Question

Why do tests of controls and substantive tests of transactions in the payroll and personnel cycle typically have a less important effect on the related balance sheet accounts than they do in the sales and collection cycle?

Answer 1

Compared to payroll and personnel cycle, the more proportion of audit time is devoted to in performance of tests of controls and substantive tests of transactions in the sales and collection cycle. The main reason for it is the immateriality of year-end balances in payroll-related accounts. Moreover, for the verification of related payroll accounts, the chances of availability of independent third party evidence are very less. The chances of getting confirmations for verification are very few in case of payroll accounts. On the other hand, it is easy to get confirmation from customers to verify the sales and collection cycle. The process of verifying the realizability of receivables and sales cutoff tests, in the sales and collection cycle, are very crucial and time-consuming tasks.