PAYROLL AND PERSONNEL CYCLE

Understand, evaluate and document transaction flow and control activities - Payroll Process

a) Based on information gathered during "show" meetings held with the client and other relevant information sources (for example client procedures manuals), understand and document the following:

i) business process and sub-processes/transactions flow, including how transactions are initiated, recorded, processed and reported and the related accounting records (whether electronic or manual), supporting information, and specific accounts in the financial statements (); and

ii) control activities relevant to the audit which management use to gain comfort ().

b) Evaluate the design of controls relevant to the audit within the business process and sub-process (). The controls documented should be those that address the information processing objectives of ():

• Completeness of records;
• Accuracy of records;
• Validity of records; and
• Restricted access to assets and records.

c) Confirm that the following have been recorded (, , ):

i) Implications for the audit plan; and

ii) Implications for reporting to the client.

Note: Where the client does not have documentation which we consider adequate for audit purposes, we should develop our own documentation to meet ISA requirements. Although, it is not required, the use of flowcharts is one of the more effective ways to document our understanding of business processes.

Consider, for example, the following points of focus:

Business performance reviews

• What are the key performance indicators reviewed by management and how does management use them to monitor payroll expense, for example:

- payroll costs by location

- average hourly pay rates

- overtime costs

- full-time equivalents

- payroll expense per standard unit of measure (e.g. payroll expense per patient day in hospital, per unit produced, etc.)

- payroll accrual at period end?

- Payroll expense by classification (e.g., faculty, student, administrative, etc.)

• How does management compare payroll expense with independently accumulated information, such as:

- departmental budgets

- past performance indicators?

• What is the extent of management's review of significant or unusual items, such as:

- employees earning significantly more than average for grade

- new hires and terminations

- individually significant payments

- sick leave or vacation payments?

• How does management monitor payroll amounts recorded in the general ledger compared to payroll amounts paid and recorded in payroll registers and/or disbursements recorded in payroll bank accounts?

• If applicable, how does management monitor payroll (effort certification) related to employees charging payroll to federal/state grants?

Time recording	Obj.
How is evidence of performance of services obtained and approved? ( e.g. clock cards. timesheets, terms of service)?	AV
How is overtime worked authorised?	AV
What ensures that time sheets, clock cards and other evidence of services performed are recorded completely and accurately?	CA
What ensures that only appropriate users can enter time keeping information, and that duties are adequately segregated (i.e., between capture and validation)?	R

Payroll calculation	Obj.
What prevents or detects errors in the input of relevant payroll data (e.g., hours, pay rates, withholding rates, deductions, vacation accrual rates, etc.)?	A
What ensures that employee services are input in the proper period?	A
What ensures that gross pay and deductions are accurately calculated?	A
What ensures that payroll taxes are determined and accounted for in accordance with local laws and regulations?	A
What ensures that all employees' services (including overtime due) are input for processing?	C
What ensures that applicable deductions are complete?	C
What ensures that the total payroll expenditures are equal to the amounts updated to the general ledger and the payroll database?	CA
What ensures rejected payroll data is analysed and corrected in a timely manner?	CA
What ensures that periodic updates for batch processing are appropriately executed?	CAV
What ensures there is adequate segregation between payroll processing and the approval of new employees and time records?	R
What prevents fictitious payroll data being entered for employees?	V

Payroll payment	Obj.
What ensures payroll payments are for the correct amount?	A
What ensures payroll payments are recorded in the proper period?	A
What ensures that payroll payments are made to the proper employee or other recipient?	AV
What ensures that manual payroll checks written between pay dates are recorded?	C
What ensures all payroll payments are recorded completely?	C
What ensures that the total payments input are equal to the amounts updated to the cash accounts, payroll expense and the general ledger?	CA
How are cash payments and employee advanced authorised and controlled?	CAV
What ensures missing, duplicate or long-outstanding checks are investigated?	CAV
How are payroll bank statements reconciled to the general ledger cash accounts? (Note that if bank reconciliations have been covered in the revenue or payables cycle, they need not be addressed here)	CAV
How are unclaimed payroll checks secured?	R
How is access to unissued checks and check signing machines restricted?	R
What ensures that only appropriate users can enter payments and that duties are adequately segregated (e.g., between payment processing and capturing payroll data)?	R
How are manual payroll check requests approved?	V
How are electronic fund transfers (direct deposits) controlled?	V
What ensures payments made are for services actually rendered?	V