Question

Payroll may seem like an easy area to review however there are many items to review for this function. Please share your thoughts on auditing payroll and payroll accruals, etc. How would you approach this and what are specific areas/items you would want to verify?

Answer 1

Payroll audits are necessary for the reasons as below :

1) For having upto date information about payroll

2) For ensuring that proper statutory deductions are being made and thereby compliances are met related to payroll

3) Reconciling banking transactions

4) To ensure employment status of employees - For instance, to confirm that an employee who is on employment leave is not getting wages /salary by error

Specific areas which one can verify with respect to payroll are :

a)Who is responsible for hiring and sacking employees from the organisation

b) Flow /process of paperwork for newly joined and terminated employess

c) Whether there is a separate bank account maintained for making payments to employess

d) Whether budgets are outlined for payroll and whether the actual incidence of payroll is within the budgetary limits and if not then reasons therefor as well as approval from higher authorities to spend increased amount on payroll as compared to budgeted

Payroll accruals happens because there will always be certain time lag between the time employees render services and the same are paid due to :

a) Payroll clerk receives data from time office after a lag

b) Data has to be scrutinised to understand that there are no fake or ingenuine claims

c) Getting payroll checks signed by a competent authority

It should be checked that whether following has been accounted for :

Salary/Wage (Debited )as expense ( Income Statement)

Salary/Wage (Credited) payable as liability ( Balance Sheet )

Optional deductions/Contributions for Pensions etc( Credited) as liability ( Balance Sheet)

Withholding taxes ( Credited) as liability ( Balance Sheet)