Chapter 18

Audit of the Payroll and Personnel Cycle

← Review Questions

18-1 General ledger accounts that are likely to be affected by the payroll and personnel cycle in most audits include the following:

Cash Direct labor Inventory Salary expense Construction in progress Commission expense Wages payable Payroll tax expense Payroll taxes withheld Accrued payroll taxes

18-2 In companies where payroll is a significant portion of inventory, as in manufacturing and construction companies, the improper account classification of payroll can significantly affect asset valuation for accounts such as work in process, finished goods, and construction in process. For example, if the salaries of administrative personnel are incorrectly charged to indirect manufacturing overhead, the overhead charged to inventory on the balance sheet can be overstated. Similarly, if the indirect labor cost of individual employees is charged to specific jobs or processes, the valuation of inventory is affected if labor is improperly classified. When some jobs are billed on a cost plus basis, revenue and the valuation of inventory are both affected by improperly classifying labor to jobs.

18-3 Five tests of controls that can be performed for the payroll and personnel cycle are:

1. Examine time card for indication of approval to ensure that payroll payments are properly authorized. The purpose of this test is to determine that recorded payroll payments are for work actually performed by existing employees (existence). 2. Account for a sequence of payroll checks to ensure existing payroll payments are recorded. The purpose of this test is to determine that existing payroll transactions are recorded (completeness). 3. Examine time cards to ensure that recorded payroll payments are for work actually performed by existing