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we are talking about human resource management and we're talking about a fund perspective of how we're going to audit now you remember that when we audit what we're doing is we're doing an assessment of risk we're identifying internal controls and then finally based upon the risk of material misstatement is we're going to develop the substantive testing where we are measuring monetary in a statement human resources is a fairly complex process it involves hiring people and paying people from the human resource perspective we are hiring people at a specific rate for a specific job and hopefully we're hiring the right person for the job that is appropriate payroll we are paying these people on a bi-weekly basis so there's some very specific issues that we are concerned with as we are paying this person on an ongoing basis transactions that were concerned with is payments to the employee so there is a specific check that goes to the employee from behind the scenes there's numerous accruals that were concerned with such as liabilities to Social Security unemployment taxes for one case the list of deductions that are coming from the payroll of an individual can be quite substantial so what we need to do is we need to make sure that we are taking the appropriate deductions and paying that money appropriately to the appropriate people at the appropriate time when we're thinking about payroll transactions this is going to affect cat in a manufacturing environment we are concerned with inventory as well as direct and indirect labor expenses any accrual payroll liabilities are going to affect cash and the various accruals within the system we are going to be looking at some very specific documentation we want to validate that in fact this employee is in fact a real person that he or she is actually doing a real job and in fact that the payment going to this person is appropriate based upon what Human Resources has determined we also want to make sure that when the person is terminated that this person is no longer receiving a paycheck it seems unusual that that would happen but actually it does happen more often than what you might want to think and it's happening because people are not doing their job well I won't go through all these listings here but the one thing that I want do want to focus on is you notice that there is a master payroll file well the master payroll file has individuals has their paid rates as their addresses have some very personal information this obviously is should be a secure file and there should be only specific people that have access to this file either from a read-only perspective and certainly from a change perspective you notice the file here that says master file change report in most modern accounting systems an ERP is an example what happens in the background is it actually logs every change that occurs in this master file so as an auditor we would be interested in going into this file and determining who is making the changes and are these changes appropriate major functions obviously as Human Resources the hiring supervision is the approval of the employees attendance time in attendance monitoring employee activity productivity and the payroll variance costing timekeeping is the process of monitoring the actual time and attendance for the employee there should be a pine keeper and the pine keeper as they complete their report should be approved by the supervisor and then that report is then going to go to payroll where payroll processing is going to compute the amount of money that's actually going to be due the employee disbursement is the payment of the employees compensation and benefits and then we're going to be accumulating these in the general ledger there's some very specific segregation of duties that's absolutely critical the one thing that I want to focus on you is the difference between human resources and time keeping and payroll you notice that human resources is responsible for the pain of the person Human Resources is responsible for updating the files the master file of the human resource file and timekeeping is simply through the approval and review of time records payroll is reviewing and this doing the calculation for the payment the treasurer is actually going to be thus tributing the payroll checks to the employees now the distribution generally speaking is going to be through some sort of direct deposit system so we want to make sure that things are in place so that the money gets deposited into the appropriate account and only gets deposited once into the appropriate account we've talked about the audit risk model the audit risk model is what we start off with is understanding the inherent risk in assessing the inherent risk the auditor may want to consider the effective economic conditions the supply and skill of workers turnover other issues that we would be very interested in finding up we clearly want to find out how many people they've hired how many people they've terminated what the turnover rate is for an employee becomes very important because the more turnover there is the more opportunity there is for errors and mistakes certainly if there's a high level of turnover it is going to affect the organization the inherent risk associated with non officers is generally considered low the inherent risk associated with offer officers may not be considered low because of their ability to take advantage of their position so you notice that we're actually considering officers and highly paid employees separately as compared to the primary payroll within the organization so we have the inherent risk we then need to consider the control activities control activities relates to the occurrence the occurrence of payroll transactions the once insurance the payments is for payroll related services are being made to a valid employee for actual time work very possible that the auditor is going to do a search of these employees a sample of employees and identify that these employees are actually there or actually working and are an actual person and this is going to be a part of this confirmation of the controls authorization of payroll transactions the entity may have controls for hiring terminating setting employees awarding benefits and issuing checks it's very important for the auditor to understand what the controls are we talked about the segregation of duties between human resources and payroll as an example we want to make sure that best practices are being followed in terms of hiring and terminating employees very possible that they may be doing a good job in terms of hiring but the termination process may in fact be a little weak I've determined this and numerous audits that I've gone through is sometimes it's very difficult to get everyone to do their job in terms of terminating individuals within the system and again if they're not terminated it possibly may mean that they may be getting another check or at risk of getting another check but the other issue becomes is keep in mind that this has implications throughout the organization if they're not terminated chances are they still have access to email they still may have access to the network so it's critical that the termination of the employee occurs immediately when the person is actually terminated we want to get their badges we want to get their keys we want to make sure that they are turned off on all the systems so their access is no longer there those are the kinds of pieces that it's easy to say this needs to be done but in actuality it takes many departments to get on track to make sure that these people are terminated appropriately obviously accuracy is critical classification of payroll expenses the payrolls charged the wrong account financial statements may be misstated if payroll expense is not properly classified between direct and indirect inventory and cost of goods sold these costs may be inappropriate very important to understand the budget process because in many cases if we understand the budget process we are going to understand what is taking place within the organization relating the assessed level control risk to substantive testing keep in mind that once we've identified the internal controls we've identified the inherent risk this determines the risk of material misstatement of the test of controls for payroll systems support the planned level of control risk the auditor conducts of santé testing at the assessed control level if tests do not support the level of control the nature and timing and extensive testing is going to be increased we've talked about analytical procedures analytical procedures are critical they're absolutely important and necessary at the beginning stage of the audit they're also necessary at the ending stage of the audit but also analytical procedures can be used as substantive testing and again keep in mind the substantive testing is where we are measuring monetary in a statement some of the tests that we might want to consider is comparing current year with prior year payroll expenses compare current and prior to your payroll cost as a percentage of sales and industry data we also would want to consider the number of hours worked and the total payroll do a quick division determine the average hourly rate compare this from year to year and period the period and we should see a very definitive trend compute the labor utilization rates and statistics with industry standards compare budget with actual it's very interesting how that the budget process becomes very important as we are working through understanding what's taking place within the organization there's no question that a well-structured budget is a significant internal control within the organization tests of details of transactions so we are talking about substantive procedures these of santé procedures here we're looking at the detail transactions so one of the things that we might do is trace a sample payroll to the master employee list to verify validity one of the things that becomes very important is to determine who has not been paid see what took place maybe they haven't been paid because they have been terminated but someone forgot to take them out of the system that is a clearly a risk one of the interesting things related to this person that's not been taken out of the system chances are the organization is still paying his or her insurance so there not only is a risk but there's a real cost this person even if they are not getting a payroll check we want to trace a sample of pine sheets to the payroll register that's the sample payroll checks for proper authorization recompute sample payroll checks for gross pay deductions and net pay hopefully you're not going to find any errors there trace a sample of timesheets before and after the period for appropriate allocation this is a cut-off issue and then examine a sample of payroll checks for proper classification account balances when you think about account balances we're talking about things like our or think talking about things like our payables any account balance that we're going to see on the balance sheet are things that we're interested in from detail of account balances we're looking for existence or vouching a selected amounts from the accounting schedule for accruals to support documentation so we're clearly looking at the accruals we're reviewing supporting documentation to determine that the entity is legally obligated to pay this liability we're going to search for unreported liabilities as well as obtain an account analysis for the schedule for accruals of the payroll liabilities but schedules for cold payroll where the amounts and supporting documentation when we're looking at disclosures occurrence rights and obligations completeness classification and understandability as well as accuracy and valuation are the key presentation issues that we need to be concerned with so as we're going through the human resources and payroll it's absolutely critical that you gain a very good understanding of the internal control structure within the organization there's going to be some very standard testing that you're doing clearly accuracy is going to be very important we also want to make sure that the amounts that we are deducting from the employee for insurance for 401k for childcare for all these are getting to the appropriate accounts and being paid on a timely basis we want to make sure again that people that are working and unappropriate are getting paid we want to make sure that they're getting paid at the right amount we want to make sure that payroll is calculating vacation time is calculating overtime all these issues become extremely important one of the things that becomes difficult in the process is it's usually not a problem employees that have been in system for a couple of years because they've been in the system through this whole time where we have a good accounting system the problems are going to be these employees that have been in the organization for 20 30 40 maybe and 50 years their documentation the support that they have for their start of employment was never entered into a system because there was no system so as we are going through the auditing for payroll for Human Resources keep in mind that most of this should be very straightforward the difficulties are going to be these long-term employees and it becomes even more complicated because many employees will go through their careers maybe they start started they've stopped they've had medical leave they had other issues so it's not a very straight forward process as we're moving through this keep in mind that you are as an auditor are interested in validating the accounts determining transactions making sure that the internal controls are there the tests that we've talked about here are critical to our understanding of the process and I think it becomes a very interesting process frankly I think Human Resources is one of the more interesting audits you're going to do Human Resources accounts for maybe 30 40 50 % of total expenses so it's critical that you dedicate your time in terms of assessing this once you would determine the internal controls if they're there you are going to have a fairly easy audit related to this okay so I thank you very much for your time everyone have a great day and we will have another lecture shortly okay thank you