AUDITORS' PROCEDURES : TESTS OF CONTROLS ON PAYROLL

-relevant to F8 (ACCA)



If you are asked as to what steps you would take to ensure that payroll system is adequately installed of its internal controls, as an AUDITOR you could systematically take following steps. Remember, use key items like payroll lists, bank statements and specific documents to tailor made in your "application". merely regurgitating the following carries little or no marks.



STEP 1 : SETTING SALARIES & WAGES
AGREEING calculation of gross pay with:
· Authorised rates of pay
· Production records. See that production bonuses have been authorised and properly calculated
· Clock cards, time sheets or other evidence of hours worked.
·Verify that overtime has been authorised

VERIFY that gross salaries and bonuses are in accordance with
· personnel records,
· letters of engagement and
· increases in pay have been properly authorised.

STEP 2 : PAYMENTS
wages paid in cash
• Arrange to attend the pay-out of wages to confirm that the official procedures are being followed
• Examine receipts given by employees: check unclaimed wages are recorded in unclaimed wages book
• Check that unclaimed wages are banked regularly by inspection of bank statements and supporting documentation
• Inspect that unclaimed wages books to check it shows reasons why wages are unclaimed
• Review pattern of unclaimed wages in unclaimed wages book; variations may indicate failure to record
Holiday pay
• Verify a sample of payments with the underlying records and check the calculation of the amounts paid

For salaries, auditors should test that comparisons are being made between payment records and they should themselves examine paid cheques or a certified copy of the bank list for employees paid by cheque of banks transfer.

STEP 3: RECORDING
WAGES, reconciliations with:
· The previous week's payroll
· Clock cards/time sheets/job cards
· Costing analyses, production budgets

POINTS TO NOTE:
üThe total of salaries should be reconciled with the previous week/month or the standard payroll.
üconfirm that important calculations have been checked by the clients and re-perform those calculations.

REVIEW wages for a number of weeks:
· Additions of payroll sheets
· Totals of wages sheets selected to summary
· Additions and cross casts of summary
· Postings of summary to general ledger (including control accounts)
· Casts of net cash column to cash book

STEP 4: DEDUCTIONS
RE-PERFORM the calculations of taxation and non-statutory deductions. For income tax they should carry out the following tests.
· Scrutinize the control accounts maintained to see appropriate deductions have been made
· Agree that the payments to the taxation bodies are correct

POINTS TO NOTE
üThey hould agree other deductions to appropriate records.
üFor voluntary deductions, they should inspect the authority completed by the relevant employees.