Kế toán, kiểm toán - Chapter twelve: Auditing the human resource management process

Auditing the Human Resource Management ProcessChapter TwelveOverview of the Human Resource Management ProcessThe 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.Flowchart for EarthWear ClothiersHumanResourceDepartmentsBy dateOperatingPayrollInitiatespersonnelchangesPayrollmaster filechangesReviewsmaster filechangereportReviewPayrollmaster filechangesTimesheetsApprovedbysupervisorTimesheetsInputErrorcorrectionsFrom ITTo ITFlowchart for EarthWear ClothiersDepartmentsPayrollITPayrollmasterfileErrorreportPayrollprocessingPayrollchequesPayrollregisterErrorcorrectionsPayrollregisterReviewby datePayroll masterfile changesreportPayrollreportingGeneralledgerPeriodicpayrollreportsTax reportsand formsTwo 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.Types of Transactions and Financial Statement Accounts AffectedFinancial Statement Accounts AffectedTypes of Documents and RecordsThe Major FunctionsSegregation of DutiesInherent Risk AssessmentIn 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 riskassociated with non-officersof the company isgenerally considered low.The inherent risk associated withofficers of the company may not be considered low because of theability to take advantage of theirhigh position.Control Risk AssessmentUnderstand and document the human resource management process based on a reliance approach.Set and document the control risk for the human resource management process.Plan and perform tests of controls on payroll transactions.Control Activities and Test of Controls – Payroll TransactionsOccurrence of Payroll TransactionsThe auditor want assurance that payments for payroll-related services are being made to valid employees for time actually worked. Controls must be in place to ensure that no payments are made to fictitious employees and payments to valid employees are stopped once the employee is terminated.Control Activities and Test of Controls – Payroll TransactionsAuthorization of Payroll TransactionsThe client must have controls for hiring and terminating employees, setting pay rates, making withholdings, awarding benefits, making direct deposits to employees’ accounts and issuing payroll cheques.Control Activities and Test of Controls – Payroll TransactionsAccuracy of Payroll TransactionsThe auditor’s main concern is that the employee’s gross pay and payroll deductions may be incorrectly computed.Control Activities and Test of Controls – Payroll TransactionsClassification of Payroll TransactionsIf 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.Relating the Assessed Level of Control Risk to Substantive ProceduresIf 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 do not support the level of control risk, the nature and extent of substantive testing will be increased.Auditing Payroll-Related AccountsSubstantive Analytical ProceduresTests of Detail of Transactions, Account Balances and DisclosuresTests of Detail of Transactions, Account Balances and DisclosuresTests of Detail of Transactions, Account Balances and DisclosuresPayroll Expense AccountsPayroll 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. Accrued Payroll LiabilitiesThe entity incurs a number of liabilities including payroll taxes withheld, medical and life insurance premiums, pension and other miscellaneous deductions.Accrued wagesand salariesAccrued payrolltaxesAccrued commissionsAccrued bonusesAccrued benefits (vacation & sick pay)Accrued Payroll LiabilitiesCut-offAn examination of supporting documentation for the accruals provides evidence on the proper period for recording the expense or liability.Accrued Payroll LiabilitiesExistence and ValuationTo 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.Accrued Payroll LiabilitiesCompletenessThe 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.Accrued Payroll LiabilitiesPresentation and Disclosure Completeness AssertionEvaluating the Audit FindingsThe 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.End of Chapter 12