AUDITING AND ASSURANCE SERVICES IN MALAYSIA

TOPIC 10: AUDIT OF PAYROLL CYCLE

References: Chapter 20AUD390 2014AUDITING AND ASSURANCE SERVICES IN MALAYSIA

LEARNING OUTCOMESAUD390 2014OVERVIEW OF THE ACCOUNTS & CLASSES OF TRANSACTIONSBUSINESS FUNCTIONS & DOCUMENTSFINANCIAL REPORT ASSERTIONSMAJOR INTERNAL CONTROL & RELATED AUDIT PROCEDURESSUBSTANTIVE TESTS FOR PAYROLL ACCOUNT

OVERVIEW OF PAYROLL & PERSONNEL CYCLEAUD390 2014Objective to audit:To evaluate whether the account affected by the cycle are fairly presented in accordance with generally accepted accounting principlesDifferences between this cycle and the other cycles:There is only 1 class of transactions for payrollTransactions are far more significant than related balance sheet accountsInternal control over payroll are effective for almost all companies

AUD390 2014CLASSES OF TRANSACTIONSACCOUNTSBUSINESS FUNCTIONSDOCUMENTS & RECORDSPayrollPayroll cashAll payroll expense accountsAll payroll withholding accountsAll payroll accrual accountsPersonnel & employment

Timekeeping & payroll preparation

Payment of payroll

Preparation of payroll tax returns & payment of taxesPersonnel 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 ACTIVITIESAUD390 2014Adequate separation of dutiesProper authorizationAdequate documents & recordsPhysical control over assets and recordsIndependent check on performancePreparation of Payroll Tax FormsPayment of the Payroll Taxes Withheld and Other Withholdings on a timely basis

1. Adequate Separation Of DutiesAUD390 2014Purpose: To prevent overpayments and payments to nonexistent employeesTherefore, Human Resource Department should be independent of the payroll functionE.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

2. Proper AuthorizationAUD390 2014Purpose: To ensure that the payroll payment are for authorized purposesFor example: The hours worked by each employee, especially overtime, should be authorized by the employees supervisor.Evidence of approval maybe noted on all time cards.

3. Adequate Documents & RecordsAUD390 2014Purpose: To ensure adequate number of documents & records represent the transactions For example: The existence of time card or punch card to verify the attendance of employee to work

4. Physical Control Over Assets & RecordsAUD390 2014Purpose: To ensure payroll cheques are being used for authorized transactions onlyE.g.Access to unsigned cheques should be restrictedCheque should be signed by an independent personPayroll cheque should be distributed by someone independent of the payroll and timekeeping functionsAny unclaimed cheques should be returned for redepositAccess to the cheque signed-machine should be restricted

5. Independent Check On PerformanceAUD390 2014Purpose: To ensure payroll transaction are monitored accordingly by responsible personFor example: Payroll computations should be independently verified, including comparison of batch totals to summary report

6. Preparation Of Payroll Tax FormsAUD390 2014Purpose: To prevent a potential liability for unpaid taxes, penalty and interest if the client fails to prepare the tax forms properlyFor example: Perform detailed reconciliation of the information on the tax forms and the payroll recordsIndication of potential misstatements:The payment of penalties and interest in the past for improper paymentsNew personnel in the department responsible for the preparation of returnsLack of internal verification of the informationThe existence of serious cash flow problems for the client

7. Payment Of The Payroll Taxes Withheld & Other Withholdings On A Timely BasisAUD390 2014Purpose: To ensure the payment of the payroll taxes withheld & other withholdings on a timely basisFor example: Determine the clients requirements for submitting the payments by referring to sources such as laws, union contracts & agreements with employees