Payroll System
Intended Learning Outcomes
After the presentation, you should be able to:
• Identify the risk and control objectives for payroll system
• Identify the controls to be implemented for payroll system
• Identify audit procedures for testing controls of payroll system
Prepare Personal Action Forms
• Prepare
• Submit
Prepare Time Records
• Prepare
• Submit
Update WIP Account
• Receive
• Allocate
• Record
• Summarize
Prepare Payroll
• Receive
• Prepare
• Record
• Send
• File
Distribute Paychecks
• Receive
• Distribute
Prepare Accounts Payable
• Receive
• Review
• Prepare
• Record
• Send
Prepare Cash Disbursement
• Receive
• Prepare
• Deposit
• Resend
Update General Ledger
• Receive
• Verify
• Post
• File
Payroll System
Elements of the payroll system
• Calculating gross wages and salaries
• Recording wages and salaries payable in the accounts
• The calculation of tax and other deductions from wages and salaries
• The payment of wages and salaries
Calculating Gross Wages and Salaries
Risks
• Wages and salaries may be paid to individuals who are not employees.
• Employees may be paid for work they have not done.
• Gross wages and salaries could be calculated incorrectly.
• Taxation and other deductions could be calculated incorrectly.
Calculating Gross Wages and Salaries
Control Objectives
Principal Controls
Tests of Control
Wages and salaries • There should be a segregation of • The auditor can check that the segregation of
should not be paid
duties: the individual responsible
duties does exist.
to individuals who
for preparing wages and salaries
are not employees.
should not be the person who
actually pays them.
• The gross pay for each individual • The auditor should check that departmental
employee should be authorized
payroll lists are properly authorized.
by an appropriate person.
• Documentation for authorizing new employees
• There
should
be
formal
and putting them on the payroll file (manual or
authorization of new employees.
computerized) should be checked.
Calculating Gross Wages and Salaries
Control Objectives
Principal Controls
Tests of Control
Salaries should be
calculated
correctly.
• There should be formal personnel • The payroll file should be checked.
records, giving details of each
employee and his or her rate of
pay, and dates of starting and
leaving employment.
Calculating Gross Wages and Salaries
Control Objectives
Principal Controls
Tests of Control
Employees paid
time-based wages
should only be
paid for time they
have worked.
• There should be time sheets for • Time sheets can be checked. These should
hourly-based employees, and
include the signature of the manager or
these should be authorized by an
supervisor confirming the hours worked by the
appropriate supervisor.
individual employee.
• Alternatively, a clock card system • For a clock card system, the auditor will need to
might operate.
test the controls in operation (e.g., ensure that
employees cannot clock in for each other).
Calculating Gross Wages and Salaries
Control Objectives
Principal Controls
Tests of Control
Payments should not
be made except for
work done and
unless properly
authorized.
Payroll calculations
should be accurate.
• A senior manager should check the total • Authorized payroll lists should be checked. These
payroll cost each week or month, to make
should contain the signature or initials of the
sure that the total amount does not
manager who checked the list.
appear excessive.
• In a computerized payroll system, • Test data could be used to check that the exception
exception reports might also be
reporting system is working properly. Exception
produced, for example, reporting gross
reports could be reviewed for evidence of follow up
wages over pre-set parameters and then
(e.g. annotated explanations).
followed up by management.
• Bonus payments to individuals must be • Check a sample of bonus payments to ensure that the
authorized.
payments are properly calculated and authorized.
The Calculation of Tax and Other Deductions
Control Objectives
Principal Controls
Tests of Control
Taxation and other
• Payroll procedures (IT or manual) • The auditor can review any manual procedures
deductions from pay
should provide for the deduction of
for calculating deductions, and the tax rates
should be calculated
all appropriate deductions, using upused. In an IT system, general IT controls will
correctly.
to-date rates of tax.
be important to check that the system was
properly developed, tested and implemented.
Test data could be used and results compared
to independently calculated figures.
The Calculation of Tax and Other Deductions
Control Objectives
Principal Controls
Tests of Control
Voluntary deductions
from pay should only
be made with the
consent of the
employee.
• Senior management should • The auditor can check that a senior manager has
check the total amount of
approved total deductions, evidenced by his or
deductions each week or month.
her signature on the appropriate document.
• All voluntary deductions must be • The payroll file can be checked against the
authorized in writing by the
calculation of deductions in employee wages or
employee, and this written
salaries, to confirm that voluntary deductions are
authorization should be kept in
authorized.
the payroll file.
Recording Wages and Salaries Payable in the Accounts
Control Objectives Principal Controls
Gross pay,
deductions and
net pay should be
properly and
accurately
recorded in the
accounts.
Tests of Control
• The accounts are prepared from payroll • There should be evidence that the payroll has
data that has been approved by a
been formally approved. (In an integrated IT
senior manager.
system, the nominal ledger accounts will be
• Accounting for payroll should be
automatically updated.)
completed within a strict timescale.
• There should be checks on the procedures for
• There should be control accounts for
recording payroll and the time within which
payroll, with regular reconciliations
the work is done.
between control totals and the payroll • There should be documentary evidence of
records of all individual employees.
control account reconciliations and review of
these reconciliations.
Checklist
qIdentify the risk and control objectives for payroll system
qIdentify the controls to be implemented for payroll system
qIdentify audit procedures for testing controls of payroll system