AUDITING

BAC2664 (New), BAC2287(Old)

Topic 9, Lecture 10
Audit of the Payroll and
Personnel Cycle

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 Payroll and Personnel Cycle
• Cycle form
• Functions in a cycle and related documents
• Characteristics and objectives of internal control
• Audit objectives of payroll and human resources
• Compliance with the laws
• Confirmation of basic salary, tax deductions and
EPF
• Test of controls and real transactions
• Test for ‘dummy workmen’

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 Overview of the Payroll Cycle
• Hiring of personnel (terms and conditions, letter of
appointment)
• Time keeping (punch card used to record attendance)
• Prepare payroll register (subsidiary ledger – detailed
record of all personnel – rate of pay, allowances,
deductions, net pay)
• Approve pay cheques (cheques or credit transfer
prepared and approved)
• Distribute or disburse pay cheques (cash, cheques,
credited directly to personnel bank account)

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 Payroll Activities, Documents,
Records
Activity Document Record

Authorization:
Rate of pay Rate authorization Employees earnings
form record
Deduction Deduction
authorization form Payroll register
Preparing payroll
register Punch card

Signing pay cheques Cheques, credit Payroll register

transfer
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 Payroll Activities, Documents,
Records
Recording:

Journalizing, posting General journal

the payroll Payroll register

Summarizing journal
entries

Posting summary General ledger

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 Payroll Activities, Documents,
Records
Custody:
Access to documents,
records restricted to
authorized personnel
only

Subsequent
accountability:
Unclaimed cheques
properly controlled

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 Human Resource Department
Activity:
Hiring and processing new recruitments employees

Responsibilities:
1 Interviewing, selecting suitable employees,
2 Issuing letter of appointment
• Maintaining personnel files in alphabetical order for
each employee (file contains: application form, letter of
appointment, approved rate of pay, authorized
deductions)
• Maintain earnings record

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 Various Departments
Activity:
Monitor hours worked

Responsibilities:
5 Maintain record of hours, days, month worked
6 Prepare and approve summary of hours
worked (normal hours, overtime)
7 Maintain punch card (serial numbered and
controlled for issued and unused)
8 Send approved summary to HRD for further
processing
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 Human Resource Department
Activity:
Compute the payroll

Responsibilities:
5 Prepare payroll register from summary of
hours worked
6 Compute deductions according to
statutory EPF, IRB, SOCSO
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 Cashier
Activity:
Check the payroll register, make disbursement of payroll

Responsibilities:
5 Maintain an imprest system for payroll (reconcile new,
current, closed personnel account)
6 Reconcile float for each month to the total net pay
shown in payroll register
7 Check and reconcile all employees have presented the
cheques for the month

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 Accounting Department
Activity:
Distribute payroll

Responsibilities:
5 Pay cheques based on cashier’s payroll
6 Personnel produce identification and acknowledge
receipt when collecting pay cheques
7 Make surprise attendance at payout of net pay
8 Unclaimed cheques returned to cashier
9 Comply with Unclaimed Moneys Act 1965 – where pay
remain unpaid for 12 months

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 Accounting Department
Activity:
2 Journalizing (allocating, classifying) basic pay, allowances, deductions, net
pay
3 Summarizing journal entries, posting the summary

Responsibilities:
6 Recording basic pay, allowances, deductions, net pay in the GJ according to
chart of accounts
7 Record net pay in cash book
8 Posting to GL

Possible errors/irregularities:
Recording payroll to the wrong account

Control procedures:
14 Establish proper chart of account
15 Establish internal verification of extensions and footings

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 Internal Control Questionnaire
Does the system ensure that only bona fide employees can be paid for work
actually done at rates approved by management?
Are proper approvals for engagement of new employees required?
3 Are punch cards used, controlled, examined, and approved by dept head?
4 Are time keeping, payroll preparation, distribution, and cheque signing functions
separated?
5 Are payroll disbursements made by cheques?
6 Are overtime rates and hours properly approved?
7 Are rates of pay checked to authorized rates?
8 Is employee identification required when pay is distributed?
9 Is there adequate control over unclaimed wages and subsequent payment?

Does the system ensure that errors on payroll are promptly detected?
• Are payroll calculations checked by a second employee?
• Is the payroll independently checked for rate changes, new recruitments, and
leavers?
• Is there authorization for rates and rate changes in payroll files?
• Are employees furnished with details of gross pay and deductions?

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 Internal Control Questionnaire
Does the system prevent payrolls being
completed and paid without proper
approval?
2 Are payrolls independently approved and
distribution reviewed?
3 Is cheque preparation segregated from signing
and distribution function?
4 Are imprest bank accounts used?
5 Are independent reconciliations of payroll bank
accounts prepared?
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 Test of Control
The audit of salaries and wages should be sufficiently comprehensive to
determine whether:
2 Payment ought to have been made
3 Deductions have been correctly calculated and accounted for
4 Payments and deductions have been correctly recorded in the
books.

Audit Procedures:
7 Select (10 employees – 10%) in 1-3 month and trace amount in
payroll register to bank statements.
8 From the same selection:
(a) vouch salary, rates, to authorization of engagements or rate
changes signed by authorized person listed in the PF.
(b) where overtime and allowances are paid:
(i) check calculations, basis of payment
(ii) vouch to authorization for payment
(c) check for authorization for any payment of bonus

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 Test of Control
From the same selection:
2 Check the calculation of EPF, SOCSO deductions
3 Check employees contribution in total

From the same selection:

6 Agree in total with the copy stamped by EPF, SOCSO
7 Check tax deducted by reference to authority given by IRB
8 Scrutinize monthly salary and wages totals for the year
9 Obtain explanations for any unusual items
10 Ensure payrolls have been approved by the correct person
11 Cast, cross-cast all columns
12 Check posting of summary total to GL
13 List any missing supporting documentation and authorization
14 Discuss with independent responsible official
15 Prepare brief memorandum discussing the matters

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 Substantive Tests
Management assertions Objectives of
substantive procedures
– test of details
Existence or occurrence Existence
Ownership
Rights and obligations Completeness
Completeness Accuracy
Valuation or allocation Classification
Cut-off
Detail tie-in
Realisable value
Presentation Presentation
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Disclosure Disclosure
 References
1 Lecture notes
2 Tutorial questions
3 Past examination questions
4 Text – margaret boh, chapter
5 articles

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