Payroll Cycle

The human resources (HR) function;

The timekeeping function;

The payroll preparation function;

Payment preparation and pay-out function

The deductions: payments and recording function.

Internal Controls

all applicants should conduct the Interviews with the head of the
department in which the applicant is going to work present

Senior official should authorise and approve all appointments and dismissals/resignations on supporting documentation.

All changes in service conditions should be decided upon by the human resource department after consultation with all interested parties and consideration of relevant laws and regulations

The objective of this function is to ensure that all matters relating to the personnel department are properly maintained.

Documentation used:

o Blank clock cards;

o Hours recorded on clock;

o Batch control sheet and batch register.

Documents Used

Updated list of employee details

Payroll amendment forms

Employee’s file;

Authorising body should document and approve all changes

All amendments should be recorded on sequentially pre-numbered payroll amendment forms and supported by further documentation and should also be authorised and signed by senior management

All documents should be maintained in each employee file

This function is necessary to keep an accurate and complete record of valid hours worked for which the company must remunerate employees

Controls to be implemented

Clock cards should

be numerically accounted for (sequence check)

be issued by the personnel department and prepared from personnel records/master file

be stored at clock machine under supervision, not with the employees

Entry and exit points to the work area should

be limited to one access point

protected by a “turn style” type mechanism

be supervised during clocking periods.

Clock procedures

the clocking machine should be situated at the entrance/exit to ensure that personnel may not leave premises without clocking in/out

supervision over the clocking of employees in order prevent employees from clocking in for absentees

The foreman should

keep a record of personnel present and time worked

sign clock cards as evidence of approval of hours worked by the employee.

the foreman’s clock card should be approved by a senior official

Overtime should:

be authorised by the factory manager or foreman according to the company policy

the foreman’s overtime is authorised by the factory manager

The aim of this function is to calculate gross wages, deductions from employees (which must be paid over to the relevant authorities) and net wages.

Documentation used

Clock cards

Updated list of employees

Payroll (wage journal)

Week to week reconciliation.

Controls to be implemented

The hours recorded on the payroll should be obtained directly from the clock card or computer-transaction file

The wage rates, deductions should be obtained from personnel records or master files

An independent person should review the calculations and castings

The senior personnel should inspect the payroll and the week to week reconciliations performed before payments can be authorised

As proof of functions performed, all personnel should sign payroll

Documentation used:

Authorised payroll;

Payroll

Payslips

Pay-packets

Unclaimed wages register

Control Objectives

The objective of the function is to ensure that employees are paid their wages for only the hours which they have worked

Control to be implemented

  • Two signatories, one of whom must be senior management should sign the wage cheque authorise appointments, dismissals and increases
  • The payroll should be compare to the wages cheque by a senior employee
  • The current payroll should be compared with the previous payroll and the validity of all changes to supporting documentation must be ascertained
  • After approval, the payroll and documentation should be signed/stamped as cancelled .
  • Two wage department members should do the make-up of wage packets and an extremely tight physical security should be over all aspects of cash handling
  • The make up of wage packets is preferably done by an independent persons not involved with the preparation of the payroll
  • The details of the wage should appear on the wage-packet and the money in the wage packet should be independently reviewed
  • The wages cheque should be cashed at the bank by two or more persons not at regular times and not travelling on the same route

Documents used

General ledger

Payroll (wage journal)

Cash payments journal

Return form

The objective of this function is to ensure that the amounts owed to the relevant authorities are correct, are paid over within the required period, and are supported by the relevant supporting documentation or return.

Controls to be implemented

Appointing risk compliance officers.

Risk management policies

Validity and Authorisation

Completeness

Accuracy

Recording;

Cut off.

All valid payroll transactions should be recorded and nothing is left out.

All recorded wages should be valid and supported by proper documentation

Payroll transaction should be shown at the correct amounts

All purchase transactions should be correctly recorded.

  • All payroll transactions should be recorded in the correct reporting period.
    Internal controls: A strict monthly schedule for posting the entries to raise the liabilities for the deductions, making the necessary payments on a timeous basis and for supervisory checks on the above activities should be developed
  • The pay-out should be done by personnel not involved with the compilation of wages and it must not e done by the foreman.
  • As proof of receipt, the employees should sign payroll
  • Foreman should sign payroll after pay-out as proof of supervision and
    identification of employees.

  • The paymaster and the foreman who conducted the
    pay-out should agree all unclaimed pay packets to the payroll at the end of the pay-out.
    • The paymaster should retain unclaimed wages and payroll should lock them away in the company premises
    • Independent reconciliations of unclaimed wages on hand and the register should be perfomed regularly and the register should be reviewed for unusual occurrences
    • after two weeks the unclaimed wages remaining uncollected should be banked and
      a copy of the deposit slip should be attached to the register.

Substantive testing

  • Validity/Occurrence
    Direction of testing: from the accounting records to the supporting documents.
  • Completeness
    Direction of testing From source documents to accounting records.

General procedures

Obtain and document understanding of the business

  • Evaluate the effectiveness of internal control & the impact on the nature, timing and extent of substantive procedures.
  • Preliminary analytics
  • Obtain payroll as at year end
  • Obtain management representation letter (mention the assertions required in the question)
  • Audit the deductions general ledger account