Figure 15-1 Summary of the Audit Process for the Human Resources and Payroll Cycle

Documentation

Client Acceptance

Assess Risk of Misstatement

Develop Risk Response

Perform Risk Responses

Understand the entity and its environment:
- Identify significant risks for revenue cycle
- Determine materiality (overall, performance, and specific)

Assess risk of material misstatement at assertion level:
- Identify relevant controls to mitigate those risks
- Assess the design and implementation of identified relevant controls

Determine audit approach (strategy) for revenue cycle:
- Develop response at assertion level:
• Design tests of controls (if plan to rely upon controls)
• Design substantive analytical procedures
• Design substantive tests of details (mandatory if material)
• Design fraud-related substantive procedures (if significant fraud risk)

Gather audit evidence:
- Perform tests of controls
- Perform substantive analytical procedures
- Perform substantive tests of details (substantive tests of transactions and substantive tests of balances)
- Evaluate results and adjust audit approach (strategy) if necessary

Specific Considerations

Materiality: Most companies have a large number of transactions involving payroll, often involving large total amounts. However, the balance sheet accounts (accruals) are normally insignificant, except for labour charged to inventory (in the case of manufacturing organizations) or capitalized to PPE or deferred costs.

Significant Risks: A significant risk is payroll fraud because most transactions involve cash—the occurrence assertion is high risk. For manufacturing companies with significant labour charged to inventory, the classification is often a significant risk (there is a potential for misclassification between payroll expense and inventory or among categories of inventory—this affects the valuation assertion for inventory).

Key Controls: Internal controls are normally good for payroll transactions because of strict federal and provincial tax laws and the potential impact on employee morale. Many companies use outside service organizations for Processing payroll. The auditor is responsible for assessing the internal controls of the outside service organization.

Ethical requirements and quality control