TESTING THE PAYROLL SYSTEM

<< TESTING THE PURCHASES SYSTEM

TESTING THE CASH SYSTEM >>

Fundamentals of Auditing ACC 311

Lesson 27

TESTING THE PAYROLL SYSTEM

Control Objectives

The control objectives in respect of a wages and salaries system are as follows:

(a) Payment of wages and salaries should be made only in respect of the client's authorized employees.

(b) Payment should be made at authorized rates of pay.

output, commissions on sales.

(d) Payroll and payroll deductions (tax and social security) should be calculated accurately.

(e) Payment should be made to the correct employees.

(f) Liabilities to the tax authorities for tax and social security should be properly recorded.

CONTROL PROCEDURES - WAGES AND SALARIES

(a) Approval and control of documents

There should be written authorization to employ or dismiss any employee.

ii)

Changes in rates of pay should be authorized in writing by an official outside the wages

department.

iii)

Overtime worked should be authorized in advance by a manager/supervisor,

iv)

An independent official should review the payroll and sign it.

The wages cheque should be signed by two signatories and agreed with the signed payroll.

vi)

Where weekly pay relates to hours at work, clock cards should be used. There should be

supervision of the cards and the timing devices, particularly when employees are clocking-on or

off.

vii)

Where a piece work system operates, payment should only be made for work of an appropriate

quality which has been inspected and approved.

viii)

Personnel records should be kept independently of the payroll department for each employee

giving details of engagement, retirement, dismissal or resignation, rates of pay, holidays etc, with

a specimen signature of the employee.

ix)

A wages supervisor should be appointed who could perform some of the authorization duties

listed above.

(b) Arithmetical accuracy

(i)

Where appropriate, payroll should be prepared from clock cards, job cards etc, and a sample

checked for accuracy against current 'rates of pay.

(ii)

Payroll details should be checked for '.he accurate calculation of deductions e.g. tax, social

security, pensions, trade union subscriptions etc

(c) Control accounts

(i)

Control accounts should be maintained in respect of each of the deductions showing amounts

paid periodically to the inland Revenue, trade unions etc.

(ii)

Overall analytical checks should be carried out to highlight major discrepancies e.g. check

against budgets, changes in amounts paid over a period of time, check against personnel

records.

(iii)

Management should exercise overall review and control.

(d) Access to assets and records

Ideally, payment should be made by cheque or by direct transfer into the employees' bank account. If payment

is made in cash, the following procedures should be in place:

(i)

Employees should sign for their wages.

(ii)

No employee should be allowed to take the wages of another employee.

(iii)

When wages are claimed late, the employee should sign for the wage packet and the release of

the packet should be authorized.

(iv)

The system should preferably allow the wages to be checked by the employee before the

packet is opened, by using specially designed wage packets.

(v)

The wages department should preferably be a separate department with their

personnel not

involved with receipts or payments functions.

(vi)

The duties of the wages staff should preferably be rotated during the year, and ensure that no

Fundamentals of Auditing ACC 311

employee is responsible for all the functions in respect of any particular department.

(vii)

The employee making up the pay packets should not be the employee who prepares the

payroll.

(viii)

A surprise attendance at the pay-out should be made periodically by an independent official.

(ix)

Unclaimed wages should be recorded in a register and held by someone outside the wages

department until claimed or until a predefined period after which the money should be re-

banked. An official should investigate the reason for unclaimed wages as soon as possible.

Tests of Controls - Wages and Salaries

A suggested program of tests of control is set out below. This can, of course, be modified to suit the particular

circumstances of the client.

(a) Test sample of time sheets, clock cards or other records, for approval by responsible

official. Pay particular attention to the approval of overtime where relevant.

(b) Test authority for payment of casual labor, particularly if in cash.

wages, that unclaimed wages are re-banked etc.

(d) Test authorization for payroll amendments by reference to personnel records.

(e) Test control over payroll amendments.

(f) Examine evidence of checking of payroll calculations (e.g. a signature of the financial

controller).

(g) Examine evidence of approval of payrolls by a responsible official.

(h) Examine evidence of independent checks of payrolls (e.g. by internal audit).

(i) Inspect payroll reconciliations.

(j) Examine explanations for payroll expense variances.

(k) Test authorities for payroll deductions.

(l) Test controls over unclaimed wages.

Table of Contents: