Payroll Cycle Flashcards
What is the primary function of the payroll cycle?
The payroll function involves:
* Recording of time worked by employees
* Processing of weekly/monthly payrolls
* Allocation of payroll expenses
* Payment to employees/deductions
Payroll expenses include medical aid, pension, and tax deductions.
What are the key activities in the payroll cycle?
The key activities include:
* Initiating payroll transactions
* Timekeeping
* Payroll preparation
* Payment preparation and payout
* Deductions payments and recording
Each activity is crucial for ensuring accurate payroll processing.
What should the flow of documentation in payroll preparation include?
The flow should include:
* Clock cards
* Updated list of employees
* Payroll (wage journal)
* Week to week reconciliation
This documentation is essential for tracking payroll accuracy.
What are the potential consequences of payroll errors for employees?
Potential consequences include:
* Incorrect salary deposits
* Financial stress for employees
* Loss of trust in the payroll system
Payroll errors can lead to employee dissatisfaction and turnover.
What is the purpose of conducting independent reviews of payroll?
The purpose is to:
* Ensure accuracy
* Validate payroll calculations
* Prevent errors and fraud
Independent reviews enhance the integrity of the payroll process.
The objective of the Human Resources function
To ensure that all matters relating to the personnel department is property maintained. HR deals with all aspects of human capital of the company, it should be skilled in recruiting, cancelling, negotiating and labour law. The information kept by this department should be accurate because it is used to produce that clock cards and timesheets of employees.
Risk of Human resource function
- unsatisfactory or unnecessary employees recruited or retained
- dismissal without following the correct procedure
- Unnecessary stuff retained due to inefficiencies in HR department.
- Inclusion of fictitious employees or change of rate of pay of an employee
HR funtion: controls - 1
- For hiring and termination: there must be separate departments; ensures segregation of duties
- Formal interview process: conducted to ensure hiring of individuals with necessary qualifications. And perform background checks before hiring.
- The letter of employment must state the** terms of employment** and remuneration
- Hr manager to authourise all new hires and changes to existing employess’ contract
HR function: controls - 2
- Changes must be made on pre-numbered change forms and must be authorised by the HR manger
- There must be a review and segreation of duties
( approve - record - review)
Example of details in employee file
- particulars of engagement & termination of service;
- authorised rates of pay and changes therein;
- authorised holidays and sick leave;
- name and address of the employee;
- identity number;
- income tax reference number.
Time keeping function : risks
- Invalid hours because employees con clock in for absent employees
- clock cards could be made for fictitious employees enabling payment to ghost employees
- Errors in calculating and collating information on clock cards made by the payroll department
Timekeeping funtion: controls
- The foreman should keep a record of personnel present time and worked time. Approve hours worked by EE through signiture. their clockcard is approved by a senior official.
- Overtime should be authorised by foreman according to company policy. Their overtime is authourised be a factory manager.
Timekeeping function: controls
- Clock cards should be numerically accounted for and issued by the HR department and prepared from employee file. stored at clock machine under supervision.
- Entry and exit should be limited to one access point, protected by turnstyle mechanism. it should be supervised during clock- in periods
- clocking machine must be at entry/ exit to ensure all personnel clock in/out. there must be supervision to prevent clocking in for others
Payroll risks
- Errors made due to incorrect calculatins and casting thereof
- They may use incorrect or unauthorised pay rates; hours or deduction tables during recordings = errors
- fictitious employees may be fraudulently included
Payroll conrols
- The hours recorded on the payroll should be the same as the hours on the clock card or computer-transaction file;
- The wage rates, deductions should be the same as the rates etc. on the personnel records or master files;
- The calculations and castings should be reviewed by an independent person (e.g. one wage clerk checks another clerks work/edit checks);
- Before payments can be authorised, the senior personnel should inspect the payroll and the week to week reconciliations performed;
- All personnel should sign payroll as proof of functions performed.
Payment and payout: risks
- Since most payments are cash, there is a risk of errors and theft when it is being paid or when pay packets are being made.
- There is a risk of fraud for electronic payments
- Misappropriation of unclaimed wage packets
Payment and payout: controls -1
- EFT schedule:
- signed by 2 people, one should be senior management
- presented to senior management for authorisation
- senior EE compare to wages bank account
- compare current and prev. payroll and ascertain the supporting document to validify changes.
- sign/ stamp payroll and documentation as cancelled after approval
Payment and payout: controls - 2
- Cash withdrawals should:
* To be done by two or more persons;
* Not at regular times;
* Not travelling on the same route;
* It is preferable to use a security company to do wage payouts.
Payment and payout: controls - 3
the make- up of wage packets
* Be done by two wage department members and physical security over all aspects of cash handling should be extremely tight;
* Preferably be done by independent persons not involved with the preparation of the payroll;
* The wage details should appear on the wage-packet
* The money in the wage-packet should be independently reviewed.
Payment and payout: controls - 4
The payout:
* Should be done by independent personnel not involved with the compilation of wages
* The foreman must identify all employees, however, the payout must not be done by himself;
* The employees should sign payroll as proof of receipt;
* The foreman should sign payroll after payout as proof of supervision and identification of employees.
Payment and payout: controls - unclaimed wages
unclaimed wages:
at the end of the payout:
* the paymaster and the foreman who conducted the payout should agree all unclaimed pay packets to the payroll (i.e unsigned entries).
* Once all employees who have not claimed the pay packets have been identified,
* details of unclaimed wages should be entered in an unclaimed wage register.
* The payroll should be signed as evidence of performing the control procedure;
* Unclaimed wages and payroll should be retained by the paymaster who should lock them away;
* Regular, independent reconciliations of unclaimed wages on hand and the register should be performed;
* The register should be reviewed for unusual occurrences; (Not collecting wages)
* Unclaimed wages remaining uncollected after two weeks should be banked;
* Copy of the deposit slip attached to the register
Deductions: risks
- Non-compliance with laws and regulations;
- Fraud (cash involved).
Deductions: controls
- Appointing risk compliance officers;
- Risk management policies.
Validity: Internal Controls
There should be complete records kept for every employee, in the employee file. These documents should include (among others):
* particulars of engagement & termination of service;
* authorised rates of pay and changes therein;
* authorised holidays and sick leave;
* name and address of the employee;
* identity number;
* income tax reference number.
Validity: Test for control
Select a sample of employee files and:
* Inspect the documentation in the employee’s personnel file, employee contract, identity details, tax form etc. Ensure that documentation is complete, and all documents are present.
* By observation, physically verify a sample of employees in the organisation.
* Enquire of the foreman to vouch for the validity of staff whom you have not physically verified.
Authorisation: internal control
- Changes to details should be made on a pre-numbered change form, and it should be authorised by the HR manager.
- Overtime should:
* Be authorised according to the company policy by the factory manager or foreman.
* The foreman’s overtime is authorised by the factory manager. - In the case of EFT payments, the payment should be approved by at least two senior officials.
Authorisation: Test of control
- Select a sample of employee changes, and inspect that changes are made on a pre-numbered change form.
* Select a sample of employee change forms and inspect for the signature of the HR Manager.
- Select a sample of employee changes, and inspect that changes are made on a pre-numbered change form.
- Enquire from the HR manager about the company policy on overtime.
* Select a sample of overtime payments and inspect that the overtime is awarded according to the company policy.
* Select a sample of overtime payments and inspect for a signature of the factory manager or the foreman.
* Select a sample of the foreman’s overtime, and inspect that the overtime was authorised by the factory manager.
- Enquire from the HR manager about the company policy on overtime.
- Enquire from senior management (the relevant person) about whether all payments are approved by two senior officials.
* Observe EFT Payments being made and observe that two senior officials approve the payments.
- Enquire from senior management (the relevant person) about whether all payments are approved by two senior officials.
Completeness: Internal control
During the wage payout, every employee should collect only his own pay packet and should sign once payment has been collected. Employees should not be allowed to collect payments on behalf of other employees.
* The payroll/wage preparation should be done by two wage department members and physical security over all aspects of cash handling should be extremely tight.
* The wage details should appear on the wage-packet (gross wage, deductions); (PAYSLIPS)
* The money in the wage-packet should be independently reviewed.
*The wage payment and the unclaimed wages will also fall within this category.
Completeness: test for control
- Attend on a surprise basis the wages payout and observe whether each employee collects their own payment and signs for it.
- Observe that the payroll preparation is done by two independent members.
- Select a sample of wage packets and inspect the details on the wage packet (which should include the gross wage and deductions);
- Select a sample of wage packets and inspect for the signature of an independent person as proof of review.
Accuracy : internal control
- The hours recorded on the payroll should be the same as the hours on the clock card or computer-transaction file;
- The wage rates, deductions should be the same as the rates etc. on the personnel records or master files;
- The calculations and castings should be reviewed by an independent person (e.g. one wage clerk checks another clerks work/edit checks);
- Before payments can be authorised, the senior personnel should inspect the payroll and the week to week reconciliations performed;
- All personnel should sign payroll as proof of functions performed.
Accuracy: Test of control
- Select a sample of payroll runs and inspect that the hours correspond with the hours on the clock card.
- Select a sample of payroll runs and inspect that the rates and deductions used correspond to the rates and deductions in the personnel records/masterfiles.
- Select a sample of payroll runs and inspect that there is a signature of a clerk as proof that calculations were reviewed.
- Select a sample of reconciliations and inspect for a signature of senior personnel as proof of review.
Recording: Internal control
- The hours recorded on the payroll should be obtained directly from the clock card machine report or computer-transaction file.
- The wage rates, deductions should be obtained from personnel records or master files.
- All personnel should sign payroll as proof of functions performed.
Recording: Internal control
- Select a sample from the payroll run and select a sample of recorded hours. Match these hours to a clock-card machine report or computer-transaction file. Follow any deviations with management.
- From a payroll run select a sample of employees. For these employees match the wage rates used and other deductions to their respective personnel records. Follow any deviations with management.
- Inspect a sample of payroll runs for evidence of review. Follow any deviations with management.
Cut off: Internal controls
A strict monthly schedule should be developed for:
* Posting the entries to raise the liabilities for the deductions,
* Making the necessary payments on a timeous basis, and
* Supervisory checks on the above activities
Cut off: test of control
- Enquire with senior management about the policy on how and when liabilities are raised and then paid.
- Select a few months and inspect that entries are raised on time.
- For the same sample confirm through inspection that liabilities are settled timeously.
- Follow any deviations with management.
