Chat with AIExam 13: Auditing Human Resources Cycle Process: Personnel and Payroll in Service Industries
You are assigned to audit a public client. This client uses a service provider for processing its payroll transactions which are considered material and significant. Your job is to provide a work program listing the steps you would perform as part of the audit. You may assume that the client receives a SAS 70 Type II report that matches the period under audit.
Other details:
Your client primarily provides services to a specific industry. It has 5 senior managers who are eligible for bonus and stock compensation. All other employees are salaried, except one who is paid only commission. The service provider supplies the terminal used to enter the transactions and receive the output. Employees are paid using EFT. There is a Human resource Department and an accounting clerk who together oversee the payroll function. The accounting clerk reports to the controller.
(32) 
VerifiedAnswers will vary depending on student. The important points to consider include:
Define the objectives
Define the assertions
Review the internal control for payroll processing both within the company and at the service provider
Specifically:
Are there issues in the SAS 70 report? Can the firm rely on the report or is additional work needed. Note: This should be done early on in the audit to allow for time if additional tests are needed.
Who provides the input to the payroll system?
What are the access controls surrounding the terminal used to interact with the service provider? Is the terminal locked or in a safe room when not in use?
Who approves changes to the employee master file? How are these documented?
Is an imprest payroll account used?
Who reconciles the bank statement for payroll? Does that person have any payroll/cash disbursement function? Can that person access the payroll system via the terminal?
How are the data recorded in the general ledger and payroll?
Are the payroll master files and employee registers reconciled to each other and to the general ledger on a monthly basis? If yes, by someone other than HR and the payroll clerk?
Specific Substantive Tests:
Perform test of transactions, such as tracing the pay stubs back to supporting documentation, while also recalculating amounts.
Trace totals per the employee register to the cash disbursements journal, the general ledger, the bank statement, and the payroll employee master file.
Trace changes to proper authorization.
Recalculate commission expense for one or two separate time periods. Tie to sales for the respective period.
Examine the payroll bank statement for: direct deposits returned, old or unusual items, adjusting items.
Examine the sequence of direct deposit slips for missing numbers- indicating completeness issues.
Examine any returned W-2s and trace to current employee list and employee register.
Compare year-end accruals with those from previous years.
Examine executive contracts for information concerning proper accrual amounts.
Examine the valuation of stock options and determine if this is in compliance with GAAP.
Examine payments made subsequent to year-end for information concerning unaccrued items existing at year-end.
Examine output from the service provider for accuracy and completeness. Is the output printed in a secure area away from unauthorized access?
Examine the disclosures to the financial statements to determine if pension expense, stock compensation expense, and other post-employment benefits are properly recorded.
Examine any entries to deferred tax and comprehensive income required as a result of work performed in the payroll area.
Consult with in-firm or outside experts on such matters as stock compensation treatment, pension liabilities, etc. in order to accurately assess that each is properly stated/disclosed in the financial statements.
An auditor expresses an unqualified opinion on the financial statements of a publically held client. Subsequent to the audit, the client files for bankruptcy protection. The auditor issuing the unqualified opinion may:
(38) VerifiedD
Payroll should be notified first when an employee leaves the company.
(35) Why would a service organization choose to hire an accountant to perform a SAS 70 engagement and issue a report? Would the clients of the service organization
(in other words, the user organizations) want the service organization to provide a
SAS 70 report? Why or why not? What might the service organization consider when
it contracts for a SAS 70 engagement to make the resulting report the most useful
for user organizations and their auditors?
(37) AU 324 identifies which of the below as being a criterion for meeting the significance test for service providers?
(32) List appropriate steps and documents that an auditor could use in a walkthrough of the following human resources processes:
• Hiring, authorizing input of a new employee to the payroll master file
• Change of pay rate, input of a change of pay rate to the payroll master file
• Obtaining employee authorization for voluntary withholdings from payroll payout
such as medical and life insurance
• Separation of employees from the company, changes to the payroll master file following
Separation
(37) Input and submission controls required of the user company include:
(40) A W-2 form is used to report earnings to the appropriate governmental bodies.
(43) Time worked not accepted by the payroll application program because the employee is not in the payroll master file is an example of which assertion(s)?
(39) If a client outsources payroll to a service firm, the auditor must obtain a SAS 70 Type I report.
(30) Tracing the amounts used to calculate payroll to the source documents tests which assertion?
(35) When payroll is outsourced and the auditor relies on a SAS 70 Type II audit report, dual testing is not relevant.
(38) 
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