Payroll & Personnel Cycle

Basic functions of payroll & personnel cycle

Salaries & wages payment integral part of business

Cycle results in outflow of funds = major expense

Susceptibility to fraud = rewards for perpetrating fraud in cycle can be considerable

Personnel: human resources

Timekeeping

Payroll preparation

Number of wage earners

Nature of business

Requirements of workforce

Deductions: payment & recording

Documents in cycle

Employment contract/employee file

Payroll amendment form

List of employees

Clock card

Batch control sheets & batch register

Deduction tables & returns

Payroll (wage journal)

Pay-packets/payslips/ salary advices

Unclaimed wage register

Wage (or salary reconciliation)

Records reconciliation of current period's wages to previous period's wages

Cash due to employee placed in pay-packet. Salary slip/advice informs employee how remuneration is comprised

Spreadsheet that lists employees' names, work section or cost centre, overtime hours and normal hours worked, gross pay, deductions, and net pay

Records hours a wage earner worked

List of valid employees & details, necessary for computing wages & salaries, provided by personnel

Schedules or returns provided by firms to that deductions from employees can be paid over (eg PAYE, medical aid)

Documents identify batches of clock cards & control movement between timekeeping and payroll functions in cycle

Used to detail & authorise changes made in employee register that impact workforce

Formalises terms and conditions of employment. Copy kept by personnel department in employee's personnel file

Deals with all aspects of human assets of a firm

Keeps records of all employees, executes hiring and dismissing of staff & ensures that pay rates & changes are correclty done

Ensures that accurate record of hours worked for which employees remunerated are kept

Amount that wage earner will receive is calculated

Payment prep & pay-out

Transfer amount owed to employees per payroll

Deductions from an employee's gross pay (PAYE) are paid over to respective bodies such as SARS within permitted periods

Personnel (HR)

Control activities: (i) all requests for appointment or dismissal of employees must originate from section making request, (ii) request must be signed by section head & countersigned by section manager after reference to budget, (iii) changes to pay rates, promotions to higher roles and other changes must be decided upon by personnel dept

Risks: recruiting/retaining unsatisfactory employees

Timekeeping

Payroll preparation

Control activities: wage clerk prepare the payroll & recon; supervisor or second clerk must verify computations and sign payroll

Risks: inclusion of fictitious employees

Payment prep & payout

Control activities: wage packets made up by 2 wage dept members; on delivery of wage packets, section head should agree number of pay packets to payroll; pay packets locked away until payout; wage payout conducted by 2 employees; employees must provide identification, sign in acknowledgment of receipt of pay packets; not allowed to collect for other employees

Deductions: payment & recording

Control activities: isolation of responsibilities to one employee for raising and paying over deductions; strict monthly schedule for posting entries to raise liabilities for deductions; payroll and return forms must be presented to signatories for scrutiny before deductions are approved

Risks: penalties for non-payment/criminal charges

Risks: errors of theft of cash during drawing of cash / misappropriation of unclaimed wages

Auditing cycle

Risk of material misstatement in salaries & wages not normally deemed high even if they make up a large portion of a company's expense

ISA 315 (revised): auditor required to identify & assess risk of material misstatement in AFS

Illegal employment practices

Inclusion of fictitious employees

Disclosure of directors & prescribed officer's remuneration: s30 Companies Act

Employment benefits

Financial statement assertions

Occurence

Completeness

Accuracy, cut-off & classification

Totals (account balances) recorded for salaries/wages include amounts paid to genuine employees for genuine hours worked

Amounts paid for salaries/wages have been recorded appropriately, payments have been recorded in the correct accounting period & amounts have been recorded in the proper accounts

All salaries/wages paid or payable for the period have been included in the account balance

Presentation: Auditor must be concerned with these assertions: (a) completeness; (b) classification & understandability; (c) accuracy & valuation

Substantive procedures

Substantive procedures: payroll & personnel cycle

Procedures to confirm that no 'ghost' employees

Analytical procedures

Nature, timing & extent of further audit procedures to be conducted depends on risk assessment carried out

Control activities: entry/exit points to work area limited / protected by turnstiles & supervised during clocking periods

Risks: invalid hours recorded by clocking a card for fictitious employee/employees clocking for absent employees

Include: comparisons of salaries (month to month by division/dept/section); wages (period-to-period costs); ratio and trend analysis; investigation of fluctuations & follow up on explanations provided by client; review recons

Sample of employees selected from payroll and: (a) inspect documentation in employee's personnel file; (b) perform positive (physical) identification of employees; (c) enquire from senior personnel to confirm in writing that specified individuals are employed in sections/divisions; (d) inspect returns to outside bodies such as SARS

Detailed testing of payroll

Presentation & disclosure

Notes in AFS

General procedures/testing to be performed

Obtain & document understanding of the business

Evaluate effectiveness of internal control & impact on the nature, timing and extent of substantive procedures

Preliminary analytics

Obtain payroll as at year end

Audit deductions GL account

Obtain management representation letter (mention the assertions required in the question)

Controls

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