What is the major control risk for the payroll payment process?
Relevant to candidates attempting Foundations in Audit and Show
This article focuses on the audit of wages but many of the points made also apply to salaries (the term payroll covers both). The distinction between the two is that wages are normally paid weekly in cash to employees working in departments such as production. Salaries, on the other hand, are paid monthly to employees normally working in administrative departments, via electronic transfers to their bank accounts. Changes in technology and less reliance on cash have blurred this traditional distinction and many hourly paid employees are now paid via bank transfer. However, in some small companies or in parts of the world where few people have bank accounts, employees are still paid in cash based on hours in attendance or work completed. The auditor is required to plan and perform their work in order to form an opinion on the financial statements and in doing so to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. As such this article will consider some of the key considerations that the auditor should make when planning and performing work on payroll, including the nature, timing and extent of procedures that should be carried out. The article will also consider the potential for fraud within the payroll function and some of the fraud risk factors that the auditor should be alert to when planning and performing their work. Audit work on wages – timingMuch of the audit work on the wages system may be performed during the interim audit, through detailed controls testing, as due to the nature and volume of payroll transactions the auditor is likely to wish to place some reliance on the company’s control system. However, some substantive procedures to confirm payroll costs and wage accruals will form part of the final audit. Interim audit work on wages should involve the normal stages of recording, evaluating and testing internal controls. Wages control objectivesIn order to evaluate the control system the auditor will firstly consider the objectives which the control activities should be designed to achieve. Typical control objectives for wages include the following:
Evaluation of the internal control systemThe evaluation should be performed by considering if controls exist to ensure specified control objectives are met. Auditors often complete questionnaires to assist in system evaluation. Internal Control Questionnaires (ICQs) ask specific questions about controls relevant to each control objective. The alternative is an Internal Control Evaluation Questionnaire (ICEQs), sometimes referred to as key or control questions which focus on risks rather than objectives. They cover the same areas as control objectives and typical examples include:
If the evaluation indicates that controls exist a test of controls will be performed but if controls are weak or absent then a substantive procedure will be appropriate, to determine if material misstatement has occurred. Stages in a wages systemFive stages are shown below and typical controls identified are linked to relevant control objectives. (i) Setting up master file data Relevant controls
(ii) Recording wages due Relevant controls
(iii) Calculation of wages Relevant controls
(iv) Payment of wages Relevant controls
(v) Accounting for wage costs and deductions Relevant controls
The above comparisons and reconciliations should be performed by senior responsible officials who are independent of the payroll department – for example, management or financial accounting staff. Assessing the risk of material misstatement due to fraudThe risk of fraud should be considered by the auditor when planning the work which is to be performed on payroll. Even companies that appear to have good internal controls can suffer from instances of fraud. The most common payroll frauds include:
The common feature that often facilitates these frauds is inadequate segregation of duties. Frauds can be difficult to prevent where there is collusion among staff. Historically organisations have lost significant sums when large numbers of staff came to expect the routine inclusion of unauthorised overtime in their pay. While it is not the responsibility of the auditor to prevent or detect fraud, the auditor must identify and assess the risk of misstatement due to fraud and respond appropriately in order to obtain sufficient appropriate evidence regarding these risks. Typical tests of control and substantive proceduresInterim
audit
Final auditTests 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. A substantive audit programme should include:
Computer assisted audit techniques Test data consists of data submitted by the auditor to test the operation of application controls such as data-validation (edit) checks. Test data should be input using valid and invalid transactions to check the operation of these controls. Examples include:
Audit software is normally used by the auditor for substantive testing and can interrogate a client’s computer files, re-perform calculations or extract items for further investigation. Examples include:
SummaryKnowledge 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. It is also important that, for a given wages system, candidates can identify significant deficiencies in internal control, explain the implications of the deficiencies and recommend appropriate controls. Written by a member of the FAU examining team What are the risks associated with payroll?7 Major Payroll Risks and Ways to Manage Them. Underpayments. ... . Recordkeeping and payslips. ... . Tax and entitlements. ... . Employee classification. ... . Fraud. ... . Poor security and backups. ... . Reliance on a single employee.. What is the main problem in the payroll process?Among the most common payroll issues noted in the same survey was "organizational inconsistency" in the payroll process, incorrect tax withholding, and over-and-under payments to employees. Along with these there is often employee misclassification issues and overtime miscalculations, as well.
What are the controls for payroll?Here is a payroll controls checklist for the payroll internal controls that your small business can do.. Limit access to payroll records. ... . Inspect payroll records. ... . Create a separate bank account. ... . Have time cards approved twice. ... . Get your records audited. ... . Use security measures. ... . Familiarize yourself with trends.. How do you audit payroll controls?How you can perform a payroll audit for your business. Scan your employee list, pay rates, and hours worked. ... . Confirm pay rates and hours worked. ... . Verify variable payments. ... . Scrutinize off-cycle payroll. ... . Do a payroll reconciliation. ... . Reconcile internal payroll records with tax forms. ... . Search for outstanding tax liabilities.. |