CHAPTER 3
PRACTICE OF AUDITING THE HUMAN
RESOURCE MANAGERMENT PROCESS
1
OUTLINE
3.1. CHARACTERISTICS AND MANAGEMENT ASSERTIONS OF
HUMAN RESOURCE MANAGEMENT PROCESS
3.1.1. Characteristics of human resource management process
3.1.2. Management assertions of human resource management process
3.2. PERFORMING THE AUDIT OF HUMAN RESOURCE
MANAGEMENT PROCESS
3.2.1. Test of control
3.2.2. Analytical procedures
3.2.3. Tests of details
3.1.1. CHARACTERISTICS OF HUMAN
RESOURCE MANAGEMENT PROCESS
❖ The human resource process starts with the
establishment of sound policies for hiring, training,
evaluating, counseling, promoting, compensating, and
taking remedial actions for employees.
❖ Two main types of transactions are processed through
the human resource management process:
• Payments to employees for services rendered.
• Accrual and payment of payroll-related liabilities arising
from employees’ services, including liabilities for Social
Security and unemployment taxes.
3.1.1. CHARACTERISTICS OF HUMAN
RESOURCE MANAGEMENT PROCESS
❖Many types of documents and records.
The Major Functions
Key Segregation of Duties
The Key Segregation of Duties
3.1.2. MANAGEMENT ASSERTIONS OF HUMAN
RESOURCE MANAGEMENT PROCESS
HUMAN RESOURCE MANAGEMENT PROCESS
Calculating Recording of Payment of
wages and wages and wages and
salaries salaries and salaries
deductions
• Risks and • Risks and • Risks and
control control control
objectives objectives objectives
• Controls • Controls • Controls
• Test of controls • Test of controls • Test of cont
CALCULATING WAGES AND SALARIES
1.1. RISKS AND CONTROL OBJECTIVES
- Risks
+ The company may pay employees too much money
+ The company may pay employees who have left
- Control objects:
+ Emloyees are only paid for work that they have done
+ Gross pay has been calculated correctly and
authorized
+ Net pay has been calculated correctly.
CALCULATING WAGES AND SALARIES
1.2. CONTROLS
- Staffing and segregation of duties
- Maintenance of personnel records and regular checking of wages and salaries to
details in personnel records
- Authorisation
+ Engagement and discharge of employees
+ Changes in pay rates
+ Overtime
+ Non-statutory deductions (pension contributions)
+ Advances of pay
- Recording of changes in personnel and pay rates
- Recording of hours worked by timesheets, clocking in and out arrangements.
- Review of hours worked
- Recording of advanced of pay
- Holiday pay arrangements
- Answering queries
- Review of wages against budget
CALCULATING WAGES AND SALARIES
1.2. CONTROLS
EXAMPLE:
The workforce at CleanCo Limited has negotiated a pay rise through
discussions between the trade union and management.
What should the manager do to ensure that the employees are not paid too
much or too little for their work.
CALCULATING WAGES AND SALARIES
1.2. CONTROLS
EXAMPLE:
The workforce at CleanCo Limited has negotiated a pay rise through
discussions between the trade union and management.
What should the manager do to ensure that the employees are not paid too
much or too little for their work.
- Increases should be authorized on an individual basis by the Personnel
Manager, who is in charge of payroll.
- Details of the pay rise should be entered into each employee’s personnel
file
- As the computer system calculates pay automatically, the new details
must be entered into the master file by the Personnel Manager using the
private password which allows him to make such changes.
CALCULATING WAGES AND SALARIES
1.3. TESTS OF CONTROLS
- Check that the wages and salary summary is approved for
payment
- Confirm that procedures are operating for authorizing
changes in rates of pay, overtime, and holiday pay.
- Obtain evidence that staff only start being paid when they
join the company, and are removed from the payroll when
they leave the company.
- Check that the engagement of new emloyees and discharges
of former employees have been confirmed in writing.
- Check that the calculations of wages and salaries are being
checked.
CALCULATING WAGES AND SALARIES
1.3. TESTS OF CONTROLS
- For wages, check calculation of gross pay with:
+ Authorised rates of pay
+ Production records. See that production bonuses
have been authorized and properly calculated
+ Clock cards, time sheets or other evidence of hours
worked. Verify that overtime has been authorized.
- For salaries, verify that gross salaries and bonuses are in
accordance with personnel records, contracts of
employment … and that increases in pay have been
properly authorized.
INTERACTIVE QUESTION 1
The following system of time records exists at Shepherd Limited.
Staff members are required to fill in a manual timesheet as they
arrive, stating the time of arrival and as they leave, stating the
time of depature. Staff members are then paid an hourly rate
on the basis of this record.
Requirement:
Which two of the following outcomes arise from this system?
a. Employees may be paid at an inappropriate rate
b. Employees may be paid for work they have not done
c. Employees are paid for the hours they have worked
d. Employee deductions may be inappropriate.
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.1. RISKS AND CONTROL OBJECTIVES
- RISKS:
+ The various elements of pay might not be recorded correctly
in the payroll
+ Amounts paid to employees might not be reflected in the cash
at bank account
+ Pay might not be recorded correctly in the nominal ledger
In addition, the company has duty to pay over HRMC the correct
amounts in respect of tax and national assurance. If there are
calculated wrongly, the company might face a large tax bill in
the future of arrears and penalties. The company also has a
duty to pay other deductions on behalf of employees, for
example pension deductions. Again, errors might mean future
liabilities.
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.1. RISKS AND CONTROL OBJECTIVES
- CONTROL OBJECTIVES:
+ Gross and net pay and deductions are accurately
recorded on the payroll
+ Wages and salaries are correctly recorded in the
nominal ledger
+ Wages and salaries paid are recorded correctly in cash
records.
+ All deductions have been calculated correctly and are
authorized.
+ The correct amounts are paid to HMRC
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.2. CONTROL ACTIVITIES
Responsibility for the preparation of payroll
should be delegated to a suitable person, and
adequate staff appointed to assist him. The extent
to which the staff responsilble for preparing
wages and salaries may perform other duties
should be clearly defined. In this connection full
advantage should be taken where possible of the
division of duties and checks available where
automatic wage accounting systems are in use.
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.2. CONTROL ACTIVITIES
- Bases for compilation of payroll (for example, clock cards, overtime
records, agreed hours).
- Arrangements for the preparation, checking (reconciling to payroll
information) and approval of payroll.
- Procedures for dealing with non-routine matters.
- Maintenance of separate employees’ personnel records.
- One-for-one checking of payroll details back to independently
maintained personnel records.
- Reconciliation of total pay and deductions between one payday and
the next
- Comparison of actual pay totals with budget estimates or standard
costs and the investigation of differences between them.
- Agreement of gross earnings and total tax deducted with taxation
returns.
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.3. TEST OF CONTROLS
- For wages, there should have been reconciliations
with:
+ The previous week’s payroll
+ Clock cards/time sheets/job cards.
+ Costing analyses, production budgets.
The total of salaries should be reconciled with the
previous week/month or the standard payroll.
In addition, assurance providers should confirm that
important calculations have been checked by the clients
and re-perform those calculations.
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.3. TEST OF CONTROLS
- These include checking for wages for a
number of weeks:
+ Additions of payroll
+ Totals of payroll detail selected to
summary of payroll
+ Additions and cross-casts of summary
+ Postings of summary to nominal ledger
+ Net cash column to the cash at bank
account
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.3. TEST OF CONTROLS
- For salaries they include checking for a
number of weeks/months:
+ Additions of payroll
+ Totals of salaries details to summary
+ Additions and cross-casts of summary
+ Postings of summary to nominal ledger
+ Total of net pay column to the cash at
bank account
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.3. TEST OF CONTROLS
- Assurance providers should check the calculations of
taxation and non-statutory deductions.
For PAYE and NI they should carry out the following
tests:
+ Scrutinise the nominal ledger accounts maintained to
see appropriate deductions have been made.
+ Check that the payments to HMRC are correct
They should check other deduction to appropriate
records. For voluntary deductions, they should see the
authority completed by the relevant employees.
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.3. TEST OF CONTROLS
EXAMLE:
An audit assistant on the audit of Maybury plc has
been asked to test controls over the payroll.
What should she do to evaluate the recording pay?
RECORDING WAGES, SALARIES AND
DEDUCTIONS
2.3. TEST OF CONTROLS
EXAMLE:
TEST OF CONTROL:
- Sample four separate weeks of payroll
- Check the signature of the person who checks the payroll and authorises.
- Check for her initials showing the brought forward figures have been
checked.
- Recheck the brought forward figures from the previous payroll.
- Cast a sample of lines in the payroll to ensure it is arithmetically accurate.
- Check the calculations of staturory deductions.
- Obtain journal sheet for posting to ledger an confirm that the postings
are correct.
- Trace postings to ledgers to ensure processed correctly
- Check a sample of hours worked to original clock cards.
PAYMENT OF WAGES AND SALARIES
3.1. RISKS AND CONTROL OBJECTIVES
- Risks
The key risks here are that people who are not
employees are paid and those that are employees
are not paid.
- Control objects:
The correct emloyees are paid
PAYMENT OF WAGES AND SALARIES
3.2. CONTROLS
Payment of cash wages - Segregation of duties:
(this is increasingly rare) + Preparing the payroll net pay summary
+ Filling of pay packets
+ Distribution of wages
- Authorisation of wage cheque cashed
- Custody of cash
+ When the wages cheque is cashed
+ Security of pay packets
+ Security of transit
+ Security and prompt banking of unclaimed wages
- Verification of identity
- Recording of distributions
PAYMENT OF WAGES AND SALARIES
3.2. CONTROLS
Payment of - Preparation and authorization of
salaries cheques and bank transfer lists
- Comparison of cheques and bank
transfer list with payroll
- Maintenance and reconciliation of
wages and salaries nominal ledger
account
PAYMENT OF WAGES AND SALARIES
3.2. CONTROLS
Example:
At Pynewood Limited, the bookkeeper calculates the
wages and then prepares the bank transfer list. She
then puts through the transfer herself.
Point out the deficiency of the salaries system.
PAYMENT OF WAGES AND SALARIES
3.2. CONTROLS
Example:
The deficiency of the salaries system:
There is no segregation of duties between preparing
the payroll and preparing the bank transfer lists, and
then again between preparing the lists and making
the actual payment. This means that the bookkeeper
could easily perpetrate a fraud of paying staff
extra or paying non-existent staff and keeping the
proceeds.
PAYMENT OF WAGES AND SALARIES
3.3. TESTS OF CONTROLS
- Arrange to attend the pay-out of wages to confirm
that the official procedures are being followed
- Before the wages are paid compare payroll with
wage packets to ensure all employees have a wage
packet.
- Examine receipts given by employees; check
unclaimed wages are recorded in unclaimed wages
book.
- Check that no employee receives more than one
wage packet.
PAYMENT OF WAGES AND SALARIES
3.3. TESTS OF CONTROLS
- Check entries in the unclaimed wages book with the
entries on the payroll
- Check that unclaimed wages are banked regularly
- Check that unclaimed wages books show reasons why
wages book; variations may indicate failure to
record.
- For salaries, check that comparisons are being made
between each month’s payroll net pay summary and
examine paid cheques or a certified copy of the
bank list for employees paid by cheque or bank
tranfer.
PAYMENT OF WAGES AND SALARIES
3.3. TESTS OF CONTROLS
Example:
At HyperCo plc, all employees are salaried and are paid
by direct transfer to their bank each month.
What should the auditor do to evaluate the control over
payment of wages?
PAYMENT OF WAGES AND SALARIES
3.3. TESTS OF CONTROLS
Example:
Test of controls:
The auditor will test that controls operate properly
over this direct transfer by requesting a certified
copy of the bank list for the payroll to see how the
sum leaving the company’s bank account is broken
down and checking the individual amounts paid
back to the payroll.
INTERACTIVE QUESTION 3
Which two of the following control activities will reduce
the risk of emloyees who have left being made up a pay
packet which is collected by the leaver of an accomplice?
a. Check that each employee only collects one pay
packet
b. Supervision of payout by member of staff who knows
all the employees personally
c. Authorisation of payroll
d. Comparison of payroll with wage packets to ensure
that they match