1. CHAPTER 4: PAYROLL CYCLE
1.1 INTRODUCTION OF THE TOPIC
You have recently qualified as a Chartered Accountant, and unlike most of your peers
have decided to start your own company selling photocopiers. You realise that you
require the help of a personal assistant and a couple of sales clerks. Where do you
begin? You would start by advertising the positions, and where suitable candidates
respond to the advert, you would request them to fill out an application form. After
identifying potential candidates, an interview will be conducted and if successful an
employment contract, stipulating the terms and conditions of employment, will be
UNIVERSITY OF JOHANNESBURG the employment contract, authorisation to deduct UIF, Pension Fund Contributions,
etc will also be created. The employee will resume work, and on a weekly basis
account for the hours worked by completing a timesheet. At the end of each week or
DEPARTMENT OF ACCOUNTANCY month this information would be collated and captured onto the system, resulting in a
payslip being generated for the employee, detailing the gross salary/wages,
deductions and net pay. This would also enable payment to be made to the employee
for services rendered. This in a nutshell explains the payroll cycle. As you go through
the module, remember this simple example and make applicable what you learn to it,
AUDITING 300/BCTA for e.g. what controls would you put in place to ensure that you on a monthly basis
account completely for all employee related cost?
2018 This cycle controls what is to most businesses, a major expense. Inherently this cycle
is a high risk cycle from an audit perspective due to the fact that cash is involved.
Although many businesses are trying to move away from using cash to pay wages by
making payments directly into bank accounts, extensive use of cash is still made as
many wage earners prefer cash and may not operate bank accounts. Wages and
salaries are also usually internally generated, and unlike purchases and payments
fore
reasonably easy to create fraudulent outflows if controls are not sound, for e.g. by
creating fictitious hours worked or fictitious employees In this module we will
endeavor to explore the intricacies of this cycle and also find out how this will affect
the audit procedures to be performed in order to attain sufficient and appropriate audit
evidence to reduce audit risk to an acceptably low level.
MODULE: Payroll Cycle
1.2 CHARACTERISTICS AND ACTIVITIES IN THE CYCLE 1.3 HUMAN RESOURCES
The payroll cycle consists of five functions which we will explore throughout this Description of the function
module. These functions are:
The human resources function The objective of this function is to ensure that all matters relating to the personnel
The timekeeping function department are properly maintained. This department deals with all aspects of the
The payroll preparation function human assets of the company and therefore should be skilled in things such as
The payment preparation and payout function recruiting, counseling, negotiating and labour law. They will be responsible for keeping
The deductions: payments and recording function all employee records (i.e. employee permanent file), focus on the hiring and dismissal
of staff, and ensuring that pay rates and changes thereto are implemented promptly.
As elucidated in earlier modules, it is important to understand that the auditor does not It is important that accurate and complete records for all valid employees are
provide an opinion over individual cycles audited, but over the financial statements as maintained by this department, this facilitates the provision of information necessary
a whole. The accounts therefore typically affected by this cycle are the following: to produce valid clock cards or timesheets.
1) Within the statement of comprehensive income Documentation used
Gross salaries
Wages
Commissions Payroll amendment forms
Bonuses Updated list of employee details
Manufacturing wages
Risks in this function
Employer contributions
1. Unsatisfactory or unnecessary employees may be recruited or retained
2. Dismissals of employees that may not have been followed the correct
2) Within the statement of financial position
procedures
Employees for remuneration accrued 3. There may be staff that are not necessarily needed, but are kept because of
Accounts payable (Payroll deductions) the human resources department not identifying this
Accounts payable (Employer contributions) 4. Employee details could be fraudulently amended to include non-existent
Various bank accounts employees, or to change the rates of pay applicable to an employee.
The controls that should be implemented within this function to reduce risks to
mentioned earlier on an individual basis starting with the human resource function. It an acceptable level should include:
is important to explore the documentation relevant within each function, remember it
is literally impossible to audit anything if you are not certain about what documents to 1. Interviews should be conducted with all applicants; the head of department in
scrutinize. We will then move on by looking at the risks that exist within each function, which the applicant is going to work should also be present.
as well as the controls that should be in place to ensure that risk is reduced. 2. All appointments and dismissals/resignations should be authorised and
approved by a senior official on supportive documentation.
It is important to note that the system description that is about to be provided is for a 3. Changes to pay rates, promotions to higher employment grades and any other
company with the necessary staff capacity to ensure the necessary levels of changes in service conditions should be decided upon by the human resource
segregation of duties between each function. department after consultation with all interested parties, e.g. unions, and
consideration of relevant laws and regulations, e.g. minimum wage regulations.
4. All changes should be documented and authorized by the authorizing body (e.g.
wage committee)
5. All these amendments should be recorded on sequentially numbered payroll
amendment forms and supported by further documentation. These should also
be authorised and signed by senior management
6. All documents above should be maintained in each employee file. This will
include documents such as application forms, personal details of each
employee, letter of appointment, IRP2, authorisation in respect of deductions,
employment contracts and payroll amendment forms.
, The controls that should be implemented within this function to reduce risks to
1.4 TIMEKEEPING an acceptable level should include:
Description of the function 1. Clock cards should:
This function is necessary to keep an accurate and complete record of valid hours a. be numerically accounted for;
worked for which the company must remunerate employees, i.e. the company needs b. be issued by the personnel department and prepared from personnel
to ensure that all employees are paid exactly for the hours that they worked. This records/master file
relates mainly to wage earners, as salary earners usually get paid at the end of the c. be kept at clock machine, under supervision, not with the employees).
month, and it is usually a fixed amount. Wage earners on the other hand, get paid
weekly, and their remuneration will vary depending on the hours that they have worked 2. Entry and exit points to the work area should:
by requiring the employee to pass a clock card or swipe through a time clocking device a. be limited to one
which will automatically record the time of either entry or exit. On a weekly basis, daily b.
hours clocked will be calculated and totalled before being sent to the next function c. supervised during clocking periods
the payroll preparation function.
3. Clock procedures:
Documentation used
a. clocking machine should be situated at the entrance to ensure that
Blank clock cards personnel may not leave premises without clocking in/out;
Hours recorded on clock b. supervision over clock (prevent employees to clock in for absentees).
Batch control sheet and batch register
4. The foreman should:
Risks in this function a. keep a record of personnel present and time worked
b. sign clock card as evidence of approval of hours worked by the
1. Fellow employees can clock in for an absent employee, therefore resulting in employee
recording of invalid hours
2. Clock cards could be made out and clocked for ghost employees, thereby
facilitating the payment of wages to ghost employees
3. Errors could be made by payroll department, in calculating and collating Overtime should:
information on the clock card for recording, e.g. hours worked and rates used c. be authorised according to the company policy by the factory manager
etc. or foreman
.
1.5 PAYROLL PREPARATION The controls that should be implemented within this function to reduce risks to
an acceptable level should include:
Description of the function
1. The hours recorded on the payroll should be obtained directly from the clock
The aim of this function is to calculate gross wages, deductions from employees which card or computer-transaction file
must be paid over to the relevant authorities, and net wages. 2. The wage rates, deductions should be obtained from personnel records or
master files;
As mentioned earlier during our discussion of the timekeeping function, at the end of 3. The calculations and castings should be reviewed by an independent person
each week, the details on the clock cards need to be calculated and collated, so that (e.g. one wage clerk checks another clerks work/edit checks);
the payroll can be drawn up. This involves calculation of all the hours worked, and 4. Before payments can be authorised, the senior personnel, should inspect the
must be split between overtime and normal hours, as the rates per hour for these two payroll and the week to week reconciliations performed.
categories are different. Total hours worked by an employee, multiplied by the 5. All personnel should sign payroll as proof of functions performed.
amount that the employee is to be paid for the week. Very important to remember that 1.6 PAYMENT PREPARATION AND PAYOUT
in this function appropriate deductions, for e.g. PAYE, must also be extracted from
authorised, up to date tables, or in the case of other deductions, for e.g. Pension Fund, Description of the function
must be deducted in terms of the authorisation form completed by the employee. This
information is then recorded on the payroll also referred to as the wages journal. The objective of the function is to ensure that employees are paid out the amount of
wages for which they have worked. As wages are paid out weekly, it is done mostly
Documentation used by cash, for which an employee must sign after the collection thereof. Employees will
also receive a pay slip, indicating how much they have earned, and the amount of
Clock cards money that should be included in their pay packets. The pay packets should be
Updated list of employees distributed at the respective paypoints of the employees; they should count their cash
Payroll (wage journal) immediately upon collection, and compare it to the pay slips. Any discrepancies should
Week to week reconciliation be queried immediately. Where an employee is absent during the pay out of wages,
Risks in this function be recorded.
1. Errors may be made due to incorrect calculations and casting Documentation used
2. The company may use incorrect or unauthorized pay rates, hours or deduction
tables during recording Authorised payroll
3. Fictitious employees may be included fraudulently Payroll signed by employees
Payslips
Paypackets
Unclaimed wages register
Risks of this function
1. Since the payment function is done by working mostly with cash, there is a risk
that errors could occur as well as theft, when cash is actually being paid to
employees, or when the pay packets are being made up.
2. There is also a risk that there could be misappropriation of the unclaimed wage
packets.
1.1 INTRODUCTION OF THE TOPIC
You have recently qualified as a Chartered Accountant, and unlike most of your peers
have decided to start your own company selling photocopiers. You realise that you
require the help of a personal assistant and a couple of sales clerks. Where do you
begin? You would start by advertising the positions, and where suitable candidates
respond to the advert, you would request them to fill out an application form. After
identifying potential candidates, an interview will be conducted and if successful an
employment contract, stipulating the terms and conditions of employment, will be
UNIVERSITY OF JOHANNESBURG the employment contract, authorisation to deduct UIF, Pension Fund Contributions,
etc will also be created. The employee will resume work, and on a weekly basis
account for the hours worked by completing a timesheet. At the end of each week or
DEPARTMENT OF ACCOUNTANCY month this information would be collated and captured onto the system, resulting in a
payslip being generated for the employee, detailing the gross salary/wages,
deductions and net pay. This would also enable payment to be made to the employee
for services rendered. This in a nutshell explains the payroll cycle. As you go through
the module, remember this simple example and make applicable what you learn to it,
AUDITING 300/BCTA for e.g. what controls would you put in place to ensure that you on a monthly basis
account completely for all employee related cost?
2018 This cycle controls what is to most businesses, a major expense. Inherently this cycle
is a high risk cycle from an audit perspective due to the fact that cash is involved.
Although many businesses are trying to move away from using cash to pay wages by
making payments directly into bank accounts, extensive use of cash is still made as
many wage earners prefer cash and may not operate bank accounts. Wages and
salaries are also usually internally generated, and unlike purchases and payments
fore
reasonably easy to create fraudulent outflows if controls are not sound, for e.g. by
creating fictitious hours worked or fictitious employees In this module we will
endeavor to explore the intricacies of this cycle and also find out how this will affect
the audit procedures to be performed in order to attain sufficient and appropriate audit
evidence to reduce audit risk to an acceptably low level.
MODULE: Payroll Cycle
1.2 CHARACTERISTICS AND ACTIVITIES IN THE CYCLE 1.3 HUMAN RESOURCES
The payroll cycle consists of five functions which we will explore throughout this Description of the function
module. These functions are:
The human resources function The objective of this function is to ensure that all matters relating to the personnel
The timekeeping function department are properly maintained. This department deals with all aspects of the
The payroll preparation function human assets of the company and therefore should be skilled in things such as
The payment preparation and payout function recruiting, counseling, negotiating and labour law. They will be responsible for keeping
The deductions: payments and recording function all employee records (i.e. employee permanent file), focus on the hiring and dismissal
of staff, and ensuring that pay rates and changes thereto are implemented promptly.
As elucidated in earlier modules, it is important to understand that the auditor does not It is important that accurate and complete records for all valid employees are
provide an opinion over individual cycles audited, but over the financial statements as maintained by this department, this facilitates the provision of information necessary
a whole. The accounts therefore typically affected by this cycle are the following: to produce valid clock cards or timesheets.
1) Within the statement of comprehensive income Documentation used
Gross salaries
Wages
Commissions Payroll amendment forms
Bonuses Updated list of employee details
Manufacturing wages
Risks in this function
Employer contributions
1. Unsatisfactory or unnecessary employees may be recruited or retained
2. Dismissals of employees that may not have been followed the correct
2) Within the statement of financial position
procedures
Employees for remuneration accrued 3. There may be staff that are not necessarily needed, but are kept because of
Accounts payable (Payroll deductions) the human resources department not identifying this
Accounts payable (Employer contributions) 4. Employee details could be fraudulently amended to include non-existent
Various bank accounts employees, or to change the rates of pay applicable to an employee.
The controls that should be implemented within this function to reduce risks to
mentioned earlier on an individual basis starting with the human resource function. It an acceptable level should include:
is important to explore the documentation relevant within each function, remember it
is literally impossible to audit anything if you are not certain about what documents to 1. Interviews should be conducted with all applicants; the head of department in
scrutinize. We will then move on by looking at the risks that exist within each function, which the applicant is going to work should also be present.
as well as the controls that should be in place to ensure that risk is reduced. 2. All appointments and dismissals/resignations should be authorised and
approved by a senior official on supportive documentation.
It is important to note that the system description that is about to be provided is for a 3. Changes to pay rates, promotions to higher employment grades and any other
company with the necessary staff capacity to ensure the necessary levels of changes in service conditions should be decided upon by the human resource
segregation of duties between each function. department after consultation with all interested parties, e.g. unions, and
consideration of relevant laws and regulations, e.g. minimum wage regulations.
4. All changes should be documented and authorized by the authorizing body (e.g.
wage committee)
5. All these amendments should be recorded on sequentially numbered payroll
amendment forms and supported by further documentation. These should also
be authorised and signed by senior management
6. All documents above should be maintained in each employee file. This will
include documents such as application forms, personal details of each
employee, letter of appointment, IRP2, authorisation in respect of deductions,
employment contracts and payroll amendment forms.
, The controls that should be implemented within this function to reduce risks to
1.4 TIMEKEEPING an acceptable level should include:
Description of the function 1. Clock cards should:
This function is necessary to keep an accurate and complete record of valid hours a. be numerically accounted for;
worked for which the company must remunerate employees, i.e. the company needs b. be issued by the personnel department and prepared from personnel
to ensure that all employees are paid exactly for the hours that they worked. This records/master file
relates mainly to wage earners, as salary earners usually get paid at the end of the c. be kept at clock machine, under supervision, not with the employees).
month, and it is usually a fixed amount. Wage earners on the other hand, get paid
weekly, and their remuneration will vary depending on the hours that they have worked 2. Entry and exit points to the work area should:
by requiring the employee to pass a clock card or swipe through a time clocking device a. be limited to one
which will automatically record the time of either entry or exit. On a weekly basis, daily b.
hours clocked will be calculated and totalled before being sent to the next function c. supervised during clocking periods
the payroll preparation function.
3. Clock procedures:
Documentation used
a. clocking machine should be situated at the entrance to ensure that
Blank clock cards personnel may not leave premises without clocking in/out;
Hours recorded on clock b. supervision over clock (prevent employees to clock in for absentees).
Batch control sheet and batch register
4. The foreman should:
Risks in this function a. keep a record of personnel present and time worked
b. sign clock card as evidence of approval of hours worked by the
1. Fellow employees can clock in for an absent employee, therefore resulting in employee
recording of invalid hours
2. Clock cards could be made out and clocked for ghost employees, thereby
facilitating the payment of wages to ghost employees
3. Errors could be made by payroll department, in calculating and collating Overtime should:
information on the clock card for recording, e.g. hours worked and rates used c. be authorised according to the company policy by the factory manager
etc. or foreman
.
1.5 PAYROLL PREPARATION The controls that should be implemented within this function to reduce risks to
an acceptable level should include:
Description of the function
1. The hours recorded on the payroll should be obtained directly from the clock
The aim of this function is to calculate gross wages, deductions from employees which card or computer-transaction file
must be paid over to the relevant authorities, and net wages. 2. The wage rates, deductions should be obtained from personnel records or
master files;
As mentioned earlier during our discussion of the timekeeping function, at the end of 3. The calculations and castings should be reviewed by an independent person
each week, the details on the clock cards need to be calculated and collated, so that (e.g. one wage clerk checks another clerks work/edit checks);
the payroll can be drawn up. This involves calculation of all the hours worked, and 4. Before payments can be authorised, the senior personnel, should inspect the
must be split between overtime and normal hours, as the rates per hour for these two payroll and the week to week reconciliations performed.
categories are different. Total hours worked by an employee, multiplied by the 5. All personnel should sign payroll as proof of functions performed.
amount that the employee is to be paid for the week. Very important to remember that 1.6 PAYMENT PREPARATION AND PAYOUT
in this function appropriate deductions, for e.g. PAYE, must also be extracted from
authorised, up to date tables, or in the case of other deductions, for e.g. Pension Fund, Description of the function
must be deducted in terms of the authorisation form completed by the employee. This
information is then recorded on the payroll also referred to as the wages journal. The objective of the function is to ensure that employees are paid out the amount of
wages for which they have worked. As wages are paid out weekly, it is done mostly
Documentation used by cash, for which an employee must sign after the collection thereof. Employees will
also receive a pay slip, indicating how much they have earned, and the amount of
Clock cards money that should be included in their pay packets. The pay packets should be
Updated list of employees distributed at the respective paypoints of the employees; they should count their cash
Payroll (wage journal) immediately upon collection, and compare it to the pay slips. Any discrepancies should
Week to week reconciliation be queried immediately. Where an employee is absent during the pay out of wages,
Risks in this function be recorded.
1. Errors may be made due to incorrect calculations and casting Documentation used
2. The company may use incorrect or unauthorized pay rates, hours or deduction
tables during recording Authorised payroll
3. Fictitious employees may be included fraudulently Payroll signed by employees
Payslips
Paypackets
Unclaimed wages register
Risks of this function
1. Since the payment function is done by working mostly with cash, there is a risk
that errors could occur as well as theft, when cash is actually being paid to
employees, or when the pay packets are being made up.
2. There is also a risk that there could be misappropriation of the unclaimed wage
packets.
