Question

EXHIBIT 5.15 

Internal Control Questionnaire Payroll Processing

Yes/No Comments

Control Environment

Are all employees paid by check or direct deposit?

Is a special payroll bank account used?

Are payroll checks signed by persons who do not prepare checks or keep cash funds or accounting records?

If a check-signing machine is used, are the signature plates controlled?

Is the payroll bank account reconciled by someone who does not prepare, sign, or deliver paychecks?

Are payroll department personnel rotated in their duties? Required to take vacations? Bonded?

Is there a timekeeping department (function) independent of the payroll department?

Are authorizations for deductions signed by the employees on file?

Occurrence

Are time cards or piecework reports prepared by the employee approved by her or his supervisor?

Is a time clock or other electromechanical or computerized system used?

Is the payroll register sheet signed by the employee preparing it and approved prior to payment? Are names of terminated employees reported in writing to the payroll department?

Is the payroll periodically compared to personnel files?

Are checks distributed by someone other than the employee’s immediate supervisor?

Are unclaimed wages deposited in a special bank account or otherwise controlled by a responsible officer?

Do internal auditors conduct occasional surprise distributions of paychecks?

Completeness

Are names of newly hired employees reported in writing to the payroll department?

Are blank payroll checks prenumbered and the numerical sequence checked for missing documents?

Accuracy

Are all wage rates determined by contract or approved by a personnel officer? Are timekeeping and cost accounting records (such as hours, dollars) reconciled with payroll department calculations of hours and wages? Are payrolls audited periodically by internal auditors? Are individual payroll records reconciled with quarterly tax reports?

Classification

Do payroll accounting personnel have instructions for classifying payroll debit entries?

Cutoff

Are monthly, quarterly, and annual wage accruals reviewed by an accounting officer?

5.65 

Internal Control Questionnaire Items: Assertions, Tests of Controls, and Possible Errors or Frauds. Following is a selection of items from the payroll processing internal control questionnaire in Exhibit 5.15.

• Are names of terminated employees reported in writing to the payroll department?
• Are authorizations for deductions signed by the employee on file?
• Is there a timekeeping department (function) independent of the payroll department?
• Are timekeeping and cost accounting records (such as hours, dollars) reconciled with payroll department calculations of hours and wages?

Required:

For each of the four preceding questions:

• Identify the assertion to which the question applies.
• Specify one test of controls an auditor could use to determine whether the control was operating effectively.
• Provide an example of an error or fraud that could occur if the control were absent or ineffective.
• Identify a substantive auditing procedure that could detect errors or frauds that could result from the absence or ineffectiveness of the control items.

Answer 1

Internal control system in an organisation is required to be perfect and effective in order to minimise losses and wastages. Therfore, organisation should try to implement such Internal controls that are easy to monitor and effective.

1. For the above questions, the assertion is related to applying Internal control in an organisation. Internal control is best technique to monitor business operations. Internal Auditor may be in house or from outside an organisation. For a well-defined Internal control in an organisation, organisation/business's operating policies, procedures, should be clearly defined, documented , implemented. Organisation's objectives, priorities , structure to be exactly known like role of each authority, etc.

2. Test of Controls to be applied are as given below:

• Whether payroll master has been properly updated to remove the names of persons , who left the organisation,
• Whether proper accounting entries have been recorded in the books of accounts like example, to protect unauthorised changes in time and out time of employees have been maintained.
• Whether a sample of data processed by payroll software and time punching machines have been verified.

3. Error/Fraud if Internal Control is ineffective:

• If Leave card not updated or authorised on time, employees can make misuse of this area and likely to be case of mismanagement and frauds.
• Full and final settlement, There may be cases of full & final settlement of employees done who left the organisation, but assets still with employees, and also their liabilities not discharged, resulting in poor internal control and loss for organisation.
• Contact details not updated of leaving employees, Userid to be deleted of outgoing employees, if this area kept loose, there can be areas of frauds, losses for an organisation.

4. Audit procedures to detect  frauds:

• A good IT system limits risk of fraud , i.e Standardised reporting formats, passwords, processing controls , application controls , if included keeps environment User friendly and smooth process of payroll of employees in an organisation.
• MIS Reports related to payroll regarding their accuracy, adeqacy to be reviewed and monitored at frequent time intervals to ensure transparency and proper Internal control in an organisation.
• Management Personnel should have high ethical values and integrity, Key controls like review of accounting system, reports, inspection of supporting documents, should be done effectively and this helps to overcome problem of segregation of duties , responsibilities.
• Monitoring is the prime responsibility of Management , should be undertaken and feedback should be taken to understand the effectiveness of controls.