Chapter 15

Explain why it is common to verify total officers' compensation even when the tests of controls results in payroll are excellent. What audit procedures can be used to verify officers' compensation?

It is common to verify total officers' compensation even when the results of tests of control in payroll are excellent because management may be in a position to pay themselves more than the authorized amount since the controls over the officers' payroll are typically weaker and therefore easier to override than those of the normal payroll. The usual audit procedure used to verify the officers' compensation is to obtain the authorized salary of each officer from the minutes of the board of director meetings and compare it to the related earnings record.

List several audit procedures that the auditor can use to determine whether payroll transactions are recorded at the proper amount.

Several audit procedures the auditor can use to determine whether recorded payroll transactions are recorded at the proper amount are: - Recompute hours worked from time cards. - Compare pay rates with union contract, approval by the board of directors, or other source. - Recompute gross pay. -Check withholdings by reference to income tax, employment insurance and Canada (or Quebec) Pension Plan tables and authorization forms in personnel files. - Recompute net pay. - Compare cancelled cheque with payroll journal for amount.

List several analytical procedures for the human resources and payroll cycle, and explain the type of error that might be indicated when there is a significant difference in the comparison of the current year's and previous years' results for each of the tests.

Comparison of payroll expense accounts to amounts in prior years. - Cutoff errors or improper amounts recorded in a particular period Direct labour divided by sales compared to industry standards and prior years. - Cutoff errors or amounts charged to improper payroll accounts Commission expense divided by sales compared to industry standards, prior years, or sales agreements. - Failure to record commission on sales, or recording the improper commission amount Employee benefits expense divided by salaries and wages compared to prior year balances adjusted for changes in the wage rates and not including officer's salaries - Failure to record employee benefits expense or recording of the improper amount. Comparison of accrued payroll and employee benefits accounts to prior years. - Failure to record payroll accruals or recording improper amounts at the end of a period. The percentage of labour included in work in progress and finished goods inventories compared to prior years. - Use of improper labour standards, or classification errors Analysis of direct labour variances. - Use of improper labour standards, or classification errors

DrinkOh Limited uses an application service provider to process its payroll. Its employees enter their hours using their smartphones. The payroll clerk collects the smartphone data and transmits it to the application service provider for payroll processing. Describe three controls that should be present over payroll processing at DrinkOh Limited. For each control, describe the risk of error or fraud that is mitigated or prevented by the control.

Hours worked should be approved by a supervisor or manager before being submitted to the application service provider - Unauthorized hours or inaccurate hours worked are paid. Hours worked should be printed and compared to hours used by the application service provider prior to approval of payment processing -Unauthorized hours or unauthorized changes to hours could be made by the application service provider personnel./Unauthorized employees could be added Payroll journal should be approved by an independent person (other than the payroll clerk) before payroll payment is processed - Prevents unauthorized payments Two individuals should be required to enter their passwords before pay is released to the bank - Prevents unauthorized access to electronic funds

1. Explain what an imprest payroll account is. What is its purpose as a control over payroll?

a. An imprest payroll account is a separate payroll account in which a small balance is maintained. i. A cheque for the exact amount of each net payroll is transferred from the general account to the imprest account immediately before the distribution of the payroll. ii. The advantages are: 1. Limits the client's exposure to payroll 2. Allows delegation of payroll cheque signing duties 3. Separates routine payroll expenditures from irregular expenditures 4. Facilitates cash management.

1. What are some of the business functions in the inventory and distribution cycle? What are some of the records in use? What are some of the key controls that are put in place? (See Figure 14-4)

a. Business functions: i. Complete hiring process to set up employment ii. Record timekeeping for employees as necessary iii. Prepare payroll calculation of current pay, deductions, net pay iv. Payment of payroll to employee v. Payment of withholdings and completion other reporting forms (T4s, etc.) b. Records: i. Employee hire form/contract ii. Wage rate change form iii. Time record iv. Payroll journal v. Payroll cheque or direct bank deposit vi. T4 form c. Key controls: i. Proper authorization ii. Adequate segregation of duties iii. Master file change iv. Access rights management v. Timekeeping and payroll preparation costs vi. Payroll payment controls vii. Employee withholdings and benefit remittance controls

List three risks of error that could happen in the human resources cycle.

a. In general, management is motivated to understate payroll expense b. For accrued payroll liabilities - relevant assertions are completeness and cut-off c. For payroll expenses - relevant assertion is occurrence d. Errors in payroll withholdings and remittances e. Potential for misstatement of inventory of payroll f. Potential for nonexistent (fictitious) employees

1. Explain why a combined audit approach is common for the human resources and payroll cycle.

a. Internal control for payment of payroll is normally highly structured and well controlled to control cash disbursements and the auditor can rely on controls to decrease the amount of testing.

1. Explain the relationship between the human resources and payroll cycle and inventory valuation.

a. Labour allocation to specific items in the WIP, FG & Construction in process inventory b. For audits where payroll is a significant portion of inventory (common for manufacturing and construction companies), the improper account classification of payroll can significantly affect asset valuation for accounts such as work in process, finished goods, or construction in process.

Distinguish between the following payroll audit procedures, and state the purpose of each: (1) Trace a random sample of sequentially numbered time records to the related payroll cheques in the payroll register, and compare the hours worked with the hours paid, and (2) trace a random sample of payroll cheques from the payroll register to the related time records, and compare the hours worked with the hours paid. Which of these two procedures is typically more important in the audit of payroll? Why?

(1) To trace a random sample of sequentially prenumbered time cards to the related payroll cheques in the payroll register and compare the hours worked to the hours paid is to test if those employees who worked are being paid for their time actually worked. Employees are likely to inform management if they are not paid, or underpaid. (2) To trace a random sample of payroll cheques from the payroll register and compare the hours worked to the hours paid is to test if the recorded payroll payments are for work actually performed by non fictitious employees. This test, in effect, attempts to discover fictitious employees or duplicate payments, if there are any. For this reason, the second procedure is typically more important to the audit of payroll

Which one of the following controls is the best control to prevent or detect fictitious payroll transactions? (1) Use and account for prenumbered payroll cheques. (2) Restrict authorization for hiring, terminating, or changing pay rate or job status to the human resources function. (3) Verify internally authorized pay rates, computations, and agreement with the payroll register. (4) Conduct periodic independent bank reconciliations of the payroll bank account.

(2) Restrict authorization for hiring, terminating, or changing pay rate or job status to the human resources function.

An auditor found that employee time records in one department are not properly approved by the supervisor. Which of the following could result? (1) Duplicate pay cheques might be issued. (2) The wrong hourly rate could be used to calculate gross pay. (3) Employees might be paid for hours they did not work. (4) Payroll cheques might not be distributed to the appropriate employees.

(3) Employees might be paid for hours they did not work.

A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that (1) only proper employees worked and their pay was correctly computed. (2) jobs on which employees worked were charged with the appropriate labour cost. (3) internal controls over payroll disbursements are operating effectively. (4) all employees worked the number of hours for which their pay was computed.

(4) all employees worked the number of hours for which their pay was computed.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing to (1) verify that payroll taxes are deducted from employees' gross pay. (2) determine whether internal control activities are operating effectively. (3) uncover fictitious employees who are receiving payroll cheques. (4) identify potential liabilities for unpaid payroll taxes

(4) identify potential liabilities for unpaid payroll taxes