Chapter 12: Auditing the Human Resource Management Process Overview of HRM process: The human resource process

s 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. Types of Transactions and Financial Statement Accounts Affected :
Type of Transaction Account Affected
Cash Inventory Direct and indirect labor expense accounts Various payroll-related liabilitiy and expense accounts Cash Various accruals (such as payroll taxes and pension costs)

Payroll transactions

Accrued payroll liability transactions

Types of documents and reports:

Personnel records, including wage-rate or salary authorizations. Personnel records, including wage-rate or salary authorizations. W-4 and other deduction authorization forms. W-4 and other deduction authorization forms. Time card/time sheet. Time card/time sheet. Payroll check/direct deposit records. Payroll check/direct deposit records. Payroll register. Payroll register. Payroll master file. Payroll master file. Payroll master file changes report. Payroll master file changes report. Periodic payroll reports. Periodic payroll reports. Various tax reports and forms. Various tax reports and forms.

The Major Functions:

Human Resources

Authorization of hiring, firing, wage-rate and salary adjustments, salaries, and payroll deductions. Review and approval of employees' attendance and time information; monitoring of employee scheduling, productivity, and payroll cost variances. Processing of employees' attendance and time information and coding of account distribution. Computation of gross pay, deductions, and net pay; recording and summarization of payments and verification of account distribution. Payment of employees' compensation and benefits. Proper accumulation, classification, and summarization of payroll in the general ledger.

Supervision

Timekeeping Payroll processing Disbursement General ledger

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 labor contracts and the impact of regulation on the company.

Control Risk Assessment: 1. Understand and document the human resource management process based on a reliance approach. 2. Plan and perform tests of controls on payroll transactions. 3. Set and document the control risk for the human resource management process. Control Activities and Test of Controls Payroll Transactions: Occurrence of Payroll Transactions, Authorization of Payroll Transactions, Accuracy of Payroll Transactions, Classification of Payroll Transactions Tests of Detail of Transactions, Account Balances, and Disclosures:
Assertions about Transactions Occurrence Completeness Authorization Accuracy Cutoff Classification Substantive Tests of Transaction

Trace a sample of payroll checks to the master employee list to verify validity. Trace a sample of time sheets to the payroll register. Test a sample of payroll checks for proper authorization. Recompute a sample of payroll checks for gross pay, deductions, and net pay. Trace a sample of time sheets before and after period end to the appropriate payroll report. Examine a sample of payroll checks for proper classification into expense accounts.

Assertions about Account Balances at Period End Existence

Tests of Details of Account Balances

Vouch selected amounts from account schedules for accruals to supporting documents (payroll tax returns, corporate benefit policies, etc.). Review supporting documentation to determne that the entity is legally obligated to pay the liability. Search for unrecorded liabilities. Obtain an account analysis schedule for accrued payroll liabilites; foot schedules for accrued payroll liabilities. Compare amounts accrued to supporting documentation, such as payroll tax returns.

Rights and obligations Completeness

Valuation and Allocation

Assertions about Presentation and Disclosure Tests of Details of Disclosures Occurrence, and rights and Inquire about accruals to ensure that they are properly obligations disclosed. Complete financial reporting checklist to ensure that Completeness all financial statement disclosures related to payroll expense have been made. Classification and Review accrued payroll liabilities for proper shortunderstandability term/long-term classification. Review benefit contracts for proper disclosure of pension and postretirement benefits. Read footnotes Accuracy and valuation and other information to ensure that the information is accurate and properly presented at the appropriate amounts.

Evaluating the Audit Findings Payroll-Related Accounts If the likely misstatement is less than the tolerable misstatement, the auditor may accept the accounts as fairly presented. If the likely misstatement is greater than the tolerable misstatement, the auditor must conclude that the accounts are not fairly presented