Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Auditing > Payroll Cycle > Flashcards

Payroll Cycle Flashcards

1
Q

Name the five functions of payroll cycle.

A
  1. The human resource function
  2. The timekeeping function
  3. The payroll preparation function
  4. The payment preparation and payout function
  5. The deductions: payments and recording function
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What accounts in the statement of comprehensive income are typically affected by the payroll cycle?

A
  1. Gross salaries
  2. Wages
  3. Commissions
  4. Bonuses
  5. Manufacturing wages
  6. Director’s emoluments
  7. Employer contributions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What accounts in the statement of financial position are usually affected by the payroll cycle?

A
  1. Employees for remuneration accrued
  2. Accounts payable (payroll deductions)
  3. Accounts payable (employer contribution)
  4. Various bank accounts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the human resource function?

A
  1. To ensure that all matters relating to the personnel department is properly maintained.
  2. It deals with all aspects of human assets of the company and therefore should be skilled in recruiting, counseling, negotiating and labour law.
  3. They are responsible for employee records, focus on hiring and dismissal of staff and ensuring that pay rates and changes thereto are implemented promptly
  4. Important that accurate and complete records for all valid employees are maintained.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What documents are used in the HR function?

A
  1. Employee’s file
  2. Payroll amendment form
  3. Updated list of employee details
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are some risk associated in the HR function?

A
  1. Unsatisfactory or unnecessary employees may be recruited or retained
  2. Dismissals of employees that may not have been followed with correct procedures
  3. There may be staff that are not necessarily needed but are kept because of the HR department not identifying this
  4. Employee details could be fraudulently amended to include non-existent employees, or to change the rate of pay applicable to an employee
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What controls should be implemented within the HR function?

A
  1. Interviews should be conducted with all applicants; the head of department in which the applicant is going to work should also be present
  2. All appointments and dismissals/resignations should be authorized and approved by a senior official on supportive documentation
  3. Changes to pay rate, promotions to higher employment grades and any other changes in service conditions should be decided upon by the HR department after consultation with all interested parties and consider the relevant laws and regulations
  4. All changes should be documented and authorized by the authoring body
  5. All amendments should be recorded on sequentially numbered payroll amendment forms and supported by further documentation. These should also be authorized and signed by senior management
  6. All documents above should be maintained in each employee file.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the timekeeping function?

A
  1. Necessary to keep an accurate and complete record of valid hours worked for which the company must remunerate employees.
  2. Keeping a record of a wage earner’s hours can be achieved by requiring the employee to pass a clock card or swipe through a time clocking device which will automatically record the time of either entry or exit
  3. On weekly basis, daily hours clocked will be calculated and totaled before being sent to the next function.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What documents are used in the timekeeping function?

A
  1. Blank clock cards
  2. Hours recorded on clock
  3. Batch control sheet and batch register
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are some of the risks within the timekeeping function?

A
  1. Fellow employees can clock for an absent employee, therefore resulting in recording of invalid hours
  2. Clock cards could be made out and clocked for ghost employees, thereby facilitating the payment of wages to ghost employees
  3. Error should be made by payroll department, in calculating and collecting information on the clock card for recording
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

List the controls that should be implemented within the timekeeping function to reduce risks to acceptable level.

A
  1. Clock cards should:
    - be numerically accounted for
    - be issued by the personnel department and prepared from personnel records/master file
    - be kept at clock machine, under supervision, not with the employees
  2. Entry and exit points to work area should:
    - be limited to one
    - protected by a turn-style type mechanism
    - supervised during clocking periods
  3. Clock procedures:
    - clocking machine should be situated at the entrance to ensure that personnel may not leave premises without clocking in and out
    - supervision over clock
  4. The foreman should:
    - keep a record of personnel present and time worked
    - sign clock card as evidence of approval of hours worked by the employee
    - foreman’s clock card should be approved by a senior official
  5. Overtime should:
    - be authorized according to the company policy by the factory manager or foreman
    - foreman’s overtime I’d authorized by the factory manager
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does payroll preparation involve?

A
  1. To calculate gross wages, deductions from employees which must be paid over to the relevant authorities and net wages
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What documentation are used in the payroll preparation function?

A
  1. Clock cards
  2. Updated list of employees
  3. Payroll (wage journal)
  4. Week to week reconciliation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are some of the risks within the payroll preparation function?

A
  1. Errors may be made due to incorrect calculations and casting
  2. The company may use incorrect or unauthorized pay rates, hours or deduction tables during recording
  3. Fictitious employees may be included fraudulently
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What controls should be implemented within the payroll preparation function to reduce risks to an acceptable level?

A
  1. The hours recorded on the payroll should be obtained directly from the clock card or computer transaction file
  2. The wage rates, deductions should be obtained from personnel records or master file
  3. The calculations and castings should be reviewed by an independent person
  4. Before payments can be authorized, the senior personnel should inspect the payroll and the week to week reconciliations performed
  5. All personnel should sign payroll as proof of functions performed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the payment preparation and payout function?

A

The objective is to ensure that employees are paid out the amount of wages for which they have worked. As it is done mostly by cash, all employees must sign after the collection thereof.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What documentations are used in the payment preparation and payout function?

A
  1. Authorized payroll
  2. Payroll signed by employees
  3. Payslips
  4. Pay packets
  5. Unclaimed wages register
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are some of risks within the payment preparation and payout function?

A
  1. Since the payment function is done by working mostly with cash, there is a risk that errors could occur as well as theft, when cash is actually being made up.
  2. Risk that there could be misappropriation of the unclaimed wage packets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What controls should be implemented within the payment preparation and payout function, specifically relating to wage cheques?

A
  1. The wage cheque should be signed by two signatories, one of whom must be senior management
  2. The wage cheque together with the current and previous payroll and supporting documents in respect of appointments, dismissal and increases should be presented to the cheque signatories
  3. A senior employee should compare the payroll to the wage cheque
  4. The current payroll should be compared with previous payroll and check the validity of all changes to supporting documents
  5. The payroll and documentation should be signed or stamped to cancel after approval.
  6. Wages cheque should be cashed at the bank
    - by two or more persons
    - not at regular times/routes
20
Q

What controls should be implemented within the payment preparation and payout function, specifically relating to the make up of wage packets?

A
  1. This should be done by two wage department members and physical security over all aspects of cash handling should be extremely tight
  2. Preferably be done by an independent persons not involved with the preparation of the payroll
  3. The wage details should appear on the wage packet (gross wage and deductions)
  4. The money in the wage packet should be independently reviewed
21
Q

What controls should be implemented within the payment preparation and payout function, specifically relating to the payout?

A
  1. It should be done by personnel not involved with make up of wages
  2. The foreman must identify all employees, however the payout must not done by himself
  3. The employees should sign payroll as proof of receipt
  4. The foreman should sign payroll as proof of supervision and identification of employees
22
Q

What controls should be implemented within the payment preparation and payout function, specifically relating to unclaimed wages?

A
  1. At the end of the payout, the pay master and the foreman who conducted the payout should agree all unclaimed pay packets to the payroll (unsigned entries). Once all employees who have not claimed 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
  2. Unclaimed wages and payroll should be retained by the paymaster and should lock them away
  3. Regular independent reconciliations of unclaimed wages on hand and the register should be performed and the register should be reviewed for unusual occurrences
  4. Unclaimed wages remaining unclaimed after two weeks should be banked and a copy of the deposit slip attached to the register
23
Q

What is the deduction: payment and recording function about?

A

It is the responsibility of the company to hold back certain portions of the wages earned due to statutory requirements. The objective of this function is to ensure that the amounts owed to the relevant authorities are correct, paid over within the required period and are supported by the relevant supporting documentation or return

24
Q

What documents are used in the deduction payment and recording function?

A
  1. General ledger
  2. Payroll (wage journal)
  3. Cash payments journal
  4. Return form
25
Q

What are risks involved in the deduction payment and recording function?

A
  1. Should the correct mount not be paid over to the different authorities , there could be significant losses due to penalties
  2. If payments to the authorities are late, there could be significant losses due to penalties
  3. Non-payment may result in criminal or civil charges as this is theft
  4. Losses could be incurred as a result of undetected overpayments
26
Q

What controls should be implemented in the deduction payment and recording function?

A
  1. 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
    - supervisory checks on the above activities
  2. The payroll and return forms should be presented as supporting evidence to the signatories before the deductions cheques are signed
  3. The financial accountant should perform independent monthly reviews of the general ledger accounts for deductions to confirm that they are being promptly cleared
27
Q

What are the control objectives for classes of transactions?

A
  1. All valid payroll transactions are recorded and nothing is left out (completeness)
  2. Personnel and wage rate changes, as well as total weekly payroll amounts have been properly authorized (authorization)
  3. All recorded wages are valid and supported by proper documentation (validity and occurrence)
  4. Payroll transactions are shown at the correct amount (accuracy)
  5. All purchase transactions are correctly recorded (recording)
28
Q

What are the control objectives for account balances?

A
  1. Payroll liabilities represent all amounts owed at balance sheet date (completeness)
  2. Payroll liabilities represent amounts properly owed to employees and payroll deductions accounts payable at balance sheet date (existence)
  3. Recognition and measurement of employee benefits in accordance with IFRS (measurement)
  4. Fair value measurements of post retirement benefits for employees recognized in accordance with IFRS (valuation)
  5. Payroll liabilities reflect actual obligations at balance sheet date (rights and obligations)
  6. Post retirement benefits are appropriately disclosed an classified in accordance with IFRS (presentation and disclosure)
29
Q

What are some of the internal controls implement is the payroll cycle to ensure all recorded wages are valid and supported by proper documentations (validity and occurrence)?

A
  1. The total wages, deductions and payroll are reviewed by senior employee and signed as evidence of this check
  2. There should be complete records kept for every employee, in the employee file
  3. Further, the foreman should be aware of the number of employees working under him
30
Q

What are some test of control procedures that can be performed by the auditor to ensure the control objective of occurrence/validity is met?

A
  1. Inspect the payroll for signature of senior official evidencing for proof of review and approval
  2. Inspect the documentation in the employee’s personnel file, employee contract, identity details, tax form, etc
  3. Thorough observation, physically verify employees
  4. Enquire from the foreman to vouch for the validity of staff whom you have not physically verified
31
Q

What are some internal control implemented to ensure that all payroll payouts are authorized according to company policy (authorization)?

A
  1. The foreman should:
    - sign clock cards as evidence of approval of hours worked by the employees
    - the foreman’s clock card should be approved by a senior official
  2. Overtime should:
    - be authorized according to the company policy by the factory manager or foreman
    - the foreman’s overtime should be authorized by the factory manager
32
Q

What test of control procedures can be done by the auditor to ensure that the control objectives of authorization has been met?

A
  1. Inspect the clock card for the foreman’s signature as proof of review
  2. Enquire about the company’s overtime policy
  3. Inspect signature for authorization of overtime worked
33
Q

What internal controls are implemented to ensure that all valid payroll transactions are recorded and nothing is left out (completeness)?

A
  1. 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 payment in behalf of another employees
  2. There should be sufficient segregation of duties in the payroll cycle, and sufficiently documented procedures with regard to granting of staff loans
  3. There should be strict and tight controls over the clocking in of employees, the preparation of the payroll and the payment of the wages
34
Q

What test of control procedure can an auditor use to ensure completeness?

A
  1. Attend on a surprise basis the payout in order to verify the validity of employees on the payroll and observe compliance with the listed procedures
  2. Enquire of personnel regarding the following:
    - the level of segregation of duties
    - the procedures regarding staff loans and compliance to laid down procedures
  3. Observe the procedure in relation of:
    - clocking in of employees
    - Preparation of payroll
    - the make up and payout of wages
    - ensure that the procedures are complied with, that sufficient controls and segregation of duties exist
35
Q

What internal controls are implemented to ensure that payroll transactions are shown at the correct amount (accuracy)?

A

There should be a review and authorization in place to ensure that the total per payroll agrees to the sum of wage cheque paid over to the employee and the cheque paid to the relevant authorities

36
Q

What test of control could be used to ensure accuracy?

A
  1. Compare the payroll totals with the wage cheque and cheques in relation of other deductions
  2. Follow through to physical paid cheques and ensure that two signatories have signed as evidence of review
37
Q

What internal control procedures are in place to ensure that all payroll transactions are correctly recorded (recording)?

A
  1. The hours recorded on the payroll should be obtained directly from the clock card or computer transaction file
  2. The wage rates, deductions should be obtained from personnel records or master file
  3. The calculations and casting should be reviewed by an independent person
  4. Before payments can be authorized, the senior personnel should inspect the payroll and week to week reconciliations performed
  5. All personnel should sign payroll as proof of functions performed
38
Q

What test of control procedures can be used to ensure the objective of recording?

A
  1. By inspection, verify that positions from the wage journal to the relevant accounts in the general ledger are correct
  2. Select a sample from the payroll and agree hours recorded to clock cards and wage rates to personnel record
  3. Inspect payroll for signature of the senior official evidencing for proof of review and approval
39
Q

What internal controls are implemented to ensure all payroll transactions are recorded in the correct reporting period (cut off)?

A
  1. 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
  2. Supervisory checks on the above activities
40
Q

What test of control procedures can be used to ensure that correct cut offs are used?

A
  1. Be inspection of dates and details on copies of the outside entity returns and paid cheques, verify that clearing accounts in respect deductions are cleared by paying over amounts deducted to the relevant authorities timeously and that the salaries paid and deduction paid over pertain to the period under audit
41
Q

What are the general controls for all cycles?

A
  1. Supervision and review by management
  2. Segregation of duties
  3. Rotation of duties
  4. Sufficient stationery control
  5. Scrutinize all records and documents for extraordinary or unusual items
  6. Test castings and calculations on all selected items, documents and ledger accounts
42
Q

What are some of the general procedures the auditor will perform on payroll balances?

A
  1. Obtain and document understanding of business
    - ID significant classes of transactions for salaries and wages related to the core process
    - obtain an understanding of the related HR policies and procedures
    - identify policies used by management to monitor payroll related expenditures
  2. Evaluate the effectiveness of internal controls and impact on the nature, timing and extent of substantive procedures
  3. Preliminary analytics:
    - current year vs prior year
    - obtain reasons for non expected movements
  4. Obtain payroll as at year end:
    - cast and re perform calculations on list
    - trace closing balance to trial balance, general ledger and creditors ledger
    - inspect list for unusual items and follow up
    - agree the list to prior year and enquire about any omission
  5. Audit the deductions general ledger account as follow:
    - cast and re perform the account
    - trace opening balance to prior year financial statements
    - trace payment to cash book
    - trace adjustment to journals and supporting documentations
    - trace closing balance to trial balance
  6. Obtain management representation letter (mention the assertions required in question)
43
Q

To test validity, what is the direction of testing?

A

Accounting records to supporting documents

44
Q

How do the auditor perform substantive procedures to ensure validity?

A
  1. Select from the ledger account in relation of wages a number of wage payouts and do the following:
    - test casting
    - prepare for each period total wages, deductions and net wages
    - follow the above calculations to payroll make sure they agree
  2. Test the accuracy of the payroll by verifying all employees:
    - exist (with letter of appointment, etc)
    - time worked (agree to clock card)
    - wage rate (compared with personnel record)
    - deductions (authorization forms and applicable deduction table)
    - test castings, cross castings and calculation on payroll
    - compare payroll’s total with the wage cheque and cheques for deductions (follow through to physical paid cheques and agree details and investigate endorsement and agree cheque with external source documents)
45
Q

Discuss the substantive procedures for completeness

A
  1. Direction of testing = source document to accounting records
  2. Select clock card and follow time worked therein through to the payroll
  3. For payroll, repeat the test performed above
  4. Follow the totals of payroll through to general ledger account and ensure that the transactions have been correctly recorded, classified and recorded in the correct period
  5. Test the casting on the general ledger accounts
  6. Perform analytical procedures on wages between period/departments and follow up extraordinary, unexplained variances
  7. Investigate on a surprise basis the unclaimed wages:
    - enquire about the procedures followed
    - count money in the presence of the cashier who sign the register as proof that she received money back
    - agree the total of unclaimed wages with the wage packets, count money in the wage packet and ensure content is correct
    - review the unclaimed wages register for extraordinary items
    - inspect the register to see whether long outstanding wages are timely banked
  8. Review clock cards, payrolls for extraordinary or abnormal items and investigate

Auditing (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions