Payroll Cycle: Salaries, Wages & HR

Payroll Cycle (Salaries & Wages)

• Includes Salaries and Wages
• Accounts affected for Salaries, and Costing Information (SCI) include gross salaries, wages, commissions, bonuses, manufacturing wages, directors’ emoluments, and employer contributions
• Accounts affected for Statement of Financial Position (SFP) include employees for remuneration accrued, accounts payable (payroll deductions), accounts payable (employer contributions) and various bank accounts.

Human Resources (HR)

• Deals with all aspects of human assets
• HR is responsible for recruiting, counseling, negotiating, and applying labour law
• Their responsibilities include keeping all employee records, hiring & dismissing staff, and ensuring pay rates and changes are implemented promptly.
• HR must keep comprehensive records for every valid employee.

HR Documentation

• Includes an employee file
• Also includes payroll amendment forms
• Should also contain an updated list of employee details

Risks Related to HR

• Recruiting or retaining unsatisfactory/unnecessary employees
• Improper dismissals of employees
• Failure to identify and release unneeded staff
• Fraudulent amendment of employee details, including rates of pay or fake employees

HR Controls

• Conduct interviews with all applicants
• Require authorization and approval for all appointments, dismissals, and resignations by a senior official
• Obtain HR department decisions on pay rates, promotions, and service conditions following consultation with all interested parties and in accordance with relevant laws/regulations
• Ensure all changes are documented and authorized by the authorizing body
• All amendments are recorded on sequentially numbered payroll amendment forms and supported by further documentation (authorized and signed by senior management)
• Keep the documentation in each employee file
• Documentation examples: application forms, personal details, letters of appointment, IRP2 forms, authorization of deductions, employment contracts, and payroll amendment forms

Timekeeping Function

• Necessary to keep accurate & complete record of valid hours worked for which company must remunerate employees
• Relates more to wage earners as salary earners are usually paid a fixed monthly amount
• Wage varies depending on amnt of hours worked in specific week
• Hour logging is done by clock card (manual) or swiping through clocking device automatically recording time of entry & exit
• Clocked hours are sent to for payroll preparation function

Timekeeping Documentation

• Should contain Bank clock cards
• Also contains Hour recorded on clock
• Should also include Batch control sheet and batch register

Risks Related to Timekeeping

• Employees clocking in for absent employees, resulting in inaccurate hours
• Creating clock cards for ghost employees, facilitating payment of wages to ghost employees
• Errors by payroll in calculating and collating clock card information, like hours worked and rates

Timekeeping Controls

• Number clock cards and account for them numerically
• Personnel department must issue and prepare cards from personnel records/master file
• Keep cards at the clock machine under supervision, and not with employees
• Limit entry and exit points to one secure access point
• Protect entry/exit point with a turnstile-type mechanism
• Supervise the entry/exit points during clocking periods
• Implement clocking machines at entrances that ensure personnel cannot leave without clocking in/out
• Supervise clocking to prevent employees from clocking in for absentees
• Require overtime authorization per company policy by factory manager/foreman
• Foremen should keep record of personnel present & time worked
• Foremen should evidence approval of employee hours on clock card
• Foremen's clock card to be approved by a senior official (eg. factory manager)
• Factory manager should authorize foremen's overtime

Payroll Preparation

• Calculate gross wages, deductions, and net wages
• Must split time between Normal time and Over time
• Use rate per employee's permanent file
• Deductions from authorized, up-to-date tables (e.g., PAYE)
• Deduct pension fund amounts based on completed authorization forms
• Record info in payroll (wages journal)

Payroll Preparation Documentation

• Should include Clock cards
• Also needs Updated list of employees
• Payroll (wage journal) is necessary
• Needs Week to week recon

Risks related to Payroll Preparation

• Arise from errors in calculations and casting
• Using incorrect/unauthorized pay rates, hours/deduction tables
• Including fictitious employees fraudulently

Controls for Payroll Preparation

• Obtain hours from clock card/computer-transaction file
• Obtain wage rates/deductions from personnel records/master files
• Have an independent person review calculations & castings
• Get a senior personnel to inspect payroll and week-to-week reconciliation before authorizing payments
• Require all personnel to sign payroll as functions confirmation

Payment Preparation and Payout Objectives

• To ensure employees are paid out the correct amount of wages for which they have worked

Payment by Cash Process

• Employee must sign after collection
• Employee receives an indicating the amount earned and the amount in pay packets
• Pay packets are distributed at the paypoints of employees
• Employees should calculate total collection and compare to pay slip
• If there are discrepancies, initiate a query immediately

Handling Employee Absence

• Absent employees are known as unclaimed wages
• Must properly record unclaimed wages

Payment Preparation and Payout Documentation

• Needs Authorised payroll
• Payroll signed by employees
• Needs Pay-slips
• Pay packets
• Needs Unclaimed wages register

Risks in Payment Prep and Payout

• Errors and theft when working with cash
• Cash misappropriation from unclaimed wages

Controls for Payment Preparation and Payout

• Must have two signatories (senior management) for wage cheque
• Present wage cheques, payroll, and supporting documentation for authorization
• Senior employee should compare payroll to wages cheque
• Current payroll compared with previous payroll & check validity of all changes to supportive docs
• Cancel payroll and documents signed/stamped after approval
• Cash wage cheques at the bank must be done by 2 or more persons
• Use a security company for wage payouts
• The wage packets must be made up by two wage department members, having thorough physical security and independent persons not involved with payroll preparation
• The wage packet includes wage details, and the money in the wage packet undergo independent review
• Payment should be done by personnel not involved with wage-packet make-up
• Foreman must identify all employees, not payout
• Employees sign payroll as receipt proof
• Foreman must sign payroll as payout, supervision, and identification proof
• Account for all unclaimed pay packets at the end of payout with paymaster & foreman
• Enter the unclaimed wages on an unclaimed wage register
• Sign payroll to evidence performing the control procedure
• Retain unclaimed wages and payroll together by the paymaster and secured
• Perform regular, independent reconciliations of unclaimed wages
• Bank unclaimed wages after two weeks, and attach the deposit slip copy to the register

Deductions, Payments, and Recording

• The company's responsibility to hold back portions of wages per statutory requirements
• The Portion held does not belong to the company
• Have accurate amounts and paid over within the required period with supporting documentation

Payments and Deductions Documentation

• Should include General Ledger
• Also needs Payroll (wages journal)
• Needs Cash payments journal
• Has to include Return form

Risks Involving Deductions

• Incorrect amounts are paid over to authorities, leading to financial penalties
• Late payments incur financial penalties
• Non-payment results in criminal/civil charges
• Losses occur from undetected overpayments

Controls for Payments and Deductions

• Strict monthly schedule for posting entries, making timely payments, and supervisory checks
• Payroll and return forms are presented as supporting evidence before deduction cheques signed
• Independent reviews of GL accounts by a financial accountant to confirm prompt clearance

Auditing Payroll, Direction of Testing

• Risk/test for overstatement of debits (assets & expenses) involves tracing from GL (Accounting records) to supporting documents
• Risk/test for understatement of credits (liabilities/income/reserves) involves tracing from supporting documents to GL (Accounting Records)

Payroll Control Objectives

• Record all valid payroll transactions, and nothing is omitted (Completeness)
• Seek proper authorization for personnel and wage rate changes + total weekly payroll amounts
• All recorded wages valid and supported by proper documentation (Validity)
• Correct amounts are shown in Payroll transactions (Accuracy)
• Purchase transactions correctly recorded (Recording)

Objectives for Account Balances

• Payroll liabilities represent all amounts owed at balance sheet date (Completeness)
• Ensure proper amounts for employees & payroll deductions accounts payable (Existence)
• Recognize & measure employee benefits per IFRS (Measurement)
• Fair value measurements of post-retirement recognition per IFRS (Valuation)
• Payroll obligations at balance sheet date (Rights and Obligations)
• Properly disclose/classify post-retirement benefits per IFRS (Presentation and Disclosure)

Internal Controls and Cycle Testing

• Must evidence all recorded wages are equal to valid
• Has to review and sign the total wages, deductions & payroll
• Must keep complete employee records
• Make foremen aware of the number of the employees working under them
• There must be clock cards that authorize according to the company policy
• Need to have foremen’s signature as evidence of approval
• Factory manager should authorize foremen’s overtime
• All payouts must be authorized
• Every employee should sign and collect only his own paycheck
• You must segregated payroll duties & have documented procedures
• Maintain strict & tight controls over the payment,prepping & clocking in of employees
• Make sure payroll transactions shown @ correct amount
• Need to have authorization & review in place to ensure that total per payroll is equal to the cheque sum
• Always record all payroll transactions correctly
• Verify postings from wages
• Obtain hours directly from computer transaction files & clock cards

Additional Payroll Guidance on Testing

• Have Strict monthly schedule
• Supervise monthly for correct reporting

General Controls (must apply to scenario):

• Supervision and review by management • Segregation of duties • Rotation of duties • Sufficient stationery control

SUBSTANTIVE PROCEDURES: GENERAL PROCEDURES

• Obtain & document understanding of business by reviewing: • Significant salary and wage transactions to core processes • Understanding of HR policies and procedure • Understanding of policies used to monitor payroll related expenditure • Evaluating the effectiveness internal control as well as its impact • Conducting preliminary analytics • Verifying amounts,inspecting payroll for unusual items, reviewing omissions or errors • Auditing deduction by tracing to prior balance • Obtaining management authorization • Preparing GL reconciliations • Performing analytical procedures of wage data