Bac2664auditing L10 1 Payroll Cycle

AUDITING BAC2664 (New), BAC2287(Old) Topic 9, Lecture 10 Audit of the Payroll and Personnel Cycle 1

Payroll and Personnel Cycle • • • • • •

Cycle form Functions in a cycle and related documents Characteristics and objectives of internal control Audit objectives of payroll and human resources Compliance with the laws Confirmation of basic salary, tax deductions and EPF • Test of controls and real transactions • Test for ‘dummy workmen’ 2

Overview of the Payroll Cycle • Hiring of personnel (terms and conditions, letter of appointment) • Time keeping (punch card used to record attendance) • Prepare payroll register (subsidiary ledger – detailed record of all personnel – rate of pay, allowances, deductions, net pay) • Approve pay cheques (cheques or credit transfer prepared and approved) • Distribute or disburse pay cheques (cash, cheques, credited directly to personnel bank account)

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Payroll Activities, Documents, Records Activity

Document

Record

Rate authorization form Deduction authorization form

Employees earnings record

Authorization: Rate of pay Deduction Preparing payroll register

Punch card

Signing pay cheques

Cheques, credit transfer

Payroll register

Payroll register 4

Payroll Activities, Documents, Records Recording: Journalizing, posting the payroll

General journal Payroll register

Summarizing journal entries Posting summary

General ledger

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Payroll Activities, Documents, Records Custody: Access to documents, records restricted to authorized personnel only

Subsequent accountability: Unclaimed cheques properly controlled

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Human Resource Department Activity: Hiring and processing new recruitments employees Responsibilities: 1 Interviewing, selecting suitable employees, 2 Issuing letter of appointment • Maintaining personnel files in alphabetical order for each employee (file contains: application form, letter of appointment, approved rate of pay, authorized deductions) • Maintain earnings record 7

Various Departments Activity: Monitor hours worked Responsibilities: 5 Maintain record of hours, days, month worked 6 Prepare and approve summary of hours worked (normal hours, overtime) 7 Maintain punch card (serial numbered and controlled for issued and unused) 8 Send approved summary to HRD for further processing 8

Human Resource Department Activity: Compute the payroll Responsibilities: 5 Prepare payroll register from summary of hours worked 6 Compute deductions according to statutory EPF, IRB, SOCSO 9

Cashier Activity: Check the payroll register, make disbursement of payroll Responsibilities: 5 Maintain an imprest system for payroll (reconcile new, current, closed personnel account) 6 Reconcile float for each month to the total net pay shown in payroll register 7 Check and reconcile all employees have presented the cheques for the month

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Accounting Department Activity: Distribute payroll Responsibilities: 5 Pay cheques based on cashier’s payroll 6 Personnel produce identification and acknowledge receipt when collecting pay cheques 7 Make surprise attendance at payout of net pay 8 Unclaimed cheques returned to cashier 9 Comply with Unclaimed Moneys Act 1965 – where pay remain unpaid for 12 months 11

Accounting Department Activity: 2 Journalizing (allocating, classifying) basic pay, allowances, deductions, net pay 3 Summarizing journal entries, posting the summary Responsibilities: 6 Recording basic pay, allowances, deductions, net pay in the GJ according to chart of accounts 7 Record net pay in cash book 8 Posting to GL Possible errors/irregularities: Recording payroll to the wrong account Control procedures: 14 Establish proper chart of account 15 Establish internal verification of extensions and footings

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Internal Control Questionnaire Does the system ensure that only bona fide employees can be paid for work actually done at rates approved by management? Are proper approvals for engagement of new employees required? 3 Are punch cards used, controlled, examined, and approved by dept head? 4 Are time keeping, payroll preparation, distribution, and cheque signing functions separated? 5 Are payroll disbursements made by cheques? 6 Are overtime rates and hours properly approved? 7 Are rates of pay checked to authorized rates? 8 Is employee identification required when pay is distributed? 9 Is there adequate control over unclaimed wages and subsequent payment? Does the system ensure that errors on payroll are promptly detected? • Are payroll calculations checked by a second employee? • Is the payroll independently checked for rate changes, new recruitments, and leavers? • Is there authorization for rates and rate changes in payroll files? • Are employees furnished with details of gross pay and deductions? 13

Internal Control Questionnaire Does the system prevent payrolls being completed and paid without proper approval? 2 Are payrolls independently approved and distribution reviewed? 3 Is cheque preparation segregated from signing and distribution function? 4 Are imprest bank accounts used? 5 Are independent reconciliations of payroll bank accounts prepared? 14

Test of Control The audit of salaries and wages should be sufficiently comprehensive to determine whether: 2 Payment ought to have been made 3 Deductions have been correctly calculated and accounted for 4 Payments and deductions have been correctly recorded in the books. Audit Procedures: 7 Select (10 employees – 10%) in 1-3 month and trace amount in payroll register to bank statements. 8 From the same selection: (a) vouch salary, rates, to authorization of engagements or rate changes signed by authorized person listed in the PF. (b) where overtime and allowances are paid: (i) check calculations, basis of payment (ii) vouch to authorization for payment (c) check for authorization for any payment of bonus 15

Test of Control From the same selection: 2 Check the calculation of EPF, SOCSO deductions 3 Check employees contribution in total From the same selection: 6 Agree in total with the copy stamped by EPF, SOCSO 7 Check tax deducted by reference to authority given by IRB 8 Scrutinize monthly salary and wages totals for the year 9 Obtain explanations for any unusual items 10 Ensure payrolls have been approved by the correct person 11 Cast, cross-cast all columns 12 Check posting of summary total to GL 13 List any missing supporting documentation and authorization 14 Discuss with independent responsible official 15 Prepare brief memorandum discussing the matters

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Substantive Tests Management assertions Objectives of substantive procedures – test of details Existence or occurrence Rights and obligations Completeness Valuation or allocation

Presentation Disclosure

Existence Ownership Completeness Accuracy Classification Cut-off Detail tie-in Realisable value Presentation Disclosure

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References 1 2 3 4 5

Lecture notes Tutorial questions Past examination questions Text – margaret boh, chapter articles

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