Question

TNC advertising company appointed an auditor to resolve the problem of irregular accounts that is showing in its financial reports: that the gross profit is 40% margin but its net profit is showing loss in the income statement. After comparing the budgeted figures, all the indirect expenses are under control except salaries and wages and their payment method is found to be suspicious. The company decided to hire Mr. Younus as the external auditor. Based on the above scenario:

1. Design adequate audit procedures that Mr. Younus will use related to vouchers and payments.

2. Give recommendations on how to resolve the issues experienced by the company, at the moment.

Answer 1

Audit Procedures for Payroll Testing:

1. Look at the employees listed on your payroll

Review your employees listed on your payroll. Verify that all of these employees worked for you during the time period. If more workers are listed on your payroll than you had working for you, you may have a problem.

Some employees commit payroll fraud by adding fake employees to payroll. Or, you may have forgotten to remove a terminated employee from your payroll.

Make sure that the list of employees on your payroll matches your employment records. Remove any employees who no longer work for you. You may need to dig deeper to find out why those employees are on your payroll.

2. Analyze your numbers

When conducting a payroll audit, you can’t avoid analyzing numbers. Running payroll is mostly numbers—pay rate, hours worked, total pay for the period, and withheld taxes are some essential payroll numbers.

Examine each employee’s pay rate to ensure you paid the worker the correct amount. Make sure the pay rate is up-to-date and matches the employee’s record. If you gave the employee a raise or salary reduction, verify that you changed the pay rate on the applicable date.

Look into the hours the employee worked. Did they really work those hours during the pay period? Does your payroll system match what’s recorded in your time and attendance software? Did you provide overtime pay to nonexempt employees who worked over 40 hours in a workweek?

3. Verify time is correctly labeled

Most employers give employees time off from work, with many providing paid time off (PTO). Do you provide time off? If so, make sure you or your employees properly labeled time when running payroll. That way, you can identify when an employee worked and when they didn’t.

If you provide a set number of paid time off, subtract it from the employee’s available time off. Be sure to label time off as vacation, personal, sick, bereavement leave, or whatever labels you use.

4. Reconcile your payroll

Next, look at your payroll. Compare your findings to other records to verify your totals match. If there is a discrepancy, closely examine your records to find out the problem.

Compare your payroll records to your business’s general ledger. The payroll expenses in your general ledger should match your payroll audit findings.

Next, you need to reconcile your payroll records with your bank statements. Compare the amounts listed in your payroll records to what was withdrawn from your account. Consider having a separate payroll account to make bank reconciliation easier.

5. Confirm tax withholdings, remittance, and reports are accurate

Another critical payroll audit procedures step is verifying the accuracy of your employment taxes.

Make sure you withheld the correct amount of taxes from each employee’s wages. You must withhold federal income, Social Security, and Medicare taxes. You may also need to withhold state and local income tax. And, verify that remitted tax amounts are correct.

Compare the values on your payroll reports to your payroll records. Wages and tax withholding amounts listed on your payroll reports should match your payroll records.

By using the above procedures, the Copany will get to know the suspicious transactions in the payroll and can resolve the matter.