UNIT 5: Payroll Function
The Payroll business cycle consists of five distinct functions and these functions can be divided:
The human resources (HR) function;
The timekeeping function;
The payroll preparation function;
The payment preparation and pay-out function;
The deductions: payments and recording function.
The accounts affected by this cycle include the following:
1) Within the Statement of Comprehensive Income
2) Within the Statement of Financial Position
Gross salaries;
Wages;
Commissions;
Bonuses;
Manufacturing wages;
Directors’ emoluments;
Employer contributions.
o Employees for remuneration accrued;
o Accounts payable (Payroll deductions, e.g.: Medical aid, Taxes and Pension Funds)
o Accounts payable (Employer contributions);
o Various bank accounts
TYPICAL JOURNAL ENTRIES
Tax (Employee Tax) and other contributions by the employer on behalf of the employee are also recorded at each month end
When payment is made to the payable, the liability is then reversed as follows:
DR salaries and wages
CR bank/ payables
DR employee tax/ medical aid/ pension fund
CR taxes to revenue service/ Discovery Health
DR Taxes to revenue service/ Discovery health
CR bank
1. HR Function:
Documentation used:
The controls that should be implemented within this function to mitigate risks to an acceptable level should include:
Employee’s file;
Payroll amendment forms;
Updated list of employee details.
All appointments and dismissals/resignations should be authorised and approved by a senior official on supporting documentation.
Interviews should be conducted with all applicants & the head of the department in which the applicant is going to work should be present.
Changes to pay rates, promotions to higher employment grades and any other 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
All changes should be documented and approved by the authorising body (e.g. wage committee)
All these amendments should be recorded on sequentially pre-numbered payroll amendment forms and supported by further documentation. These documents should also be authorised and signed by senior management.
All of the above documents should be maintained in each employee file. This will include documents such as application form, personal details of each employee, letter of appointment, authorisation in respect of deductions, employment contracts and payroll amendment forms.
DESCRIPTION:The objective of this function is to ensure that all matters relating to the personnel department are properly maintained. This department deals with all aspects of the human capital of the company and therefore, should be skilled in recruiting, counselling, negotiating and labour law. They will be responsible for keeping all employee records (i.e. employee permanent file), focus on the hiring and dismissal of staff, and ensuring that pay rates and changes thereto are implemented promptly. It is important that accurate and complete records for all valid employees are maintained by this department as this facilitates the provision of information necessary to produce valid clock cards or timesheets for record keeping purposes.
2. Timekeeping Function:
Documentation used:
The controls that should be implemented within this function to reduce risks to an acceptable level should include:
DESCRIPTION: This function is necessary to keep an accurate and complete record of valid hours worked for which the company must remunerate employees, i.e. the company needs to ensure that all employees are paid for only the hours that they worked. This relates mainly to wage earners, as salary earners usually get paid at the end of the month, and it is usually a fixed amount. Wage earners, on the other hand, get paid weekly and their remuneration will vary depending on the hours that they have worked during that specific week. Keeping a record of wage earners’ hours can be achieved by requiring the employee to pass a clock card or swipe through a time clocking device which will automatically record the time of either entry or exit. On a weekly basis, daily hours clocked will be calculated and totalled before being sent to the next function – the payroll preparation function.
Blank clock cards;
Hours recorded on clock;
Batch control sheet and batch register.
3. Clock procedures:
4. The foreman should:
2. Entry and exit points to the work area should:
5. Overtime should:
1. Clock cards should:
be numerically accounted for (sequence check);
o be issued by the personnel department and prepared from personnel records/master file
o be stored at clock machine, under supervision, not with the employees).
o be limited to one access point;
o protected by a “turn style” type mechanism;
o be supervised during clocking periods.
o the clocking machine should be situated at the entrance/exit to ensure that personnel may not leave premises without clocking in/out
o supervision over the clocking of employees (prevent employees from clocking in for absentees)
o keep a record of personnel present and time worked;
o sign clock cards as evidence of approval of hours worked by the employee.
o the foreman’s clock card should be approved by a senior official (eg. factory manager)
o be authorised according to the company policy by the factory manager or foreman
o the foreman’s overtime is authorised by the factory manager
3. Payroll preparation Function:
Documentation used:
The controls that should be implemented within this function to reduce risks to an acceptable level should include:
DESCRIPTION: 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, at the end of each week the details on the clock cards need to be calculated and collated so that the payroll can be drawn up. This involves calculation of all the hours worked, and must be split between overtime and normal hours as the rates per hour for these two categories are different. Total hours worked by an employee, multiplied by the corresponding rate per hour as per the employee’s permanent file, would equal to the amount that the employee is to be paid for the week. It is very important to remember that in this function appropriate deductions (e.g. Employee Tax) must be extracted from authorised, up to date tables or, in the case of other deductions, (e.g. Pension Fund) must be deducted in terms of the authorisation form completed by the employee. This information is then recorded on the payroll, also referred to as the wages journal.
o Clock cards;
o Updated list of employees;
o Payroll (wage journal);
o Week to week reconciliation.
The calculations and castings should be reviewed by an independent person
Before payments can be authorised, the senior personnel should inspect the payroll and the week to week reconciliations performed;
The wage rates, deductions should be obtained from personnel records or master files;
All personnel should sign payroll as proof of functions performed
The hours recorded on the payroll should be obtained directly from the clock card or computer-transaction file;
4.Payment preparation and payout:
Documentation used
o Authorised payroll;
o Payroll;
o Payslips;
o Pay-packets;
o Unclaimed wages register.
DESCRIPTION:The objective of the function is to ensure that employees are paid their wages for only the hours which they have worked. As wages are paid out weekly, it is done mostly on a cash basis. The employee must sign a wage collection register after the collection of his/her wages. Employees will also receive a pay slip, indicating how much they have earned, and the amount of money that should be included in their pay packets. The pay packets should be distributed at the respective pay points of the employees. The employees should count their cash immediately upon collection and compare it to the pay slips. Any discrepancies should be queried immediately. Where an employee is absent during the pay out of wages, the wages remaining are known as “unclaimed wages”. Unclaimed wages must also be recorded and stored in the company safe until it is collected by the employee.
The controls that should be implemented within this function to reduce risks to an acceptable level should include:
3. The make-up of wage packets should:
4. The pay-out:
2. The wages cheque should be cashed at the bank:
5. Unclaimed wages:
1. The wage cheque should be signed by two signatories, one of whom must be senior management:
o by two or more persons;
o not at regular times;
o not travelling on the same route.
o It is preferable to make use of a security company to do wage pay-outs.
o be done by two wage department members and physical security over all aspects of cash handling should be extremely tight
o preferably be done by independent persons not involved with the preparation of the payroll
o the wage details should appear on the wage-packet (gross wage, deductions);
o the money in the wage-packet should be independently reviewed.
o should be done by personnel not involved with the compilation of wages;
o The foreman must identify all employees, however, the pay-out must not be done by himself
o the employees should sign payroll as proof of receipt;
o the foreman should sign payroll after pay-out as proof of supervision and identification of employees
o unclaimed wages and payroll should be retained by the paymaster who should lock them away
o regular, independent reconciliations of unclaimed wages on hand and the register should be preformed and the register should be revealed for unusual occurrences
o unclaimed wages remaining uncollected after two weeks should be banked and a copy of the deposit slip attached to the register
5. Deduction: Payment and recordings:
Documentation used:
The controls that should be implemented within this function to reduce risks to an acceptable level should include:
DESCRIPTION:It is the responsibility of the company to hold back certain portions of the wages earned, due to statutory requirements, such as Employee Tax. The portion held by the company does not belong to the company and the company has a responsibility not only to pay the correct amount over the relevant authorities, but also to do so within the correct period. The objective of this function is to ensure that these amounts owed to the relevant authorities are correct, paid over within the required period, and are supported by the relevant supporting documentation or return.
o General ledger;
o Payroll (wage journal);
o Cash payments journal;
o Return form.
Appointing risk compliance officers
Risk management policies.
Internal Controls, control objectives and test of control in the cycle
General controls
• Supervision and review by management;
• Segregation of duties;
• Rotation of duties;
• Personnel take leave regularly;
• Internal audit function;
• Sufficient stationery control;
• Scrutinise all records and documents for extraordinary/unusual items;
• Test castings and calculations on all selected items, documents and ledger accounts
Controls
Accuracy:
Payroll transaction are shown at the correct amounts.
Recording:
All purchase transactions are correctly recorded.
Completeness:
All valid payroll transactions are recorded and nothing is left out
Cut off:
All payroll transactions are recorded in the correct reporting period
Validity and Authorisation:
All recorded wages are valid and supported by proper documentation.