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How to Test Internal Controls | Payroll [Video]

How to Test Internal Controls | Payroll

After the auditor has learned about the design of a company’s internal controls for its payroll cycle, the auditor needs to test the operating effectiveness of the internal controls for payroll.

The auditor must determine whether each internal control:
• Is operating as designed
• Is being performed by an employee who has both the ability and authorization to perform the control

There are several ways for an auditor to test internal controls. These include:
• Inquiry
• Observing the client applying the control
• Inspecting the client’s documents
• Reperforming the control
• Walkthrough (this would include several of the steps listed above)

When testing controls, the auditor should perform dual-direction tests (aka dual-purpose procedures). For example, to ensure that the client is paying actual employees for actual time worked, the auditor should both:
• Test the existence assertion (did all recorded liabilities occur?)
by vouching a sample of paychecks back to the time sheets
• Test the completeness assertion (have all liabilities been recorded?)
by tracing a sample of time sheets to the related entries in the payroll journal

0:00 Introduction
0:26 Ways to test controls
0:50 Dual-direction tests
2:29 Occurrence
5:41 Completeness
6:08 Authorization
6:46 Accuracy
7:42 Cutoff
7:50 Classification
8:38 Setting the achieved level of control risk

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Resources for Accountants

Master Excel, VBA & Power BI: WallStreetMojo's All-In-One Excel Bundle Course [Video]

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