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In this chapter, the learning objectives are Develop an understanding of the human resource management process, be familiar with the types of transactions in the human resource management process and the financial statement accounts affected,...
Chapter Twelve Auditing the Human Resource Management Process McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Overview of the Human Resource Management Process The human resource process starts with the establishment of sound policies for hiring, training, evaluating, counseling, promoting, compensating and taking remedial actions for employees The main concern of the auditor involves payroll transactions once an employee has been hired McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Flowchart for EarthWear Clothiers Departments Operating Human Resource Initiates personnel changes Payroll master file changes Time sheets Reviews master file change report Approved by supervisor McGraw-Hill/Irwin Review By date © The McGraw-Hill Companies 2010 Payroll Payroll master file changes Time sheets Input Error corrections To IT From IT Flowchart for EarthWear Clothiers Departments Payroll Error corrections IT Payroll master file Payroll processing Payroll reporting Error report McGraw-Hill/Irwin Payroll cheques General ledger Payroll register Payroll register Periodic payroll reports Review by date Payroll master file changes report Tax reports and forms © The McGraw-Hill Companies 2010 Types of Transactions and Financial Statement Accounts Affected Two types of transactions are typically processed through the human resource management process: Payments to employees for services rendered Accrual and payment of payroll-related liabilities arising from employees’ services, including liabilities for payroll taxes and pensions McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Financial Statement Accounts Affected McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Types of Documents and Records McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 The Major Functions McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Segregation of Duties McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Inherent Risk Assessment In assessing inherent risk the auditor may want to consider the effect of economic conditions on payroll costs, the supply of skilled workers and the frequency of employee turnover The auditor should be familiar with any existing labour contracts and the impact of regulation on the company The inherent risk associated with non-officers of the company is generally considered low McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 The inherent risk associated with officers of the company may not be considered low because of the ability to take advantage of their high position Control Activities and Test of Controls – Payroll Transactions Accuracy of Payroll Transactions The auditor’s main concern is that the employee’s gross pay and payroll deductions may be incorrectly computed McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Control Activities and Test of Controls – Payroll Transactions Classification of Payroll Transactions If payroll expense is charged to the wrong accounts, the financial statement may be misstated If payroll expense is not properly classified between direct and indirect labour, inventory and cost of goods sold may not be valued properly McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Relating the Assessed Level of Control Risk to Substantive Procedures If the results of the tests of controls for the payroll system support the planned level of control risk, the auditor conducts substantive procedures of payroll-related accounts at the assessed level If the tests not support the level of control risk, the nature and extent of substantive testing will be increased McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Auditing Payroll-Related Accounts Substantive Analytical Procedures McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Tests of Detail of Transactions, Account Balances and Disclosures McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Tests of Detail of Transactions, Account Balances and Disclosures McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Tests of Detail of Transactions, Account Balances and Disclosures McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Payroll Expense Accounts Payroll transactions affect many expense accounts, including direct and indirect manufacturing expense, general and administrative salaries, sales salaries, commissions and payroll tax expenses If the entity’s internal control is reliable, the auditor does not need to conduct detailed tests of all these payroll expense accounts Additional testing is necessary only when control deficiencies exist McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Accrued Payroll Liabilities The entity incurs a number of liabilities including payroll taxes withheld, medical and life insurance premiums, pension and other miscellaneous deductions Accrued wages Accrued benefits (vacation & sick pay) and salaries Accrued payroll taxes Accrued commissions McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Accrued bonuses Accrued Payroll Liabilities Cut-off An examination of supporting documentation for the accruals provides evidence on the proper period for recording the expense or liability McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Accrued Payroll Liabilities Existence and Valuation To verify the existence and valuation of an accrued payroll liability, the auditor can trace the amounts included on the account analysis working paper to supporting documentation such as payroll tax reports McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Accrued Payroll Liabilities Completeness The auditor must be aware of the normal payroll-related taxes that are paid by the entity and therefore should be able to determine if accruals have been made for payroll taxes such as social security taxes McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Accrued Payroll Liabilities Presentation and Disclosure Completeness Assertion McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 Evaluating the Audit Findings The auditor compares the aggregated identified misstatement to materiality to determine if the identified misstatement would affect the audit The auditor requests the client to correct the identified misstatements and then compares the uncorrected misstatements with materiality to conclude whether the financial statements are fairly stated If uncorrected misstatements in payroll-related accounts, and when considered together with other uncorrected misstatements, are less than materiality, the auditor may accept that the financial statements are fairly presented Conversely, if the uncorrected misstatement exceeds the materiality, the auditor should conclude that the financial statements are not fairly presented McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 End of Chapter 12 McGraw-Hill/Irwin © The McGraw-Hill Companies 2010 ...Overview of the Human Resource Management Process The human resource process starts with the establishment of sound policies for hiring, training, evaluating, counseling, promoting, compensating and. .. officers of the company may not be considered low because of the ability to take advantage of their high position Control Risk Assessment Understand and document the human resource management process. .. reliance approach Plan and perform tests of controls on payroll transactions Set and document the control risk for the human resource management process McGraw-Hill/Irwin © The McGraw-Hill Companies