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In this session, I discuss test of control and test of substantive details for the payroll cycle. ✔️Accounting students and CPA Exam candidates, check my website for additional resources: https://farhatlectures.com/ 📧Connect with me on social media: https://linktr.ee/farhatlectures #cpaexam #accountingstudent #auditcourse Understand Internal Control and Assess Control Risk—Payroll and Personnel Cycle Internal control for payroll is normally highly structured and well controlled to manage cash disbursed, to minimize employee complaints and dissatisfaction, and to minimize payroll fraud. Because of relatively common payroll concerns from company to company, high-quality computerized payroll accounting programs are available. Because processing payroll is similar for most organizations, and programs need to be modified annually for changes in withholding schedules, companies commonly use an outside payroll service for processing payroll. The auditor can often rely on the internal controls of the service organization if the service organization’s auditor issues a report on the service organization’s internal control Design Tests of Controls and Substantive Tests of Transactions—Payroll and Personnel Cycle Tests of controls and substantive tests of transactions procedures are the most important means of verifying account balances in the payroll and personnel cycle. These tests are emphasized because of the lack of independent third-party evidence, such as confirmation, for verifying accrued wages, withheld income taxes, accrued payroll taxes, and other balance sheet accounts. Even though tests of controls and substantive tests of transactions are the most important parts of testing payroll, tests in this area are usually not extensive. Many audits have a minimal risk of material misstatements, even though payroll is often a significant part of total expenses. There are three reasons for this: 1. Employees are likely to complain to management if they are underpaid. 2. All payroll transactions are typically uniform and uncomplicated. 3. Payroll transactions are subject to audit by federal and state governments for income tax withholding, Social Security, and unemployment taxes. 4. Internal controls vary from company to company; therefore, the auditor must identify the controls, significant deficiencies, and material weaknesses for each organization. 5. Controls the auditor intends to rely on to reduce assessed control risk must be tested with tests of controls. 6. If the auditor is reporting on the effectiveness of internal control over financial reporting, the level of understanding controls and extent of tests of controls must be sufficient to issue an opinion on the effectiveness of internal control over financial reporting. Adequate Separation of Duties Separation of duties is important in the payroll and personnel cycle, especially to prevent overpayments and payments to nonexistent employees. The payroll function should be kept independent of the human resources department, which controls key payroll activities, such as adding and deleting employees. Payroll processing should also be separate from the issuance of payroll disbursements. Proper Authorization As already noted, only the human resources department should be authorized to add and delete employees from the payroll or change pay rates and deductions. The number of hours worked by each employee, especially overtime, should be authorized by the employee’s supervisor. Approval may be indicated electronically or noted on all time records or done on an exception basis only for overtime hours. Adequate Documents and Records The appropriate documents and records depend on the nature of the payroll system. Time records are necessary for hourly employees but not for salaried employees. For employees compensated based on piece rate or other incentive systems, different records are required. For many companies, time records must be adequate to accumulate payroll costs by job or assignment. Prenumbered documents for recording time are less of a concern for payroll because the completeness objective is normally not a concern. Physical Control Over Assets and Records Any unclaimed checks should be returned for redeposit. If checks are signed by a signature machine, access to the machine should be restricted.