How to Examine Human Resources Risks and Controls

At every step of an audit, you have to consider risks and their associated controls. Generally, you look at three inherent human resources risk factors: the supply and demand of competent employees, existing labor contracts, and regulatory compliance.

In addition, a huge human resources risk involves payroll controls — or lack of them. If a company is paying people who don’t actually provide work during the pay period, a serious issue exists. Your audit must confirm that your client has firm controls in place to prevent such problems.

Considering the supply and demand of competent employees

If, due to supply and demand issues, your client has problems retaining competent employees, consider the effect this situation has on the effective enforcement of internal controls and going concern. Going concern addresses the possibility that the company won’t be operating more than one year past the balance sheet date.

Good retail employees are certainly not a dime a dozen, but they’re easier to replace than employees in highly technical industries. If a company’s demand for employee skills outweighs the existing supply in the labor market, labor prices will only go up, up, and up.

Evaluating labor contracts

If your client has union employees, review the bargaining agreement, the official document that outlines the terms under which the company and union employees work together. Things to consider include the following:

  • If the relationship between the company and the union is contentious and the bargaining agreement is coming up for renewal, weigh the possibility of a work interruption and the associated loss of revenue due to a strike.

  • Check to make sure that agreed-upon benefits per the bargaining agreement reflect properly on the balance sheet and income statement.

Confirming Occupational Safety and Health Act (OSHA) compliance

OSHA is a federal agency that monitors workplace safety and health programs. It’s also charged with finding and fixing workplace hazards to prevent on-the-job injuries and illnesses. If a business ignores its responsibilities to maintain a safe work environment, the neglect translates into higher worker compensation costs for injured employees. OSHA penalties for noncompliance can be quite high as well. Gauging OSHA compliance, combined with third-party contacts to the client’s attorney help you decide if you need to record any OSHA-related contingent liabilities. A contingent liability exists when there is an existing circumstance that may cause a loss in the future depending on other events that have yet to happen and indeed may never happen.

You may think the company you’re auditing doesn’t have much interaction with OSHA. Make sure you’re right and check out this link to the OSHA fact sheet “Crowd Management Safety Tips for Retailers”.

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