Chapter 8: Employee costs Flashcards
Hire Company Ltd uses a lot of temporary employees.
Which one of the following controls would best ensure that employees are only paid for
work they have performed?
A Temporary staff records should be maintained for each member of temporary staff.
B Temporary staff should complete work schedules, authorised by their supervisor.
C Temporary staff pay should be authorised by the human resources manager.
D Temporary staff should be paid by direct transfers to their bank accounts.
B It is the temporary staff’s work schedules that document the hours worked. As such
they require control to ensure that it is only the hours authorised that are subsequently
paid.
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
A,B,D
Option C is not correct as it does not relate directly to the employees’ payments but to
their tax deductions.
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
B,C,E
With regards to option B, 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.
Stamford plc employs a number of trainee staff, at six monthly intervals. All trainees must
complete a probationary period of six months before progressing to the next level of
traineeship. The accountant providing assurance on the efficiency of the operation of
controls has identified the following deficiencies within Stamford Ltd’s payroll system.
For each deficiency, select the most likely consequence which might arise as a result of that
deficiency.
Employees are not given a personnel file until they have completed their six month
probationary period.
A Employees may be paid the wrong amounts
B The computerised payroll may contain miscalculations
Many employees work overtime but there is no system for authorising the levels of overtime
claimed.
C Employees may be paid the wrong amounts
D The computerised payroll may contain miscalculations
A,C Both cases lead to the possibility that employees are paid the wrong amounts.
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 key pad. This
key pad 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
A,C,E
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.
Workworld Ltd has a computerised payroll system. All employees are paid by BACS directly
into their bank account.
Which two of the following controls will be most effective at ensuring that payment is made
to the correct employee?
A Authorisation of overtime worked
B A sample of calculations performed by the payroll package are manually reperformed
each month
C The BACS list is reviewed by the chief accountant together with supporting payroll
documentation
D The print out from the bank is agreed to the BACS list and any discrepancies
investigated
C,D Options A and B are not correct as authorisation of overtime ensures that the correct
number of hours are paid for and reperformance of payroll calculations ensures the
accuracy of the deductions etc.
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
of 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
B,C 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.
Options A and D would not lead to misstatement in the financial statements
For each of the following statements about internal controls over payroll, select whether
they are true or false.
The payroll should be checked back to individual employee personnel records on a regular
basis.
A True
B False
Leavers and joiners should be authorised by a senior member of staff.
C True
D False
Reperformance of calculations is unnecessary where the payroll system is computerised.
E True
F False
A,C,F
Process 3 is false (option F) as while the risk of errors is reduced in a computerised
payroll system, a sample of calculations should still be checked. This may also bring to
light errors with standing data and input.
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 this from happening?
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
B 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 – he will simply
add the fictitious details if the system allows him 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.
SAMPLE PAPE
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
B,D 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. SAMPLE PAPE
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.
Details of wages are not regularly checked to the personnel file.
A Pay might not be recorded correctly in the general ledger
B The company may pay employees who have left
Regular reconciliations of the payroll to timesheets are not performed.
C Pay might not be recorded correctly in the general ledger
D The various elements of pay might not be calculated correctly
Regular reconciliations of the wages and salaries control account are not performed.
E Payments might be made incorrectly
F The various elements of pay might not be calculated correctly
B,D,E
The deficiency arises when calculating wages and salaries: a failure to check wages to
the personnel file could result in an employee who has left (which would be recorded
on the file) being included on the payroll. The recording of pay in the general ledger
would not be directly affected by this.
The deficiency arises when calculating pay (ie, ensuring that the amounts on the payroll
reflect the amount recorded on the timesheets), so would not directly affect the
general ledger.
The deficiency arises after the calculation of the payroll, so although it might expose
errors in that calculation it is more likely to expose errors in the amount paid/general
ledger.
At Disastora Ltd, potential employees are interviewed by the production manager, who
then forwards successful candidates’ details, the job title and the rate of pay to the
company’s personnel manager for an employment offer to be made.
Which two of the following controls could be most effective at ensuring that wages are paid
accurately?
A Payments should be authorised by a director before being submitted for processing
B Employees should be interviewed by the production manager and a responsible
personnel official
C Hours paid should be reconciled to timesheets
D Reconciliations should be performed between the payroll and the company’s cash
records
B,C The key problem here is a lack of segregation of duties: the production manager may
be tempted to introduce non-existent employees into the system, leading to the
misappropriation of company funds by way of wages payments for non-existent
employees.
Controls to curb this would therefore seek to verify that the employees being paid do
in fact exist and have done work for the company. Authorisation by a director would
not help because the director would not know whether or not the employees were
legitimate. Reconciliation of payroll to cash records would not control the amounts
included on the payroll in the first place.
For each of the following statements about internal controls over payroll, select whether
they are true or false.
Approving the wages and salary summary for payment helps to ensure that there is
adequate segregation of duties.
A True
B False
Agreeing gross earnings and total tax deducted with taxation returns helps to ensure that
employees are being paid the correct amounts.
C True
D False
Reconciling this month’s payroll with the previous month’s payroll, without performing any
other procedures, ensures that starters and leavers are accounted for correctly.
E True
F False
B,D,F
This is an authorisation control, rather than segregation of duties specifically.
This helps ensure that the correct amounts are paid to HMRC, rather than employees.
Performing this reconciliation would flag up changes from the previous month’s
payroll, which would then need to be verified
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
B,D,E
The payroll master file would not contain details of cumulative statutory deductions to
date – these would be included on the monthly payroll instead.
Statutory deductions do not affect gross pay.
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
A,C 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.
