Audit of Payroll Cycle

The overall objective in the audit of the payroll cycle is to evaluate whether the account balances affected by the cycle are fairly stated in accordance with generally accepted accounting principles.

A payroll audit is an inspection of payroll records by a third party. The audit can be conducted for a variety of reasons, ranging from a desire to confirm internally that payroll information is correct to an inspection on behalf of an insurance company to determine the appropriate amount of the premium for workers' compensation insurance. Regular internal auditing is recommended, especially in large companies, to ensure that records are accurate and well kept, and to identify problems before they come up on an external audit. A small business usually has the advantage of fewer employees making a thorough audit possible, rather than sampling data for further review. A good time frame for scheduling a payroll audit is at the end of each quarter of business.

In a payroll audit, the auditor inspects all of the documentation related to the payroll, verifying that it is correct and looking for signs of issues such as employees with incomplete payroll histories, deductions which do not match contributions, and so on. The auditor also identifies which members of the company are responsible for handling payroll procedures, and looks over the company's protocol for handling payroll to identify problem areas and to test employees to confirm that they are using the most recent protocol. For an internal audit, companies can use their own staff or hire an audit service and request that they conduct the audit. Using a third party can ensure that the results of the payroll audit have more integrity, because a third party should not have any conflict of interest which might skew the audit results. The internal audit results can be used to tighten procedures, confirm that employees are following protocol, and identify areas where inappropriate activities may be occurring.

Audit of Inventory Cycle

The primary reason auditors observe their client taking the physical inventory is to make sure the inventory reflected on the balance sheet actually exists and that the balance sheet includes all inventory owned by the company. This includes all raw materials, supplies, inventory in transit when using Free on Board (FOB) shipping point, inventory the company may have on consignment with another business, and inventory stored off the premises. Confirming the existence of inventory through your observations addresses the occurrence and completeness assertions as well.

The auditor's objective concerning valuation is to obtain evidence that amount at which inventories have been valued is computed on an appropriate basis.

Audit of Purchase Cycle

The overall objective in the audit of the acquisition and payment cycle is to evaluate whether the accounts affected by the acquisitions of goods and services and the cash disbursements for those acquisitions are fairly presented in accordance with generally accepted accounting principles.

The purchasing cycle consists of the acquisition of goods and services in exchange for cash or promises to pay cash. The audit of accounts in the purchasing cycle (e.g., purchases of merchandise or raw materials, various expenses, accounts payable, and cash) usually consists of a combination of substantive tests and tests of controls to support an assessment of control risk that is below the maximum or at low.

Audit of Revenue Cycle

As part of a financial audit, the auditor must assess the inherent risk associated with the revenue cycle and perform tests to determine it is relatively free of error or fraud. The inherent risk for this cycle is related to the cutoff dates for particular types of sales and the pressures from management to misstate revenues. By conducting so-called substantive tests and tests of controls, the auditor can provide some assurance that the revenues of the company are recorded accurately.

Introduction to Auditing