(b) Substantive audit procedures
The main concerns with income statement/statement of comprehensive income and statement of financial position entries for payroll relate to the completeness and ‘accuracy’ of transactions (existence and rights and obligations), with proper ‘cut-off (occurrence and measurement) and presentation.

In relation to both statement of financial position and income statement/statement of comprehensive income entries, I would ensure that appropriate disclosures had been made in the financial statements in accordance with accounting standards and the statutory framework. The disclosure of amounts paid to directors is often particularly important.

(i) Payroll balances in statement of financial position

• In all cases, I would ensure that the amounts appearing in the financial statements can be traced through to supporting schedules and ensure that the schedules are arithmetically accurate.
• In all cases, I could check the amounts payable to payments made after the period-end, to documentation supporting and authorising the bank transfer, and to the bank statement.
• In all cases, the extent of testing noted below will depend on the results of tests of controls over payroll.
• In all cases, I would perform analytical procedures on the amounts payable at the period end by reference to the number of employees, the amounts payable at the end of each week, month, quarter or year (as appropriate) during the period (and in prior periods) and with reference to profits, production or sales levels, and/or tax and social insurance rates, as appropriate.
• Unpaid amounts due to the agency:
  • I would consider the need to obtain confirmation from the agency of the amount payable. If documentation from the agency is available at Blossom Textiles agreeing the amount payable, this might suffice;
  • I would check the calculation of the amounts payable to supporting documentation authorised by supervisors;
  • I would ensure that the amounts payable (particularly the rates payable) agreed with correspondence with the agency and I would check such correspondence for evidence of any disputes.
• Unpaid wages and salaries due to permanent factory staff, administrative and sales staff and directors; and unpaid bonuses due to sales staff and directors:
  • I would check the calculation of the amounts payable to appropriately authorised clock cards or contracts, as appropriate.
• Unpaid amounts due to tax authorities for tax and social insurance:
  • I would review correspondence with the tax authorities for evidence of any disputes or underpayment and pay particular attention to any delay in the payment of these amounts.

(ii) Payroll transactions in the statement of comprehensive income

• As with statement of financial position entries, I would ensure that the amounts appearing in the statement of comprehensive income can be traced through to supporting schedules and ensure that the schedules are arithmetically accurate.
• In each case, I would select a sample of entries in the statement of comprehensive income and trace them through the ledgers and daybooks to source documentation such as clock cards for permanent factory staff, documentation showing the amounts produced or processed (agency staff) or contracts (administrative and sales staff and directors).
• I would then trace a sample of source documentation (as noted above) in the opposite direction, through the daybooks and ledgers to the schedules supporting the financial statements and to the statement of comprehensive income.
• I would perform analytical procedures on the amounts appearing in the ledgers for each period, for each category or employee with reference to production and sales levels as appropriate, the number of employees, and by comparison with prior periods, for example.