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Payroll Cycle, One of the major expenses of an organisation
High risk…
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Human Resources FunctionObjective: to ensure that all matters relating to the personnel department are properly maintained
- HR should be skilled in recruiting, counselling, negotiating and labour law
- Responsible for keeping all employee records and updated
- Focus on hiring an firing
- Ensuring correct pay rates and changes implemented promptly
Accounts affected
- SCI - gross salaries; wages; commissions; bonuses; manufacturing wages; directors' emoluments; employer contributions
- SFP - employees for remuneration accrued; accounts payable (payroll deductions - medical aid, taxes, pension funds); accounts payable (employer contributions); various bank accounts
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Controls
Interviews; authorisation of hired and fired; changes and amendments; maintaining employee files
Timekeeping Function
Objective: this function is necessary to keep an accurate and complete record of valid hours worked for which the company must remunerate employees
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Controls
Control over the clock cards
Control over entry and exit points
Formal clocking procedure
Duties of foreman
Procedure for overtime working
Payroll Preparation Function
Objective: to calculate gross wages, deductions from employees (which must be paid over to the relevant authorities) and net wages.
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Controls
Recording of hours worked
Wage rates and deductions
Calculations, reviews, authorisation and signatures of personnel regarding the payroll
Payment Preparation & Payout Function
Objective: to ensure that employees are paid their wages for only the hours which they have worked.
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Controls
Checking payroll for correctness and wage cheques
Pay-packets procedure
Pay-out procedure and duties of foreman
Unclaimed wages procedure
Deductions: payments and recording Function
Objective: It is the responsibility of the company to hold back certain portions of the wages earned, due to statutory requirements, such as Employee Tax.
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Internal Controls, Control Objectives and test of 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 & document for extraordinary/unusual items
- Test castings & calculations on all selected items, docs & ledger accounts
Validity & Authorisation
All recorded wages are valid & supported by proper documentation
- Control of staff, total wages, deductions, payroll and employee records
Completeness
All valid payroll transactions are recorded and nothing is left out
- Control during the payout process
- Segregation of duties
- EFT payments
Accuracy
Payroll transactions are shown at the correct amounts
- HR mngr to verify and authorised payroll
- Imprest bank account
Recording
All payroll transactions are correctly recorded
- Obtain correct hours
- Obtain correct wage rates and deductions
- Review calculations and castings
- Week-to-week recons
- Signatures on payroll
Cut-off
All payroll transactions are recorded in the correct reporting period
- Strict monthly schedules
- Raising liabilities
- Timeous payments
- Supervision
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General Procedures
Auditor will always perform these on payroll balances
- Obtain and document understanding of the business
- Evaluate the effectiveness of internal control
- Preliminary analytics: cy vs py
- Obtain payroll as at year end
- Audit deductions GL account
- Obtain management representation letter
Validity/Occurrence
Direction of testing - from the accounting records to the supporting docs
A) test the casting in the GL accounts
B) prepare w.r.t. each period (wk/month) selected
C) test the accuracy of the payroll by verifying w.r.t. all employees (or if many, selected ones)
Completeness
Direction of testing - from source documents to accounting records
A) select clock cards and follow to GL accounts
B) perform analytical procedures on wages between periods/department etc. and follow up extraordinary/unexplained variances
C) investigate on a surprise basis the unclaimed wages
D) General: review clock cards, payrolls for extraordinary/abnormal items & investigate