Payroll audit starts from verifying the data across the various accounts and software system that manages the data of employees. By auditing payroll an auditor may uncover both innocent mistakes and fraudulent activity. Some employees may be appointed for part time but they may be paid for full time payments.
However, Wages and Salaries both are related with payroll. Usually wages are paid in cash and disburse weekly. Again, Salaries are paid in both cash and bank and disburse monthly, and normally pays to the permanent employees of the company.
However, sometimes excessive disbursement may happen mistakenly, or intentionally to the permanent and casual employees. Again, sometimes payment may be paid to the workers or employees who didn’t work or who already left the company. Considering these issues an audit is required to minimize the risk of excessive payment and minimize the chance of fraudulent act.
Considering the overall risk area and nature of errors or fraud, I will try to find out some key points which may help to the auditors in planning and performing work on the payroll.
Step 1: Typical Control Objectives of wages and salaries to be tested:
The auditor will consider the nature of internal control system of the company while disbursing the payments. But before evaluating internal control system, the auditors should design a typical control objectives for wages which are described as follows:
- Whether the payments are made for work done.
- Whether the payments are made to valid employees.
- Whether the payments are duly authorized.
- Whether the payments are made in accordance with contract/employment terms.
- Whether the wages and salaries are calculated correctly.
- Whether the payments are recorded in the company’s books of account.
- Whether the tax or other regulatory compliance properly followed.
Step 2: Evaluation of the Internal Control System:
In this respect the auditor should perform the test of control to confirm whether the internal control system are properly met. To evaluate this part auditor may make a questionnaire and will try to get the answer of this questionnaire and complete the assignment of this part. However, following points to be noted by an auditor to verify the accuracy of the payment:
- Can employees be paid without working?
- Can wages and salaries be paid to fictitious employees?
- Can wages be without approval?
- Can errors occur in wage calculations?
- Can wage costs be incorrectly recorded?
If the auditor confirms the control exists, then he will perform tests of controls. In case of weak controls or absent of the control, an auditor will perform the substantive procedure to determine material misstatement.
However, Considering the Steps 1 & Steps 2, we can make an audit guideline to detect frauds and misappropriation of funds. The following procedures an auditor can take to accomplish this assignment:
- Detection of Frauds and Misappropriation of Cash:
Following steps could be taken by an auditor to detect frauds and misappropriation of cash:
- Whether any fictitious name are entered into wages sheet and salary sheet. This may include dummy workers, ghost workers etc.
- Whether any error committed at the time of recording the wages/salaries
- Whether any fraud committed at the time of recording the wages/salaries
- Whether any clerical error occurred
- Whether resigned or discharged employees are included in the wages/salaries sheet.
- Whether wages rate are overstated.
- Whether Hours of work or days of work are overstated.
- Whether deductions have been done properly i.e Provident Fund, Insurance and advance payment.
- Current month’s wages should be compared with previous month’s wages. If any increase shown, the reasons should inquire.
- Wages/Salaries sheet should be cross checked with Cash Book and Bank Statment.
- Whether unpaid salaries/wages are deposited in the bank.
- Whether Revenue stamp properly affixed.
- The Signature of the workers/employees should verify with last three/four periods.
- Ensure all relevant persons are properly signed on wages and salary sheet.
- The Auditor will also collect the appointment letter to confirm the increment due.