Chapter 8 - Employee costs

Question 1

What are the 3 stages in a wages and salaries system?

Answer 1

1. Calculation of wages, salaries and taxes
2. Recording of wages and salaries in the accounting system
3. Payment of wages, salaries and taxes

Question 2

Explain what happens in the first stage in a wages and salaries system - Calculation of wages, salaries and taxes (3)

Answer 2

• Starters and leavers are authorised by senior managers or human resources (HR)
• Timesheets or clocking in and out arrangements exist for those paid per hour - ensure right number of hours are paid
• Personnel files are maintained for all employees and regularly reviewed to the payroll information
• Qualified/trained staff calculate payroll, restricted access to the payroll system and reliable software is used - ensure correct calculations e.g. tax

Question 3

What are some key controls for authorising starters and leavers in a wages and salaries system?

Answer 3

Starters and leavers should be authorised by senior managers or HR to prevent unauthorised payroll additions.

Question 4

Why are timesheets or clocking in and out arrangements important for hourly employees?

Answer 4

They ensure accurate tracking of hours worked, reducing the risk of overpayment or payment for unworked hours.

Question 5

How does maintaining personnel files for all employees aid in payroll accuracy?

Answer 5

It provides up-to-date records for payroll processing and ensures consistency between payroll data and employee information.

Question 6

What is the purpose of using reliable payroll software in a wages system?

Answer 6

Reliable software ensures calculations are accurate and helps maintain secure and correct payroll data.

Question 7

Why should payroll be calculated by qualified staff with restricted system access?

Answer 7

Qualified staff reduce the likelihood of errors, and restricted access prevents unauthorised changes to payroll data.

Question 8

Explain what happens in the second stage in a wages and salaries system - Recording of wages and salaries in the accounting system (1)

Answer 8

• Payroll reconciliations performed using a control account

Question 9

How do payroll reconciliations using a control account help in payroll management?

Answer 9

Reconciliations verify that payroll figures match the control account, ensuring that all transactions are recorded accurately.

Question 10

Explain what happens in the third and final stage in a wages and salaries system - Payment of wages, salaries and taxes (3)

Answer 10

• Segregation of duties between those preparing payroll and those distributing payments - For cash payments identification should be provided prior to payment
• For BACs payments there should be a review and authorisation prior to payment by HR e.g. if someone is on maternity the pay should be prorated

Question 11

Why is segregation of duties important in payroll preparation and payment distribution?

Answer 11

It reduces the risk of fraud by ensuring that no one person controls multiple stages of payroll processing.

Question 12

What identification measures should be in place for cash payments?

Answer 12

Identification should be required to verify the recipient, ensuring that payments are made to the correct employees.

Question 13

What control should be applied to BACs payments?

Answer 13

BACs payments should be reviewed and authorised by HR to ensure legitimacy and accuracy before funds are released.

Question 14

Why is it important to identify deficiencies in a payroll system?

Answer 14

Identifying weaknesses allows for corrective actions to reduce errors, fraud risks, and inefficiencies in payroll processing.

Question 15

Give an example of a deficiency related to recording employee time.

Answer 15

If there’s no supervision over manual timesheets, employees may record inaccurate hours, leading to overpayment.

Question 16

The following system of time records exists at Shepherd Limited. Staff members are required to fill in a manual timesheet as they arrive, stating the time of arrival and as they leave, stating the time of departure. Staff members are then paid an hourly rate on the basis of this record.
Which two of the following outcomes could arise from this system?
A Employees may be paid at an inappropriate rate
B Employees may be paid for work they have not done
C Employees are paid for the hours they have worked
D Employee deductions may be inappropriate

Answer 16

B, C

Shepherd has a simple control over how much work is being done by its employees. Therefore, employees should be being paid for the hours they have worked.

However, it is a very simple control, which relies on the integrity of the employees in recording the correct times they arrived and left the premises. There does not appear to be a supervisory control ensuring that employees are writing the correct times. Nor is there any provision for times when the employees are not working, for example, lunch hour or slack periods. Therefore it is possible that despite the presence of this control, employees may be paid for work they have not done.

Question 17

Personnel and wages records at Simonston Brothers Limited are maintained by Sam, the wages clerk, on a personal computer. Sam calculates the hours worked by each employee on a weekly basis, based on that employee’s clock cards and enters them on the computer. The payroll program, using data from personnel records in respect of wage rates and deductions, produces the weekly payroll and a payslip for each employee.

Sam prepares a cheque requisition for the total net pay for the week, which is sent to the company accountant together with a copy of the payroll. The accountant draws up the cheque, made payable to cash, and has it countersigned by a director. The wages clerk takes the cheque to the bank and uses the cash to prepare the wage packets.

Which two of the following are deficiencies which exist in the wages system at Simonston Brothers Limited?
A Sam records the salaries and organises the pay packets
B There is no authorisation of the payroll
C The wages cheque is countersigned by a director
D The payroll and the time recording system are separate

Answer 17

A Sam records the salaries and organises the pay packets
B There is no authorisation of the payroll

Question 18

Which two of the following control activities will reduce the risk of employees who have left being made up a pay packet which is collected by the leaver or an accomplice?
A Check that each employee only collects one pay packet
B Supervision of pay-out by a member of staff
C Authorisation of payroll by the HR Manager
D Comparison of payroll with wage packets to ensure that they match

Answer 18

A Check that each employee only collects one pay packet
C Authorisation of payroll by the HR Manager

Question 19

Is it a strength or deficiency of the payroll system

(1) Employees each have an electronic card to swipe in order to enter and leave the factory premises. This ‘swipe’ system automatically updates time records in the payroll system.
(2) There is no personnel department. Employees are engaged by department heads with the verbal consent of a director.
(3) On leaving, employees are required to return their swipe cards.
(4) The payroll has a variance function which reports items within the payroll falling outside the expected conventions which must be resolved by an authorised member of staff before the payroll can be finalised. The ability to resolve this report is controlled by a secret password.

Answer 19

(1) Strength
(2) Deficiency
(3) Strength
(4) Strength

Question 20

1 List six procedures assurance providers should carry out if wages are paid in cash.

Answer 20

From the following:
* Arrange to attend the pay-out of wages to confirm that the official procedures are being followed.
* Before the wages are paid compare payroll with wage packets to ensure all employees have a wage packet.
* Examine receipts given by employees; check unclaimed wages are recorded in unclaimed wages book.
* Check that no employee receives more than one wage packet.
* Check entries in the unclaimed wages book with the entries on the payroll.
* Check that unclaimed wages are banked regularly.
* Check that unclaimed wages book shows reasons why wages are unclaimed.
* Check pattern of unclaimed wages in unclaimed wages book; variations may indicate failure to record.
* Verify a sample of holiday pay payments with the underlying records and check the calculation of the amounts paid.

Question 21

2 What are the most important authorisation controls over amounts to be paid to employees?

Answer 21

The most important authorisation controls over wages and salaries are controls over:
* engagement and discharge of employees
* changes in pay rates
* overtime
* non-statutory deductions
* advances of pay

Question 22

3 How should assurance providers confirm that wages have been paid at the correct rate to individual employees?

Answer 22

Assurance providers should confirm that wages have been paid at the correct rate by checking calculation of gross pay to:
* authorised rates of pay
* production records
* clock cards, time sheets or other evidence of time worke

Question 23

2 Tulips Ltd has a number of staff on maternity leave claiming statutory maternity pay.
Which three of the following controls would best ensure that the correct payments are made to employees?
A The payroll should be checked back to individual employee personnel records.
B Payroll totals should be compared to adjusted budgets on a monthly basis.
C Total tax deductions should be reconciled with tax returns.
D BACS transfer lists should be authorised by the head of personnel.

Answer 23

A The payroll should be checked back to individual employee personnel records.
B Payroll totals should be compared to adjusted budgets on a monthly basis.
D BACS transfer lists should be authorised by the head of personnel.
The third option is not correct as it does not relate directly to the employees’ payments but to their tax deductions.

Question 24

3 For each of the following statements, select whether they are true or false in respect of internal controls over payroll.

Requiring employees to clock in and out of work helps to ensure that they are paid at the correct rate.
A True
B False
Reviewing wages paid against wages budgeted helps to ensure that employees are being paid the correct amounts.
C True
D False
Changes in pay rates should be authorised by senior management.
E True
F False

Answer 24

B False
Clocking in and out of work ensures correct recording of the hours clocked in and out, but has no bearing on the rate of pay.
C True
E True

Question 25

5 The following describes the processes in the payroll system at Wembley Ltd.
For each process, select whether it represents a strength or a deficiency of the system.
Employees are given individual security codes to punch into the main door keypad. This keypad also monitors the hours worked by employees, a sample of which are checked against data from headcounts during the day.
A Strength
B Deficiency
The payroll is prepared by a payroll clerk from hours worked information on a standard payroll IT package. The payroll is checked to individual records automatically by the system. The payroll is approved by the financial controller.
C Strength
D Deficiency
Wages are paid by bank transfer, which is authorised by the financial controller.
E Strength
F Deficiency

Answer 25

A Strength
All three processes represent strengths. Process 1 involves physical security as a control. Process 2 has elements of performance review and authorisation. Process 3 is also a strength as an authorisation control features.

C Strength
E Strength

Question 26

7 Which two of the following features in the payroll system of Tyne plc could result in the employee costs figure in the financial statements being misstated?
A Rates of pay are negotiated at a local level; there is no central control.
B The payroll clerk can amend standing data on the payroll system without authorisation from a senior member of staff.
C Personnel records are not kept up to date.
D The payroll department receives confirmation of new employees in writing.

Answer 26

7 Correct answer(s):
B The payroll clerk can amend standing data on the payroll system without authorisation from a senior member of staff.
C Personnel records are not kept up to date.
Unauthorised amendments could result in the creation of bogus employees or overpayment of existing employees. Personnel records contain details of pay rates. If these are not kept up to date, standing data in the payroll system may also be invalid. The first and fourth options would not lead to misstatement in the financial statements.

Question 27

9 Spoon Ltd is a company that is expanding rapidly and is regularly taking on new employees. The payroll is processed in-house in the accounts department using a PC. The financial controller is worried that fictitious employees could be included on the payroll by a dishonest employee from the accounts department.
Which one of the following internal controls is most likely to prevent fictitious employees from being added to the payroll?
A Payroll standing data periodically printed out and checked on a line-by-line basis to independently held employee details
B Use of hierarchical passwords over standing data files
C Pre-authorisation of all amendments to payroll standing data by an independent official
D Supervision of the wages payout by an independent official

Answer 27

B Use of hierarchical passwords over standing data files
In order to prevent this from happening, the key is that fictitious employees never make it onto the payroll. The financial controller is concerned that an employee from the accounts department, who has the right to access the payroll system, might be so unscrupulous as to add a fictitious employee and gain access to the wages.
* Payroll standing data periodically printed out and checked on a line-by-line basis to independently held employee details – this will detect fictitious employees added but will not prevent fictitious employees from being added.
* Use of hierarchical passwords over standing data files – this will allow the company to restrict access to standing data files to a responsible official, yet still allow other employees to process the wages. This means that an unscrupulous employee cannot access the part of the system where new employees would be added and hence will prevent the fraud. This is therefore the correct answer.
* Pre-authorisation of all amendments to payroll standing data by an independent official – an unscrupulous employee will not ask for authorisation – they will simply add the fictitious details if the system allows them to do this.
* Supervision of the wages payout by an independent official – again, this might detect dummy employees but would be unlikely to prevent the fraud.

Question 28

10 Which two of the following control procedures will reduce the risk of unauthorised disclosure of payroll data?
A Exception reporting of high amounts of net pay
B Access controls
C Back-up procedures
D Encryption of data
E Independent review of payroll

Answer 28

10 Correct answer(s):
B Access controls
D Encryption of data
Access controls and encryption of data will reduce the risk of unauthorised disclosure. Exception reporting and an independent review of the payroll would help identify unauthorised changes to payroll information. Back-up procedures would help in the protection of company data.

Question 29

What are Statutory deductions? What are some examples?

Answer 29

Statutory deductions are mandatory contributions taken from an employee’s salary during the payroll process. They include tax, National Insurance, pension contributions and student loans, and are used to fund public services

Question 30

12 For each of the following statements about internal controls over payroll, select whether each is true or false.
The payroll master file should contain details of the employee’s cumulative statutory deductions to date.
A True
B False
Reviewing changes to statutory deductions helps to ensure that changes to the calculation of gross pay are processed correctly.
C True
D False
Reviewing wages paid against budgets and timesheets helps to ensure that employees are only paid for the work that they have done.
E True
F False

Answer 30

B False
The payroll master file would not contain details of cumulative statutory deductions to date – these would be included on the monthly payroll instead.
D False
Statutory deductions do not affect gross pay.
E True

Question 31

13 Which two of the following control activities will reduce the risk that the different elements of pay might not be recorded correctly in the payroll?
A One for one checking of payroll details back to independently maintained personnel records
B Segregation of duties throughout the payroll department
C Reconciliation of total pay and deductions between one pay day and the next
D Encryption of data

Answer 31

A One for one checking of payroll details back to independently maintained personnel records
C Reconciliation of total pay and deductions between one pay day and the next

Segregation of duties would not help ensure that the elements of pay are recorded correctly (although it may help eg, to prevent unauthorised payments from being made).
Encryption of data would help to safeguard the payroll data.

Question 32

14 Deficiencies have been identified in the following areas of a company’s wages system. For each deficiency, select the risk which is most likely to arise.
No central records are kept of changes in personnel and pay rates.
A Pay might not be recorded correctly in the general ledger
B The company may pay employees who have left
There are no procedures for dealing with non-routine matters.
C Pay might not be recorded correctly in the general ledger
D The company may pay employees who have left
There is no segregation of duties between the preparation and the authorisation of the payroll.
E Pay might not be recorded correctly in the general ledger
F The company may pay employees who have left

Answer 32

B The company may pay employees who have left
Not keeping adequate records of changes in personnel and pay rates would not in itself affect the entries to the general ledger.
Correct answer(s):
C Pay might not be recorded correctly in the general ledger
Having no procedures for dealing with non-routine matters would not cause employees to be paid too much money in itself, but is more likely to affect the entries to the general ledger.
Correct answer(s):
F The company may pay employees who have left
A lack of segregation of duties would be more likely to result in making the wrong payment than in an error making entries to the ledger.