AUDITING AND ASSURANCE SERVICES

IN MALAYSIA

TOPIC 10: AUDIT OF PAYROLL CYCLE

References: Chapter 10

AUD390 2011

LEARNING OUTCOMES Overview of the accounts & classes of

transactions Business functions & documents Financial report assertions Major internal control & related audit

procedures Substantive tests for payroll account

AUD390 2011

OVERVIEW OF PAYROLL & PERSONNEL CYCLE

Objective to audit:› To evaluate whether the account

affected by the cycle are fairly presented in accordance with generally accepted accounting principles

Differences between this cycle and the other cycles:› There is only 1 class of transactions for

payroll› Transactions are far more significant

than related balance sheet accounts› Internal control over payroll are

effective for almost all companiesAUD390 AUDITING DIA

AUD390 AUDITING DIA

CLASSES OF TRANSACTIONS

ACCOUNTS BUSINESS FUNCTIONS

DOCUMENTS & RECORDS

Payroll Payroll cashAll payroll expense accountsAll payroll withholding accountsAll payroll accrual accounts

1. Personnel & employment

2. Timekeeping & payroll preparation

3. Payment of payroll

4. Preparation of payroll tax returns & payment of taxes

Personnel recordsDeduction authorization formRate authorization form

Time cardJob time cardPayroll transaction listingPayroll journal or listingPayroll master file

Payroll chequePayroll bank account reconciliation

W-2 formPayroll tax return

KEY CONTROL ACTIVITIES

1. Adequate separation of duties2. Proper authorization3. Adequate documents & records4. Physical control over assets and

records5. Independent check on performance6. Preparation of Payroll Tax Forms7. Payment of the Payroll Taxes

Withheld and Other Withholdings on a timely basis

AUD390 AUDITING DIA

1. Adequate Separation Of Duties Purpose:

To prevent overpayments and payments to nonexistent employees

Therefore, Human Resource Department should be independent of the payroll function

E.g. Payroll processing (include authorizing

for addition and termination of employees, changes in pay rates & deductions) should be separate from the custody of signed payroll cheque

AUD390 AUDITING DIA

2. Proper Authorization Purpose:

To ensure that the payroll payment are for authorized purposes

E.g. The hours worked by each employee,

especially overtime, should be authorized by the employee’s supervisor

Evidence of approval maybe noted on all time cards

AUD390 AUDITING DIA

3. Adequate Documents & Records

Purpose: To ensure adequate number of

documents & records represent the transactions

E.g. The existence of time card or punch

card to verify the attendance of employee to work

AUD390 AUDITING DIA

4. Physical Control Over Assets & Records Purpose:

To ensure payroll cheques are being used for authorized transactions only

E.g. Access to unsigned cheques should be

restricted Cheque should be signed by an

independent person

AUD390 AUDITING DIA

E.g. Payroll cheque should be distributed by

someone independent of the payroll and timekeeping functions

Any unclaimed cheques should be returned for redeposit

Access to the cheque signed-machine should be restricted

AUD390 AUDITING DIA

5. Independent Check On Performance Purpose: To ensure payroll transaction are

monitored accordingly by responsible person

E.g. Payroll computations should be

independently verified, including comparison of batch totals to summary report

AUD390 AUDITING DIA

6. Preparation Of Payroll Tax Forms

Purpose: To prevent a potential liability for

unpaid taxes, penalty and interest if the client fails to prepare the tax forms properly

E.g. Perform detailed reconciliation of the

information on the tax forms and the payroll records

AUD390 AUDITING DIA

Indication of potential misstatements: The payment of penalties and interest

in the past for improper payments New personnel in the department

responsible for the preparation of returns

Lack of internal verification of the information

The existence of serious cash flow problems for the client

AUD390 AUDITING DIA

7. Payment Of The Payroll Taxes Withheld & Other Withholdings On A Timely Basis

Purpose: To ensure the payment of the payroll

taxes withheld & other withholdings on a timely basis

E.g. Determine the client’s requirements for

submitting the payments by referring to sources such as laws, union contracts & agreements with employees

AUD390 AUDITING DIA