Potential misstatements tests of controls payroll
To ensure that all wages are authorised.
Final audit Tests to ensure the accuracy and completeness of balances in respect of wage costs and payroll deductions Control objectives 5, 6 and 7 are normally substantive in nature and conducted as part the final audit.
Test data should be input using valid and invalid transactions to check the operation of these controls. Historically organisations have lost significant sums when large numbers of staff came to expect the routine inclusion of unauthorised overtime in their pay.
A sample of payroll calculations should be checked by senior responsible official and the payroll initialled. If the inspection approach is used, a test of controls is typically conducted for a sample of documents related to transactions that occurred throughout the year.
Substantive audit procedures for payroll
Control objective 5 iv Payment of wages As indicated earlier employees should either be paid in cash or by bank transfer. Relevant controls Supervision of clocking on points and control over blank clock cards or employee ID cards are essential. Agree sundry payables for tax outstanding at the year end to the payroll records and check subsequent payment to cash book. However, some substantive procedures to confirm payroll costs and wage accruals will form part of the final audit. Doing so provides evidence that the system of controls has operated in a reliable manner throughout the reporting period. Can wage costs be incorrectly recorded? Control objective 6 Independent reconciliation of total pay and deductions between one payroll and the next. Comparing employee records on payroll file and HR files Summary Knowledge of the stages in a typical wages system and the link between control objectives, controls and audit tests should help students distinguish between these terms. Examples include: Input employee numbers that do not exist or are in an incorrect format — to ensure these items are rejected and included on an error report. Can unauthorised wages be paid?
Control objectives 1 and 3 HR department should keep blank clock cards or ID cards, which are only issued for new employees with contracts of employment. Control objective 6 Independent reconciliation of total pay and deductions between one payroll and the next.
Payroll audit program
Interim audit work on wages should involve the normal stages of recording, evaluating and testing internal controls. To ensure that errors do not occur in payroll calculations. In this scenario employees are paid based on hours worked. In the case of cash a cheque should be signed, preferably by two senior responsible officials normally directors in small companies. Comparing employee records on payroll file and HR files Summary Knowledge of the stages in a typical wages system and the link between control objectives, controls and audit tests should help students distinguish between these terms. To ensure that all payroll deductions are paid over to appropriate third parties for example, tax authorities Evaluation of the internal control system The evaluation should be performed by considering if controls exist to ensure specified control objectives are met. However, this list is not exhaustive and some of the substantive procedures may be carried out during the final audit. Error reports should be produced which list rejected items— for example, employee numbers entered that do not exist.
If additional errors are found, they will consider whether there is a systematic controls problem that renders the controls ineffective, or if the errors appear to be isolated instances that do not reflect upon the overall effectiveness of the control in question.
Frauds can be difficult to prevent where there is collusion among staff.
Interim audit work on wages should involve the normal stages of recording, evaluating and testing internal controls. Modern equivalents would include employee ID cards which are swiped by an electronic card reader.
based on 91 review