Question

  What are the common errors and frauds in the personnel and payroll cycle?

·     Which control characteristic are auditors looking for to prevent or detect these errors and frauds?

·     What features of the payroll system could be expected to prevent or detect payment of a fictitious employee?

Answer 1

Common errors and frauds in the personnel and payroll cycle are listed below :
1) False employees or Fictitious employee. Employees who had left the company or the one who are deceased.
2) Payments which are not authorized by management
3) Incorrect salary payments - Incorrect workings hours (more than the hours worked)
4) Incorrect wages or any compensation or bonus calculation or over payments
5) Commission paid incorrectly
6) Fraud in the documents which are submitted for reimbursement. (Value shown more than the actual expenses)
Control characteristic are auditors looking for to prevent or detect these errors and frauds :
1) Separation of duties / Dividing the tasks - For example recruitment work to be done by HR people and payment processing to be done by payroll. So better control can be placed.
2) Change Authorizations : A written or signed authorization by the manager should be made compulsory before implementing the change for the employee ( for example an employee is working over time , it should be authorized by the manager by giving an approval in mail to the payroll team)
3) Check payment controls : Proper payment control should be there in the payroll system so that people don't payment for an employee who has left the company
4) Internal Audit : As a standard practice Internal Audit should be done in Payroll department regularly ( may be monthly or quarterly) to check the controls in process. It helps in detecting error done by an employer and also to punish the employee who is doing fraudulent activity
Features of the payroll system could be expected to prevent or detect payment of a fictitious employee:
1) Approval and authorization from Management before an employee is added to the payroll register
2) Use direct deposit for payroll checks to create a paper trail
3) Most importantly separation of duties in recruiting the employees and maintenance of payroll records as well as personal records
4) Audit should be done on reference checks on new hire.