AUDITING THE HUMAN RESOURCE MANAGEMENT PROCESS
Answers to Review Questions
12-1 Most entities either computerize their payroll systems or use an outside service bureau because of the large volume and routine nature of payroll transactions.
12-2 There are two major types of transactions that are processed through the human resource management process: (1) payments to employees for services rendered and (2) accrual and payment of payroll-related liabilities arising from employees' services.
The financial statements accounts that are generally affected by the two types of payroll-related transactions are:
Payroll transaction:
• Cash
• Inventory
• Direct and indirect labor expense
• Various payroll-related liability and expense accounts
Accrued payroll liability transactions:
• Cash
• Various accruals (e.g., payroll taxes, and pension costs)
12-3 The payroll register, which is also referred to as the payroll journal, is a summary of all payroll checks issued to employees. The payroll master file is the computer file that maintains all the entity's records related to payroll, including information on each employee such as name, Social Security number, pay rate, and authorized deductions. The payroll master file changes report contains a record of the changes made to the payroll master file.
12-4 The following duties are performed in the human resources, timekeeping, and payroll-processing functions:
Human Resources: Authorization of hiring, firing, wage rates and salary adjustments, salaries, and payroll deductions. Timekeeping: Processing of employees' attendance and time information and coding of account distribution.
Payroll processing: Computation of gross pay, deductions, and net pay; recording and summarizing of payments; and verification of account distribution.
Chapter 12 - Auditing the Human Resource Management Process 12-1
Auditing and Assurance Services A Systematic Approach Messier 8th Edition Solutions Manual Visit TestBankBell.com to get complete for all chapters
12-5 The following table contains the key segregation of duties in the human resource management process and possible errors and fraud that can occur if such segregation of duties is not present.
Segregation of Duties
The supervision function should be segregated from the personnel records and payroll-processing functions.
The disbursement function should be segregated from the personnel records, supervision, and payroll-processing functions.
The payroll-processing function should be segregated from the general ledger function.
Possible Errors or Fraud as a Result of Conflicts in Duties
Unauthorized payments to existing employees or payments to fictitious employees.
Unauthorized payroll checks may be issued.
Concealment of a defalcation that would normally be detected by independent review of accounting entries made to the general ledger.
12-6 Two control environment factors that have a pervasive effect on the human resource management process must be considered. First, the entity's organizational structure, its personnel practices, and its methods used to assign authority and responsibility must be examined. Second, the entity should have sound policies for hiring, training, promoting, and compensating employees. These policies should include specific authority and responsibility for hiring and firing of employees, for setting wage rates and making salary changes, and for establishing benefits.
12-7 The key authorization points within the human resource management process include authorization procedures for hiring and terminating employees, setting pay rates, making withholdings, awarding benefits, and issuing payroll checks.
12-8 Control activities must exist for the classification assertion to ensure that the appropriate payroll accounts are charged. If payroll is not properly classified between direct and indirect labor, inventory and cost of goods sold may not be properly valued.
12-9 Except for executive and share-based compensation, there are generally few inherent risk factors that affect the human resource management process and its related accounts. Some factors the auditor might consider include the effect of economic conditions on payroll costs, the supply of skilled workers, the frequency of employee turnover, the presence of labor contracts, and legislation such as the Occupational Safety and Health Act.
Because officers may have motive and opportunity to take advantage of their high-positions in the form of excessive compensation, inherent risk is frequently not set at low. Key risk factors to consider are the level of performance-based
Chapter 12 - Auditing the Human Resource Management Process
12-2
compensation and the closeness of key performance measures to compensation/bonus thresholds. Share-based compensation also has a higher inherent risk because of the required assumptions and financial disclosures.
12-10 Two audit procedures that can be performed using CAATs are: (1) testing the computer logic used to calculate payroll amounts and (2) recomputing the calculation of gross pay, deductions, and net pay.
12-11 Substantive analytical procedures that can be used to test payroll accounts and payroll-related accrual accounts are:
Payroll expense accounts:
1. Use a reasonableness test to develop an expectation based on number of employees and prior year average compensation per employee category after considering pay rate changes. Compare the expectation to current-year balance and investigate the difference if it is greater than the threshold.
2. Compare payroll costs as a percentage of sales with prior years’ and industry data.
3. Compare labor utilization rates and statistics with industry data.
4. Compare budgeted payroll expenses with actual payroll expenses.
5. Estimate sales commissions by application of commission formulas to recorded sales totals.
Payroll-related accrual accounts:
1. Compare current-period balances in payroll-related accruals with the prior periods' balances after adjusting for changes in conditions.
2. Test reasonableness on accrual balances.
12-12 For the accrued payroll tax account, the auditor obtains a detailed account analysis schedule. The credits to the account represent the recognition of payroll tax expense at the end of each pay period. These amounts can be traced to the various payroll tax returns or other documentation filed by the entity and should agree to the amount of payroll tax expense included in the income statement. The debits to the account represent payments made to the relevant government agencies. These payments can be verified by tracing the amounts to the cash disbursements journal.
12-13 Disclosure items for the human resource management process and related accounts include:
• Pension benefits
• Postretirement benefits
• Share-based compensation
• Profit-sharing plans
• Deferred-compensation arrangements
Chapter 12 - Auditing the Human Resource Management Process 12-3
Solutions to Problems
12-24 To best prevent errors and fraud, one person should be assigned to each of the following functions: human resources, supervision, timekeeping, payroll processing, disbursement, and the general ledger. However, fewer could be hired, as long as certain segregations are in place. The supervision function should be separated from the human resources and payroll-processing functions; the disbursement function should be separate from human resources, supervision, and payroll-processing; and the payroll-processing function should be separate from the general ledger function. These separations would help prevent fictitious employees from appearing on the payroll, unauthorized payments from being made, and alteration of the accounting records from happening.
12-25 a. Weaknesses in the internal control system are the following:
• Lack of approval of the foreman's clock card by an appropriate supervisor is an unsound practice. Employees should not be permitted to maintain their own time records and submit them without approval.
• The computation of regular and overtime hours prepared by payroll clerk no. 2 that is used in the preparation of the payroll register is not compared with the summary of regular and overtime hours prepared by the foreman.
• Arithmetic computations and rates of pay used in the preparation of the payroll register are not checked by a person who is independent of their preparation, and payroll register columns are not verified (re-added) by a person other than the preparer of the payroll register.
• Payroll checks are not reconciled to the payroll register in order to prevent improper disbursements.
• A signature-stamp machine should not be in the custody of any payroll clerk who has access to unsigned checks.
• An officer of the company does not approve payroll.
• Since the paymaster should be independent of the payroll process, signed payroll checks should not be distributed by the foreman.
• Unclaimed payroll checks should be in the custody of an employee who is independent of the payroll process.
Chapter 12 - Auditing the Human Resource Management Process 12-4
12-14 b 12-19 c 12-15 c 12-20 b 12-16 a 12-21 c 12-17 b 12-22 b 12-18 c 12-23 c
Answers to Multiple-Choice Questions
• The comparison of regular and overtime hours indicated on payroll checks with regular and overtime hours indicated on clock cards should not be
• performed by the clerk who is responsible for the original computation of regular and overtime hours indicated on clock cards.
• The clerk who is responsible for preparing the payroll register should not perform the comparison of gross and net payroll indicated on payroll check with gross and net payroll indicated in the payroll register.
b. One should inquire whether:
• Payroll clerk no. 2 checks clock cards for the foreman's written approval.
• Approved overtime is indicated on clock cards.
• Employment, wage, and related data in payroll files are periodically crosschecked with personnel files for agreement.
• A timekeeper observes the punching of clock cards.
• Other mitigating internal control measures (e.g., bonding, required vacations, and so forth) are in existence.
12-26 McCarthy should consider performing the following procedures in the audit of Kent Company's payroll transactions:
1. Select a sample of payments to employees from the payroll register and compare each selected transaction to the related documents and records, and examine
• Evidence in support of authorization of pay rate.
• Evidence in support of time on which compensation was based, such as approved time cards or attendance records.
• Evidence in support of proper authorization of payroll withholdings.
• Evidence in support of account distribution.
• The clerical accuracy of the transaction.
• The entry to the employee's records used to summarize employee compensation for payroll reporting purposes.
. 2. Obtain the payroll register for a selected period and
• Test the arithmetic accuracy of the payroll register.
• Determine whether payroll was approved in accordance with management's prescribed procedures.
• Trace totals per the register to postings in the general ledger.
3. Observe the distribution of payroll checks.
4. Review the accounting for unclaimed wages.
5. Observe a sample of employees in the performance of their duties.
6. Perform analytical procedures.
Chapter 12 - Auditing the Human Resource Management Process 12-5
12-27
a. In order to verify the information in the input form, James should:
• Compare the names, Social Security numbers, and withholding data on the input form with W-4 forms.
• Compare names with employment authorizations.
• Compare pay rates with wage authorizations and union contracts.
• Compare numbers of hours worked (regular and overtime) with approved time sheets or other supportive records; recompute regular and overtime hours.
• Inspect employee authorization forms for "special deductions."
b. James should perform the following procedures in the examination of the November payroll register:
• Compare information on the input form with information in the payroll register and information on issued payroll checks (e.g., spelling of names, correctness of Social Security numbers, hours, rates, and deductions).
• Test payroll deductions by using withholding tax tables to recompute Social Security and withholding taxes.
• Manually compute gross and net pay and compare with computer printed figures.
• Compare payroll summary totals with other pay periods and investigate any unusual variations among periods.
• Check footings and crossfootings in the payroll register.
• Perform other related basic auditing procedures that may be deemed necessary in accordance with the circumstances.
Solutions to Discussion Cases
12-28
a. The following edit checks might be used to detect errors during the typing of answers to the input cues:
• Password: Ensures that the operator is authorized to access computer programs and files.
• Numeric check: Ensures that numbers are entered into and accepted by the system where only numbers are required to be entered (e.g., numbers 0-9 in Social Security number).
• Alphabetic check: Ensures that letters are entered into and accepted by the system where only letters are required to be entered (e.g., letters A-Z in employee name).
• Special-character check: Ensures that only specific special characters are entered into and accepted by the system where only those special characters are required to be entered (e.g., hyphens between numbers in Social Security number).
Chapter 12 - Auditing the Human Resource Management Process 12-6
• Sign check: Ensures that positive or negative signs are entered into and accepted by the system where only such signs are required to be entered or that the absence of a positive or negative sign appears where such an absence is required (e.g., hours worked).
• Arithmetic check: Ensures the validity of the result of a mathematical computation (e.g., total employees for period equal number of employee numbers in system).
• Validity check: Ensures that only authorized data codes will be entered into and accepted by the system where only such authorized data codes are required (e.g., authorized employee account numbers).
• Limit (reasonableness) check: Ensures that only data within predetermined limits will be entered into and accepted by the system (e.g., rate per hour cannot be lower than the minimum set by law or higher than the maximum set by management).
• Self-checking digit: Ensures that only specific code numbers prepared by using a specific arithmetic operation will be entered into and accepted by the system (e.g., employee numbers generated by the modulus 11 method with prime-number weighting).
• Size check: Ensures that only data using fixed or defined field lengths will be entered into and accepted by the system (e.g., number of dependents requires exactly two digits).
• Missing-data check: Ensures that no blanks will be entered into and accepted into the system when data should be present (e.g., an "S" or "M" is entered in response to "single or married?").
• Overflow check: Ensures that no digits are dropped if a number becomes too large for a variable during processing (e.g., hourly rates "on size errors" are detected).
• Control-total check: Ensures that no unauthorized changes are made to specified data or data fields and all data have been entered.
• Logic check: Ensures that spurious data are rejected (e.g., no negative regular hours).
b. The assurances provided by each validation check are provided within "a." above.
Chapter 12 - Auditing the Human Resource Management Process 12-7
12-29
a. A rough estimate of the average employee’s salary can be computed by dividing the estimated employee compensation expense by the estimated total number of employees. The salaries of the executive officers can be found on a number of websites (e.g., www.ecomponline.com, www.aflcio.org/corporatewatch/paywatch/) and are usually found in the company’s proxy statement or annual report. The salary for one officer divided by the average salary equals the proportion of executive salary to average employee salary.
In 2009, the average overall CEO Compensation was $4,463,890 whereas the median income of all occupations $33,190.
For example, in 2009, Michael S. Jeffries CEO of ABERCROMBIE & FITCH received $36,335,644 in total compensation. By comparison, the median worker made $33,190 in 2010. Mr. Jeffries made 1094 times the median worker's pay.
J. Day, President and CEO of KMART CORP earned about $2.9 million in salary and bonus in 2004. If the average employee salary is $40,000, the ratio is 72.5 to 1.
Dennis Dammerman, Vice Chairman of the Board and Executive Officer of General Electric Co., earned about $7.3 million in 2003. If the average employee salary is $70,000, the ratio is 104 to 1.
It is argued that this proportion is high because of the value of the executive’s strategic influence on the company. Whether or not this is true depends entirely on the circumstances of the company. Recently there has been increased public outrage at the large disparity between top executive salary and that of the average employee.
b. It is argued that if executive compensation is tied to the value of the stock price then executives will perform better, because their interests will be aligned with those of the company’s stockholders. Also by using stock based compensation, companies are free to use the cash that would have been used as compensation to fund other areas of the company. This strategy is frequently employed by technology companies seeking rapid growth. The FASB did not always require companies to directly expense the value of stock option compensation to the income statement. However, under ASC 718 companies are now required to recognize the value of the options granted to employees over the vesting period as compensation expense.
Chapter 12 - Auditing the Human Resource Management Process 12-8
The biggest disadvantage is the potential greed associated with high levels of stock-option compensation. When the executive stands to gain tens or hundreds of millions of dollars by achieving earnings targets, the executive’s self interests provides incentives for earnings management or fraud in order to meet or beat earnings forecasts.
c. Potential audit procedures may include:
• Analytical procedures can be used to benchmark compensation levels to other companies in the industry and to examine trends over time.
• Evaluate whether there is proper objectivity in establishing compensation (i.e., is there a compensation committee independent of management). Examine minutes of board of directors and compensation committee for approval of executive compensation and information on other cash transfers (e.g., loans, expense reimbursement).
• Use CAAT to search for payments to executives or parties related to executives.
• If fraud or embezzlement is suspected, hire a private investigator to evaluate if the executive is seemingly living beyond his or her compensation level.
Solution to Internet Assignment
12-30 A search of the Internet showed a number of sites that contained information on the retail industry. Unfortunately, many of these sites are for industry organizations and the user must be a member to obtain information. One site, the National Retail Federation contains information on its National Retail Institute (NRI). NRI provides knowledge about consumer needs, industry trends and strategies that are shaping the retail industry, and demographic information. NRI also publishes reports and books on financial and merchandising issues, information technology’s effect on retailing, and a retail salary survey. For example, one report, published annually, is entitled Combined Financial, Merchandising & Operating Results of Retail Stores
There are also a number of regional sites that contain information on the retail industry. For example, the North Carolina Retail Merchants Association’s site reported that North Carolina retail stores pay over $15 billion in wages and salaries annually.
A number of the major public accounting firms’ home pages contained information on the retail industry. Lastly, some financial services companies, such as Standard & Poors, have sites that contain links to the retail industry.
Chapter 12 - Auditing the Human Resource Management Process 12-9
Auditing and Assurance Services A Systematic Approach Messier 8th Edition Solutions Manual Visit TestBankBell.com to get complete for all chapters
Another random document with no related content on Scribd:
people’s bad treatment of us, and that she must prevent her Traders from killing us with their measles, and from telling us lies to make us do bad conduct to Missi! If they come to us and talk as before, our hearts are very dark and may again lead us to bad conduct to Missi.”
After this little parley, the Commodore invited us all on board, along with the Chiefs. They saw about three hundred brave marines ranked up on deck, and heard a great cannon discharged. For all such efforts to impress them and open their eyes, I felt profoundly grateful; but too clearly I knew and saw that only the grace of God could lastingly change them!
They were soon back to their old arguments, and were heard saying to one another, “If no punishment is inflicted on the Erromangans for murdering the Missi there, we fear the bad conduct of the Tannese will continue.”
No punishment was inflicted at Erromanga, and the Tannese were soon as bold and wicked as ever. For instance, while the Man-of-war lay in the Harbour, Nowar kept himself closely concealed; but no sooner had she sailed than the cowardly fellow came out, laughing at the others, and protesting that he was under no promise and was free to act as he pleased! Yet in the hour of danger he generally proved to be our friend; such was his vacillating character. Nor was Miaki very seriously impressed. Mr. Mathieson shortly thereafter sent his boat round to me, being again short of European food. On his crew leaving her to deliver their message to me, some of Miaki’s men at once jumped into the boat and started off round the island in search of kava. I went to Miaki, to ask that the boat might be brought back soon, but on seeing me he ran for his club and aimed to strike me. I managed to seize it, and to hold on, pleading with God and talking with Miaki, till by the interference of some friendly Natives his wrath was assuaged a little. Returning home, I sent food overland to keep them going till the boat returned, which she did in about eight days. Thus light and shadow pursued each other, the light brightening for a moment, but upon the whole the shadows deepening.
CHAPTER X. FAREWELL SCENES.
The War Fever.—Forced to the War Council.—A Truce among the Chiefs.—Chiefs and People.—The Kiss of Judas.—The Death of Ian.—The Quivering Knife.—A War of Revenge.—In the Thick of the Battle.—Tender Mercies of the Wicked.—Escape for Life. —The Loss of All.—Under the Tomahawk.—Jehovah is Hearing.—The Host Turned Back.—The War against Manuman.—Traps Laid.—House Broken Up.—War against our Friends.—A Treacherous Murderer.—On the Chestnut Tree.— Bargaining for Life.—Five Hours in a Canoe.—Kneeling on the Sands.—Faimungo’s Farewell.—“Follow! Follow!”—A Race for Life.—Ringed Round with Death.—Faint yet Pursuing.—Out of the Lion’s Jaws.—Brothers in Distress.—Intervening Events.— A Cannibal’s Taste.—Pillars of Cloud and of Fire.—Passing by on the other Side.—Kapuku and the Idol Gods.—A Devil Chief. —In Perils Oft.—Through Fire and Water.—“Sail O! Sail O!”— Let Me Die.—In Perils on the Sea.—Tannese Visitors.—The Devil Chief of Tanna.—Speckled and Spotted.—Their Desired Haven.—“I am Left Alone.”—My Earthly All.—Eternal Hope.— Australia to the Rescue.—For my Brethren’s Sake.—A New Holy League.—The Uses of Adversity.—The Arm-Chair Critics Again.—Concluding Note.—Prospectus of Part Second.
A time of great excitement amongst the Natives now prevailed. War, war, nothing but war was spoken of! Preparations for war were being made in all the villages far and near. Fear sat on every face, and armed bands kept watching each other, as if uncertain where the war was to begin or by whom. All work was suspended, and that war
spirit was let loose which rouses the worst passions of human nature. Again we found ourselves the centre of conflict, one party set for killing us or driving us away; the other wishing to retain us, while all old bitter grievances were also dragged into their speeches.
Miaki and Nouka said, “If you will keep Missi and his Worship, take him with you to your own land, for we will not have him to live at the Harbour.”
Ian, the great Inland Chief, rose in wrath and said, “On whose land does the Missi live, yours or ours? Who fight against the Worship and all good, who are the thieves and murderers, who tell the lies, you or we? We wish peace, but you will have war. We like Missi and the Worship, but you hate them and say, ‘Take him to your own land!’ It is our land on which he now lives; it is his own land which he bought from you, but which our fathers sold Missi Turner long ago. The land was not yours to sell; it was really ours. Your fathers stole it from us long ago by war; but we would not have asked it back, had you not asked us to take Missi away. Now we will defend him on it, and he will teach us and our people in our own land!”
So meeting after meeting broke into fiery speech, and separated with many threats.
To the next great meeting I was invited, but did not go, contenting myself with a message pleading that they should live at peace and on no account go to war with each other. But Ian himself came for me.
I said, “Ian, I have told you my whole heart. Go not to that meeting. I will rather leave the island or die, than see you going to war about me!”
He answered, “Missi, come with me, come now!”
I replied, “Ian, you are surely not taking me away to kill me? If you are, my God will punish it.”
His only reply was, “Follow me, follow me quickly.”
I felt constrained to go.
He strode on before me till we reached the great village of his ancestors. His followers, armed largely with muskets as well as native weapons, filled one half the Village Square or dancing ground. Miaki, Nouka, and their whole party sat in manifest terror upon the other half. Marching into the centre, he stood with me by his side, and proudly looking round, exclaimed,—
