Payroll Internal Audit Plan

Editor's Notes

• #5: Occurrence and Existence A key objective of auditing the payroll is to ascertain the existence of the actual payments and whether the payments were to genuine employees of the company, which is achieved by determining whether there are proper controls over the payroll function. Proper segregation of duties ensures that there is no particular person who can create fictitious employees and authorize salary payment to them. Completeness Due to the huge amounts involved in the payroll, there is a need to verify that all of the amounts paid out to employees are included. These amounts include salaries to permanent employees, overtime, wages paid out to temporary workers and other fringe benefits such as medical coverage and housing allowances. The auditor should query for any outstanding amounts and know the reason why they are still outstanding. Accuracy An auditor should confirm that there were correct computations of all benefits and deductions in the payroll. To test this, the auditor recalculates benefits and deductions for a sample of workers. A proper review of clock cards is undertaken to ensure accurate calculation of pay for work done. Management approves any additions to the basic pay and ensures they were calculated correctly. Additionally, the auditor inspects documentation for proof of management's review. Cut –Off To ensure Salaries expense recognized in during the period relates to the current accounting period. Any accrued and prepaid expenses have been accounted for correctly in the financial statements. Presentation and Disclosure Payroll expenses are presented in the income statement at the end of the financial reporting period. Proper presentation of payroll expenses ensures a true and fair representation of the expense. Disclosures of any unusual amounts included in the payroll are essential in explaining how and why these unusual amounts were paid. The auditor checks whether the payroll expenses have been presented in the required manner and whether any unusual amounts were disclosed in the notes to the financial statements.
• #6: Verify Active Employees For each person that received a paycheck during the quarter, verify that the person was employed during the time period for which the check was issued. Although it is more difficult to commit payroll fraud on a smaller business, one method of financial theft is by cutting checks to terminated employees and then altering the checks for cashing or colluding with the terminated employee to cash the checks and provide a kick back. Verify Pay Rate Verify the pay rate entered into the payroll processing system for each employee. Payroll rates should always be in writing, approved by an owner or manager, and filed with other employee paperwork. Review Hours Paid Compare the hours paid to employees for each pay period to the time clock reports or other tracking device used to record employee hours worked. Pay special attention to overtime hours as the cost of overtime can add up quickly and push a small business over budget in salaries and wages expense. If you offer paid time off, such as paid holidays, sick time and vacation days, review each entry of paid time off to ensure the employee who received paid time off pay was eligible for the pay. Compare Payroll Reports to General Ledger Compare the totals, such as gross payroll expense, taxes withheld and net check amount, to the general ledger to ensure each payroll processing is correctly recorded on the general ledger. If you have multiple salaries and wages accounts, such as manager payroll, administrative payroll and sales payroll, ensure that each category of payroll reflects the correct expense for the employees in those specified positions. Review Payroll Tax Submissions Business payroll taxes include Social Security taxes, Medicare/Medicaid taxes, state unemployment taxes and federal unemployment taxes, as well as the remission of federal withholdings for the employee. The total amount of payroll processed determines how often you remit payroll taxes to the respective taxing authorities, but most payroll remissions will occur at least quarterly with the exception of federal unemployment taxes, which can occur once a year if the business has low payroll amounts. Compare the payroll totals on the tax remittance reports with reports generated by the payroll system to ensure proper reporting of all payroll amounts. Perform manual calculations of all computer-generated totals to ensure proper calculation of amounts due. Verify that electronic or check remissions equal the exact amount recorded on tax remittance reports Bank Reconciliation Review Review the bank reconciliation for the payroll account to ensure that all checks cleared for the issued amount and make a note of any stale-dated payroll checks to research. Make sure you receive the hard copy of all payroll checks from your bank, even if you have to pay an additional fee for the service. Review each payroll check to ensure the check does not appear altered in any way.
• #10: Today's computerized payroll systems make reporting time worked and handling other payroll functions easy and automatic. They provide dozens of payroll reports for auditing and documentation. They offer security through hand, fingerprint and even eye recognition time clock systems to prevent false work-time reporting. They can automatically accrue paid time off and other employee benefits based on time worked. They are also vulnerable in the hands of dishonest employees who have access to and administrative rights to those systems. Entering Payroll Time Data Payroll systems use individual employee codes or other methods of recognition to ensure that employees report their own hours worked. Since codes can be shared, one employee could still falsely clock in for another simply by using another employee's code. Employee handbooks should clearly state the proper procedure for clocking in and out and the consequences for falsely entering payroll information. Human resources should establish clear procedures for requesting time off and changes to employee pay rates. Signatures should be required for any transaction affecting an employee's rate of pay or payroll processing. Division of Payroll Processing Human resources is often responsible for setting up new employees in the payroll system, processing payroll data and distributing paychecks. Entering payroll data and processing paychecks should be split between human resources and accounting to ensure that one person or department cannot complete the payroll cycle without scrutiny. Without a separation of responsibility, a dishonest employees could set up a false employee, record time worked or vacation hours and divert the money to a personal account through direct deposit. There is less opportunity to divert funds when one department inputs data and the other processes the payroll data and receives paychecks. Lack of a Payroll Preview Prior to processing paychecks, payroll systems will produce a set of reports that can be reviewed for accuracy before "live" checks are printed and direct deposits activated. The payroll preview should be done by an employee or department other than those responsible for payroll processing. Terminated employees who are still receiving paychecks, inordinate amounts of hours worked or vacation hours posted can indicate processing errors or manipulation of data. While legitimate errors can occur, deliberate attempts to divert funds could go unnoticed without a "time out" for a quick audit. Lack of Systematic Internal Audits The accounting or finance department should train an employee to conduct an internal payroll audit at least quarterly. Most employees who successfully embezzle large amounts of money do so over time. Periodic, publicized audits of the payroll and accounting functions could help deter a dishonest employee from setting up a scheme to defraud his employer and reduce the financial loss.