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 dualdirection tests (aka dualpurpose 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 Dualdirection 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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