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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
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.
(c) Wages and salaries payments should be in accordance with records of work performed, e.g. time,
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
i)
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.
v)
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
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Fundamentals of Auditing ­ACC 311
VU
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.
(c)  Observe wages distribution for adherence to procedures ensuring employees sign for
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.
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT