Back 8

Payroll transactions are correctly classified

Front 9

TIMING

Back 9

Payroll transactions are recorded on the correct dates

Front 10

What are generally considered to be the most significant risks associated with the payroll cycle?

Back 10

•CREATION OF FICTITIOUS EMPLOYEES

•FALSIFICATION OF HOURS WORKED

Front 11

Separate Personnel –S.O.D.

Back 11

Timekeeping

Recordkeeping

Distribution of pay

Front 12

ACCRUED PAYROLL EXPENSES –what are the two major balance-related audit objectives in testing payroll liabilities?

Back 12

•Accuracy –Accruals in the trial balance are stated at the correct amounts

•Cutoff –Transactions are recorded in the proper period

Front 13

What is the primary concern?

Back 13

UNDERSTATEMENT –auditors test to ensure that there are no understated or omitted accruals

–looks at subsequent disbursements

Front 14

Fraudulent Payroll

Back 14

TESTS FOR NONEXISTENT EMPLOYEES

TESTS FOR FRAUDULENT HOURS

FRAUDULENT EXPENSE REPORTS

Front 15

If a client uses a service organization for payroll, how do auditors get comfortable and test payroll controls?

Back 15

OBTAIN A TYPE 2 SOC I (SSAE 16) ---formerly known as SAS 70 reports

Front 16

•What would indicate the potential for misstated tax forms (requiring further auditor investigation?)

Back 16

•Payment of penalties and interest

•New personnel

•Lack of internal verification

•Cash flow problems

Front 17

Existence/Occurrence

Back 17

•Vouch payroll transactions from GL to timesheets

•Non-existent employees and fraudulent hours

•Examine employment contracts, pension plan, 401K plan, bonus & pay raises in board meeting minutes, stock option plan


•Analytical procedures –prior year comparisons, % of sales, average pay per employee

Front 18

Completeness

Back 18

•Numerical sequence of time cards, checks, etc. to GL
•Reconcile disbursements in the payroll journal to disbursements on the payroll bank statement•Payroll account bank reconciliation

Front 19

Valuation/Allocation (Classification)

Back 19

•Test allocation to inventory and cost of goods sold
•Accuracy of payroll rates, hours, withholdings, etc.
•Re-compute profit-sharing, bonus, stock option expense
•Test pension obligation (specialist)

Front 20

Rights and Obligations

Back 20

•Trace to authorization of bonuses, pay raises, etc.
•Re-compute obligation —payables

Front 21

•Cut-off (Timing)

Back 21

•Pay period vs. financial period
•Bonus payout

Front 22

Presentation and Disclosure

Back 22

Pensions, stock options, employment agreements, etc.

Front 23

One of the most common concerns for committing payroll fraud is ____________

Back 23

Fictitious employees

Front 24

If auditors rely on the internal controls of an outside payroll service provider, they will receive a(n) _____ report

Back 24

SOC I (SSAE 16)

Front 25

All of the following are reasons why audit tests of payroll are usually limited, EXCEPT:

Back 25

Income statement accounts associated with payroll are usually insignificant

Front 26

Identify the transaction-related audit objective associated with the following procedure: Perform a surprise payroll and observe employees picking up and signing for their checks.

Back 26

Occurrence

Front 27

When examining payroll transactions, an auditor is primarily concerned with the possibility of:

Back 27

Overpayments and unauthorized payments

Front 28

Which of the following audit procedures would be the most effective in testing for nonexistent employees?

Back 28

Vouch transactions recorded in the payroll journal to the human resources department to determine employment status

Front 29

Which of the following types of audit tests is usually emphasized due to a lack of independent third-party evidence related to payroll transactions?

Back 29

Tests of controls

Front 30

PREPARATION OF PAYROLL TAX FORMS

Back 30

•Auditor should review the preparation and understand controls.

•Detailed reconciliation of info on the tax forms and payroll records is necessary when the auditor believes the tax returns may be incorrectly prepared.