CERTIFICATE
LEVEL
SUBJECT:
ASSURANCE
• Class# 09
• Chapter - 08 : Employee Costs
TOPICS TODAY
Topics covered in this class:
• Calculating wages and salaries
• Recording of wages and salaries and
deductions
• Payment of wages and salaries
• Weaknesses
What we will learn from the above topics
• Identify risks in a payroll system
• Identify relevant controls to mitigate risk
• Identify tests of those controls
• Recognize weaknesses in a payroll system
01
CALCULATING WAGES AND
SALARIES
Risks
When calculating wages and salaries, a company might recognize the following risks:
• The company may pay employees too much money
• The company may pay employees who have not been at work
• The company may pay employees who have left
Control objectives
The controls put into place will be designed to mitigate these risks. Hence the objectives of the
controls will be to prevent these risks from occurring. Here are the control objectives which might
arise from the risks noted above:
• Employees are only paid for work that they have done
• Gross pay has been calculated correctly and authorized
• Net pay has been calculated correctly
02
CALCULATING WAGES AND
SALARIES
Controls
The following controls may be put into place to mitigate the risks noted above.
• Staffing and segregation of duties
• Maintenance of personnel records and regular checking of wages and salaries to details in
personnel records
• Authorization
Engagement and discharge of employees
Changes in pay rates
Overtime
Non-statutory deductions (for example 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 advances of pay
• Holiday pay arrangements
• Answering queries
• Review of wages against budget
03
CALCULATING WAGES AND
SALARIES
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 employees and discharges have been confirmed in writing.
• Check calculations of wages and salaries are being checked.
• For wages, check calculation of gross pay with:
Authorized 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 etc. and that increases in pay have been properly authorized.
04
RECORDING OF WAGES AND
SALARIES
Risks AND DEDUCTIONS
When considering recording wages and salaries, the company might recognize the following 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 books
• Pay might not be recorded correctly in the nominal ledger
Control objective
In addition, the company has a duty to pay over to NBR the correct amounts in respect of tax
deducted at source. If these 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.
These lead to the following control objectives:
• Gross and net pay and deductions are accurately recorded on the payroll
• Wages and salaries paid are recorded correctly in the bank and cash records
• Wages and salaries are correctly recorded in the nominal ledger
• All deductions have been calculated correctly and are authorized
• The correct amounts are paid to NBR
05
RECORDING OF WAGES AND
SALARIES
Controls AND DEDUCTIONS
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 responsible 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.
In addition there should be:
• 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' previous records
• One for one checking of payroll details back to independently maintained personnel records
• Reconciliation of total pay and deductions between one pay day 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
06
Recording of wages and salaries and deductions
Tests of controls
A key control assurance providers will be concerned with will be the reconciliation of wages and
salaries. 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.
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 (including control accounts)
• Net cash column to cash book
07
RECORDING OF WAGES AND
SALARIES AND
For salaries they include checking DEDUCTIONS
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 (including control accounts)
• Total of net pay column to cash book
Auditors should check the calculations of taxation and non-statutory deductions. For withholding
taxes they should carry out the following tests:
• Scrutinize the control accounts maintained to see appropriate deductions have been made
• Check that the payments to Govt. Treasury are correct
They should check other deductions to appropriate records. For voluntary deductions, they should
see the authority completed by the relevant employees.
08
Payment of wages and salaries
Risks and control objectives
The key risks here are that people who are not employees are paid and those that are employees
are not paid. Therefore the overriding control objective is that the correct employees are paid.
09
10
PAYMENT OF WAGES AND SALARIES
Tests of controls
If wages are paid in cash
• 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.
• 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 are unclaimed.
• Check pattern of unclaimed wages in unclaimed 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 transfer.
11 Weaknesses in a Payroll System
12 Summary
13 Sample Questions and Answers
Calculating Pay
14 Sample Questions and Answers
Recording Pay
15 Sample Questions and Answers
Payment of Wages
16
THANK YOU