Payroll Internal Audit Plan
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The document outlines the objectives and procedures for conducting a payroll audit at Panther Tyres Limited. The key objectives are to ensure payroll accuracy, verify employee existence and hours worked, and ensure payroll expenses are recorded correctly. The audit examines payroll records, attendance sheets, rates of pay and deductions. It identifies risks like unauthorized changes and issues suggestions like integrating the attendance and payroll systems to reduce errors.
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Payroll Internal Audit Plan
- 1. Payroll Audit Prepared by : Muhammad Oneeb Khan (Audit Officer) (HEAD OFFICE)
- 2. Payroll Management 1. Payroll Audit 2. Audit Objectives 3. Key Components aligned with Objectives 4. Pre-Audit Procedure 5. Post-Audit Objectives 6. Post-Audit Procedure 7. Risks 8. Controls 9. Suggestions PANTHER TYERS LIMITED
- 3. Significance of Payroll Audit : PANTHER TYERS LIMITED 1. In any organization staff and workforce are the biggest expense and asset. 2. It is very important to make sure that you are keeping a track of employees working hours. 3. To ensure that you manage employee’s time effectively so that you can get the most out of their time. 4. It is also important to maintain complete records of leaves and holidays, as well ensure that your employees are being paid correctly. 5. Employee attendance monitoring is a key function in every HR department. The main objective of attendance record audit is to assist your HR/TIME OFFICE and payroll department to be more efficient. 6. To Check over Automate employee attendance with respect to overtime , late arrivals and Out Door Duty (OD) with approval of HOD. 7. To ensure proper internal controls have been implemented and are being followed. 8. Without a time and attendance system in an organization, it can be difficult for the HR department to track and monitor attendance of the employees. To determine if time and attendance records are properly completed, reviewed, approved, and processed in a timely manner. Good internal controls are important to assure that payroll is being properly administered. As a good record keeping practice, a payroll audit can help: Maintain accuracy and compliance. Identify any potential issues or problems. Strengthen your financial controls.
- 4. Key Payroll Audit Objectives : PANTHER TYERS LIMITED • Existence/Occurrence (whether the payments were to genuine employees of the company) 100% • Accuracy (Validate proper computation) 100 % • Completeness (Payroll overview total amount report (summary of gross pay, deductions, net pay, etc), including a comparison to the previous month for reasonableness. 100% • Cut –Off (To ensure Salaries expense recognized during the period relates to the current accounting period: Matching Concept). 100%
- 5. Key Components aligned with Objectives for effective payroll management : PANTHER TYERS LIMITED • Verify Active Employees (Employment Status) • Verify Appointment Letters (In Case of newly hired employees) • Verify Rate of pay (Confirm Pay Rates) • Review Hours/Days Paid (Calculate Hours Worked and Check OD’s) • Additions Processing (Payment of arrears , Special Increments and etc..) • Deductions Processing (All Deductions including; Income Tax, EOBI, ADVANCES, PF 7% etc.. • Compare Payroll Reports to General Ledger (Validate Ledger Accounts) • Reconciliation Review with Summery (Bank Transfer and Cash Salaries)
- 6. PANTHER TYERS LIMITED HO Salary (Pre-Audit) Steps: 1. Verification of admin approved attendance and leave on payroll sheets through punch cards (Other staff) 2. Verification of admin approved attendance and leave on payroll sheets through monthly attendance sheets (Permanent staff) 3. Verify the rate of pay from previous month salary sheet. In case of new employee check appointment letter. 4. Verify all the deductions like advances ,P.F, loan from P.F from the calculation sheets provided by Accounts Dept. 5. Compare the total payable amount from Salary sheet with summary provided by Accounts Dept. 6. Verify the total salary payable amount with summary of total bank transfer and cash salary(Other Staff). 7. Evaluate, Examine and Report the significant differences.(If any) Pre-Audit Procedure:
- 7. PANTHER TYERS LIMITED HO Salary (Post-Audit) Post Audit Objectives: • To ensure that all paid salaries were authorized. • To ensure that salaries were paid at the correct rates of pay. • To ensure that employees are only paid as per attendance. • To discover and correct any errors and discrepancies in the monthly salaries. • To prevent and detect over/underpayment in staff salaries/allowances. • To expose and reveal any ghost- workers on the payroll. Is the process where by thorough examination of monthly payroll and transaction list together with other supporting documents like; input, correspondence, and statutory deduction forms/letters are perfectly examined to ensure that payment made forms/letters are perfectly examined to ensure that payment made so far is error free and the financial records reflects the actual payment without any under/overpayment for the audited period. Post Payroll Audit:
- 8. PANTHER TYERS LIMITED HO Salary (Post-Audit) Steps: • Collect the official monthly payroll and transaction list together with the related supporting documents. • Checking of rate of pay and the transaction list with the preceding or previous month payroll. • Agree Summary of total wages and deductions as per master payroll sheet to the amounts recorded in relevant department sheet. • Ensure proper interpretation and implementation of letters and correspondence as directed by the Establishment, (e.g.) letter of Appointment, Assumption, Promotion, Extension, Termination and Retirement etc. • Ensure proper placement and implementation of promotion exercise, to avoid under/ overpayment in the accrued arrears. • Check approved department wise attendance record with payroll sheets. • Check that leaves are being approved by competent authority on sample basis. • Collating of Audit observations for month and reconcile any differences with the Accountant for proper clarification. • Audit will give a comprehensive report on their findings after they have resolved areas of differences with the Accounts Dept. Post-Audit Procedure:
- 9. 1. Most important changes like: bank account no., salary value change, new hires and leavers 2. Entering Payroll Data (Excel Working) 3. Unauthorized modification of records. 4. Wrong payroll processing/double payments/ fictitious payments 5. No keeping Payroll related documents as per legal requirements. 6. Salary paid without the identification concerned employees. 7. Rate of pay may be changed due to un-authorized editing rights. 8. Record Retention 9. Lack of Systematic Integration (Cause Increase in human error) PANTHER TYERS LIMITED Risks associated with Payroll (Pre/Post)
- 10. PANTHER TYERS LIMITED Controls (Pre/Post) 1. System controls should be in place. Access to the payroll system and data is restricted based on the job duties and established in such a way to avoid the risk of fraud. Example: The person responsible to record salaries should not have the access to record the salaries payment. 2. Duties should be properly segregated. The duties between diff payroll team employees should be properly segregated to ensure there are no conflicts of interest and to avoid fraud risks. 3. Data input/changes should not only be controlled by the person doing the actual inputting, but also should be subject to a peer review (100% or by sample) and high level review and approval from the Manager. 4. A process in place to ensure all payroll related documents are properly kept for the required period and can be easily accessed if required.
- 11. Suggestions • There should be proper control over the totals, such as gross payroll expense, taxes withheld and net check amount, to the general ledger to ensure each payroll processing is correctly recorded in the general ledger. • There should be proper check over the O/D marked in each department. • There should be proper integrated system of attendance and leave record. • There should be systematic integration of SAP and CRANIUM to avoid manual calculations audit checks.(Specially Deductions) PANTHER TYERS LIMITED
- 12. PANTHER TYERS LIMITED PANTHER Tyres Ltd is a name of quality, reliability and superior standards.
Editor's Notes
- Occurrence and Existence A key objective of auditing the payroll is to ascertain the existence of the actual payments and whether the payments were to genuine employees of the company, which is achieved by determining whether there are proper controls over the payroll function. Proper segregation of duties ensures that there is no particular person who can create fictitious employees and authorize salary payment to them. Completeness Due to the huge amounts involved in the payroll, there is a need to verify that all of the amounts paid out to employees are included. These amounts include salaries to permanent employees, overtime, wages paid out to temporary workers and other fringe benefits such as medical coverage and housing allowances. The auditor should query for any outstanding amounts and know the reason why they are still outstanding. Accuracy An auditor should confirm that there were correct computations of all benefits and deductions in the payroll. To test this, the auditor recalculates benefits and deductions for a sample of workers. A proper review of clock cards is undertaken to ensure accurate calculation of pay for work done. Management approves any additions to the basic pay and ensures they were calculated correctly. Additionally, the auditor inspects documentation for proof of management's review. Cut –Off To ensure Salaries expense recognized in during the period relates to the current accounting period. Any accrued and prepaid expenses have been accounted for correctly in the financial statements. Presentation and Disclosure Payroll expenses are presented in the income statement at the end of the financial reporting period. Proper presentation of payroll expenses ensures a true and fair representation of the expense. Disclosures of any unusual amounts included in the payroll are essential in explaining how and why these unusual amounts were paid. The auditor checks whether the payroll expenses have been presented in the required manner and whether any unusual amounts were disclosed in the notes to the financial statements.
- Verify Active Employees For each person that received a paycheck during the quarter, verify that the person was employed during the time period for which the check was issued. Although it is more difficult to commit payroll fraud on a smaller business, one method of financial theft is by cutting checks to terminated employees and then altering the checks for cashing or colluding with the terminated employee to cash the checks and provide a kick back. Verify Pay Rate Verify the pay rate entered into the payroll processing system for each employee. Payroll rates should always be in writing, approved by an owner or manager, and filed with other employee paperwork. Review Hours Paid Compare the hours paid to employees for each pay period to the time clock reports or other tracking device used to record employee hours worked. Pay special attention to overtime hours as the cost of overtime can add up quickly and push a small business over budget in salaries and wages expense. If you offer paid time off, such as paid holidays, sick time and vacation days, review each entry of paid time off to ensure the employee who received paid time off pay was eligible for the pay. Compare Payroll Reports to General Ledger Compare the totals, such as gross payroll expense, taxes withheld and net check amount, to the general ledger to ensure each payroll processing is correctly recorded on the general ledger. If you have multiple salaries and wages accounts, such as manager payroll, administrative payroll and sales payroll, ensure that each category of payroll reflects the correct expense for the employees in those specified positions. Review Payroll Tax Submissions Business payroll taxes include Social Security taxes, Medicare/Medicaid taxes, state unemployment taxes and federal unemployment taxes, as well as the remission of federal withholdings for the employee. The total amount of payroll processed determines how often you remit payroll taxes to the respective taxing authorities, but most payroll remissions will occur at least quarterly with the exception of federal unemployment taxes, which can occur once a year if the business has low payroll amounts. Compare the payroll totals on the tax remittance reports with reports generated by the payroll system to ensure proper reporting of all payroll amounts. Perform manual calculations of all computer-generated totals to ensure proper calculation of amounts due. Verify that electronic or check remissions equal the exact amount recorded on tax remittance reports Bank Reconciliation Review Review the bank reconciliation for the payroll account to ensure that all checks cleared for the issued amount and make a note of any stale-dated payroll checks to research. Make sure you receive the hard copy of all payroll checks from your bank, even if you have to pay an additional fee for the service. Review each payroll check to ensure the check does not appear altered in any way.
- Today's computerized payroll systems make reporting time worked and handling other payroll functions easy and automatic. They provide dozens of payroll reports for auditing and documentation. They offer security through hand, fingerprint and even eye recognition time clock systems to prevent false work-time reporting. They can automatically accrue paid time off and other employee benefits based on time worked. They are also vulnerable in the hands of dishonest employees who have access to and administrative rights to those systems. Entering Payroll Time Data Payroll systems use individual employee codes or other methods of recognition to ensure that employees report their own hours worked. Since codes can be shared, one employee could still falsely clock in for another simply by using another employee's code. Employee handbooks should clearly state the proper procedure for clocking in and out and the consequences for falsely entering payroll information. Human resources should establish clear procedures for requesting time off and changes to employee pay rates. Signatures should be required for any transaction affecting an employee's rate of pay or payroll processing. Division of Payroll Processing Human resources is often responsible for setting up new employees in the payroll system, processing payroll data and distributing paychecks. Entering payroll data and processing paychecks should be split between human resources and accounting to ensure that one person or department cannot complete the payroll cycle without scrutiny. Without a separation of responsibility, a dishonest employees could set up a false employee, record time worked or vacation hours and divert the money to a personal account through direct deposit. There is less opportunity to divert funds when one department inputs data and the other processes the payroll data and receives paychecks. Lack of a Payroll Preview Prior to processing paychecks, payroll systems will produce a set of reports that can be reviewed for accuracy before "live" checks are printed and direct deposits activated. The payroll preview should be done by an employee or department other than those responsible for payroll processing. Terminated employees who are still receiving paychecks, inordinate amounts of hours worked or vacation hours posted can indicate processing errors or manipulation of data. While legitimate errors can occur, deliberate attempts to divert funds could go unnoticed without a "time out" for a quick audit. Lack of Systematic Internal Audits The accounting or finance department should train an employee to conduct an internal payroll audit at least quarterly. Most employees who successfully embezzle large amounts of money do so over time. Periodic, publicized audits of the payroll and accounting functions could help deter a dishonest employee from setting up a scheme to defraud his employer and reduce the financial loss.