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”.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
