Payroll Audit

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SOLUSI UNIVERSITY
FACULTY OF BUSINESS
DEPARTMENT OF GRADUATE STUDIES
TOPIC: Test of controls an a!"t #roce!res of t$e #a%roll s%ste&'
A PRESENTATION SUBMITTED TO T(E FACULTY OF BUSINESS IN PARTIAL FULLFILMENT FOR
T(E COURSE: ACCT ))*+AUDITING,
MASTER OF BUSINESS ADMINISTRATION
PRESENTED TO:
Mr B' N-.en%a /P$D0
PRESENTED BY:
Dan"el C$".a.a : ID 1234332225
S!ccess E' M!no#a : ID 1231332226
7!8a" S' M!n%"9.a : ID 123:232225
S"&;aras$e Ma8oro8e : ID123:232223
Fa"t$ Mt$e&;o : ID123:21222<

Test of controls and audit procedures of the payroll system.
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Intro!ct"on
In an internal control system, the auditor must obtain an understanding of internal control to:
Identify types of potential misstatement; assess risks, design appropriate audit procedures
ISA 260 reuires the auditor to communicate material !eaknesses in internal control to those charged !ith
go"ernance#
$est of controls are performed by a combination of "arious methods namely:
% Analytical procedures
% &nuiry
% Inspection
% 'bser"ation
% (onfirmation
% )ecalculation
% )e*performance
'b+ecti"es of the test of control for a payroll system !ill include:
% Salaries are paid on time
% Salaries are paid at the correct rates
% Salaries are accurately recorded
% Salaries are paid for !ork of entity
% Salaries are paid to the right people.
Test of controls and audit procedures of the payroll system.
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The payroll flow chat
Stage One
Stage Two
Stage Three
Stage Four
Stage Five
Stage Six
Test of controls and audit procedures of the payroll system.
(lock cards submitted and input
-ross pay and .eductions, and
net pay calculated#
'ther amendments and inputs#
/inal payroll calculated, and
payslips produced#
0ayments to employees and ta1
authorities#
0ayroll (osts and payments
recorded
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Ill!strat"on'
Cloc9 cars s!;&"tte an "n#!t
3ususidafa 40"t5 6td (ompany employs a total of ,00 people, 200 of these being !orkers !ho are paid
!eekly in cash# All !orkers are reuired to record their times of arri"al and departure using a clock card
!hich is inserted in a
time recording clock# 7se of the time recording clock is super"ised by the rele"ant factory manager# At
!eekly inter"als the cards are collected and passed to the !orks office !here the clerks total up the hours
!orked on each card and list the total hours !orked 4a 8hash9 total5# $he cards and the add list are then
passed to the !ages clerk !ho enters the hours !orked on the pre*printed payroll sheet 4!hich already has
the names printed on it5, and agrees the add list total#
Gross #a%, e!ct"ons an net #a% calc!late'
$he payroll sheets are then passed to the payroll manager !ho keeps the payroll records# :e enters the rate
of pay and calculates the gross pay# :e also computes the ta1 deductions and employer;s ta1ation, !hich he
enters on the payroll along !ith the salaries and deductions for monthly paid !orkers# :e passes the
payrolls back to the !ages clerk !ho calculates the net amount and totals all the columns on the payroll,
and raises a payment list for monthly paid employees and payments to the ta1 authority#
Ot$er a&en&ents "n#!t'
6ea"er;s and +oiner;s forms must be completed and authorised by the employee;s immediate manager and the
finance director at least one month before the amendment is reuired to the payroll# 'ther amendments to
standing data, e#g# pay rises, are completed on a specific form for this purpose, and authorised in the same
!ay# A monthly report of amendments to standing data is sent to the finance director for re"ie! and
authorisation# Standing data files are sent to departmental managers on a uarterly basis for re"ie!# /inal
payroll calculated and payslips produced# $he completed payroll is then passed to the company accountant,
!ho scans the payroll, compares the totals !ith the pre"ious !eek, and initials the payroll# $he company
accountant raises a cheue reuisition for the !eekly paid !orkers, and signs the payment list for the
monthly paid employees, !hich are then sent to the cashier;s department# $he payment list also sho!s
payments to be made to the ta1ation authorities !hich the company accountant checks to last month;s
Test of controls and audit procedures of the payroll system.
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payroll records# $he payroll is returned to the payroll clerk !ho produces the payslips, and passes these to
the cashier;s department for processing after they ha"e left#
Pa%&ents to e&#lo%ees an ta= a!t$or"t"es'
$he cashier dra!s a cheue for the net amount of the payroll !hich is then signed by t!o directors# $he
cheue is gi"en to a secure cash transit company !ho dra! the money from the bank and deli"er it under
guard to the !ages clerk# $he cashier then puts the money into pay en"elopes along !ith a pay slip for
!eekly paid !orkers# $he sealed en"elopes and rele"ant clock cards are then used for payouts# &ach !orker
obtains his money once he has identified himself and signed his clock card# 7nclaimed !ages are held for
three !eeks before being re*banked# =onthly paid !orkers and the ta1 authorities are paid by bank transfer
on the last day of each month, as per the payment list authorised by the company accountant#
Pa%roll costs an #a%&ents recore
A copy of the payroll list is sent to the head office accounts team !ho record the payroll e1pense and
payments made# Any unclaimed !ages are notified by the !ages office to the head office team on an
anomalies list completed once all of the clock cards ha"e been returned# $he head office accounts team
check the bank statements to ensure that this money has been re*banked#
Poss";le control .ea9nesses "n a #a%roll s%ste&'
$he follo!ing are possible !eaknesses that may e1ist#
% >eaknesses in the system for recording time spent at !ork:
>hen employees are paid by the hour, there !ill be a system of 8clocking on9 and 8clocking off9, typically
using employee identity cards and a time recording de"ice# Alternati"ely, employees may be reuired to
arri"e at !ork at a gi"en time, and use identity cards and a recording de"ice to record their arri"al at !ork#
$he risk is that employees !ill 8clock on9 on behalf of a colleague, using the identity card that the colleague
has gi"en him# 4A control to pre"ent this from happening is that the 8clocking on9 process should be
obser"ed each day#5
Test of controls and audit procedures of the payroll system.
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% '"ertime payments may not be properly authorised# Is the o"ertime authorised? If so, has the
amount of the payment been checked and authorised?
% )esponsibility for making the payroll payments# $he actual payments of !ages and salaries 4often
direct payments through the banking system5 may be made by a +unior person in the accounts department
!ithout proper authorisation#
% $he payroll lists for each department may not be properly authorised# $his creates a risk that
payments may be made to 8phantom9 employees#
Some weaknesses in a payroll system may be risks that are common to other types of IT system too, for
example:
% >eaknesses in the use of pass!ords# An I$ system may use pass!ords to pre"ent unauthorised
access to files and records# :o!e"er, the pass!ords used may be 8guessed at9, particularly if they are names
of family members or domestic pets, or names included in home addresses# 0ass!ords should be difficult to
guess 4ideally a combination of letters and numbers5 and should be changed regularly#
% >eaknesses in the use of e*mails# Important information may be sent by e*mail#
:o!e"er, since the information is not on paper 4in 8hard copy9 form5 there is a greater risk that it !ill be
o"erlooked or forgotten# In a payroll system, notification that employees ha"e left their +ob may be sent to
the payroll department by e*mail# If the e*mail is not acted upon, there is a risk that former employees !ill
continue to be paid, e"en after they ha"e left#
Test of controls and audit procedures of the payroll system.
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Assert"ons Control
O;>ect"?es
Controls Test of controls A!"t Proce!res
E="stence 0ayment is made
to bona fide
employees of the
entity
 Segregation of
duties bet!een
:) and payroll
functions#
 0ersonnel files
held for all
employees
 AuthoriAation
procedures for
hiring,
terminating,
time !orked,
!ages rates,
o"ertime,
benefits etc
 Any changes in
employment
status of
employees 4eg
maternity,
special lea"e
etc5 informed to
human
resources
department#
 7se of time
clocks to record
time !orked#
 'bser"e and
e"aluate
proper
segregation of
duties
 )e"ie! a
sample of
starters and
lea"ers in the
year in the
year to ensure
correct
documentation
is in place#
 )e"ie! and
test
authoriAation
procedures in
place#
 )e"ie!
policies and
procedures in
place for
changing
status and
consider
!hether
adeuate#
 )e"ie!
personnel files
for a sample of
employees
!hose status
changed in the
year#
 'bser"e
employees use
of time clocks#
 Inspect a
sample of
clock cards for
e"idence of
appro"al by
 Inspect
contracts
 Inspect (lock in
and clock off#
Access cards#
 Berify
physically that
the employee
e1ists#
 Berify changes
to the master
file#
Test of controls and audit procedures of the payroll system.
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 (lock cards
appro"ed by
super"isor#
 'nly employees
!ith "alid
employee
numbers are
paid#
 0ayroll budgets
in place and
re"ie!ed by
management#
appropriate
le"el of
management#
 )e"ie! and
test procedures
for entering
and remo"ing
employee
numbers from
the payroll
master file#
 )e"ie!
Dudgeting
procedures#
Co&#lete
ness
All payroll costs
are recorded for
!ork done by
employees
 )enumbered
clock cards in
use#
 Segregation of
duties#
 Authorisation of
!age cheue
cashed
 (ustody of cash
• &ncash
ment of
cheue
• Security
of pay
packets
• Security
of
transit
• Security
and
prompt
banking
of
claimed
!ages
 Berification of
identity#
 )ecording of
distribution#
 )e"ie!
numerical
seuence of
clock cards#
 'bser"e and
e"aluate
proper
segregation of
duties
If wages are paid in
cash
 Attend the
pay*out of
!ages to
confirm that
the official
procedures are
being
follo!ed#
 Defore the
!ages are paid
compare
payroll !ith
!age packets
to ensure all
employees
ha"e a !age
packet#
 &1amine
receipts gi"en
 'bser"e time
sheets or Access
cards, or log in
log out register,
and !hich ha"e
the total
information
about the
employee
Test of controls and audit procedures of the payroll system.
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 0reparation and
authoriAation of
cheues and
bank transfers
list#
 (omparison of
cheues and
bank transfer
list !ith payroll
 =aintenance
and
reconciliation of
!ages and
salaries bank
account#
 0reparation and
authorisation of
cheues and
bank transfer
lists#
 (omparison of
cheues and
bank transfer
list !ith payroll#
 =aintenance
and
reconciliation of
!ages and
salaries bank
account
by employees
check
unclaimed
!ages
recorded in
unclaimed
!ages book#
 'bser"e
!hether any
employee
recei"es more
than one !age
packet#
 Inspect the
unclaimed
!ages
book entries
!ith the
entries on the
payroll to
ensure they
agree#
 (heck that
unclaimed
!ages are
banked
regularly by
inspection of
bank
statements and
supporting
documentation
 Inspect that
unclaimed
!ages book to
check it sho!s
reasons !hy
!ages are
unclaimed#
 )e"ie!
pattern of
unclaimed
!ages in
unclaimed
!ages book :
"ariations may
indicate failure
to record
Test of controls and audit procedures of the payroll system.
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Holiday Pay
 Berify a
sample of
payments !ith
the underlying
records and
check the
calculation of
the amounts
paid by
recalculation#
 /or salaries,
re"ie!
!hether
comparisons
are being
made bet!een
payment
records#
 &1amine paid
cheues forb
employees
paid by
cheues or
bank transfer#
Acc!rac%
class"f"e
an
?al!at"on
All benefits and
deductions 4ta1,
pension etc5 are
computed
correctly#
 Berification of
payroll amounts
and benefits
calculations#
 0ayroll budgets
in place and
re"ie!ed by
management#
 Agreement of
gross earnings
and total ta1
deducted !ith
ta1ation returns
 )ecalculate
benefits and
deductions for
a sample of
employees
 )e"ie!
budgeting
procedures#
 Inspect
documentation
for e"idence
of
management
re"ie!
 (heck
mathematical
accuracy of any
calculations#
 0ayroll
$ransacti
ons
correctly
recorded
in the
accountin
 (hanges to
master payroll
file "erified
through before
and after
reports#
 )e"ie!
reconciliation
before and
after reports to
payroll master
file#
 )e"ie!
Test of controls and audit procedures of the payroll system.
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g system#
 0ayroll master
file reconciled
to general
ledger#
reconciliation
payroll master
file to general
ledger#
(onfirm
!hether
discrepancies
are follo!ed
up promptly
and resol"ed#
C!t off
 0ayroll
transactio
ns are
recorded
in the
correct
accountin
g period#
 All started,
lea"ers, changes
to salaries and
deductions are
reported
promptly to
payroll to
payroll
department and
changes are
updated to the
payroll master
file promptly#
 )e"ie!
entity9s
procedures for
reporting
changes to the
payroll
department#
 (heck sample
of starts and
lea"ers#
 (ompare dates
on discharge
documentation
to the system
and confirm that
employees !ere
remo"ed from
the :) system
before the ne1t
pay*run and that
no payment
occurred after
the employee
!as no longer in
ser"ice
Presentat"
on an
"sclos!re
assert"ons
 0ayroll
transactio
ns are
properly
classified
in the
financial
statement
s
 (hart of
accounts
 Independent
appro"al and
re"ie! of
accounts
charges to
payroll
 0ayroll budgets
in place and
re"ie!ed by
management
 )e"ie! of
chart of
accounts
 )e"ie!
procedures for
classifying
payroll costs#
 )e"ie!
budgeting
costs
 )e"ie!
budgeting
procedures#
Test of controls and audit procedures of the payroll system.
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References
15 &mile >oolf 4201,5# Audit and Assurance#
25 D00 learning media study notes 4200E5# Auditing and Assurance lobal#
,5 3aplan /inancial 4201,5# Auditing and assurance#
Test of controls and audit procedures of the payroll system.