CHAPTER 8:

EMPLOYEE COSTS
Instructor: Assoc.Prof. Doan Thanh Nga, CPA (Aust.)

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 CHAPTER 8 LEARNING OBJECTIVES

- Describe the business functions in payroll system

- Understand risks and control objectives; controls and apply test of
control in each stage:
+ Calculating wages and salaries
+ Recording of wages and salaries and deductions
+ Payment of wages and salaries
- Identify the deficiencies in payroll system.

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 BUSINESS FUNCTIONS IN PAYROL SYSTEM
There are three main stages in payroll system
1. Calculating wages and salaries
2. Recording of wages and salaries and deductions
3. Payment of wages and salaries

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 EMPLOYEE COSTS

1. CALCULATING WAGES Identify Risks

AND SALARIES
Management
2. RECORDING OF WAGES
AND SALARIES AND Controls

DEDUCTIONS

3. PAYMENT OF WAGES
Tests of Controls Auditors
AND SALARIES
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 Payroll system
Overview
(1)Work
Timesheets
recorded

(2) Recognition
of payroll Payroll records
liability

(3) Payment
Payslips
made

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 Employee costs - Documentation

Calculating wages & Recording wages and

Payment
salaries deductions

- Personnel records (wage - Payroll

rates, deductions…) - Accounting books - Bank transfer list
- Timesheets/ Clock cards/ job (journals, nominal - Cheques
card/ Agreed hours ledger)
- Overtime records
=> Payroll & payslip - Taxation returns

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1. CALCULATING WAGES AND SALARIES

• Only valid employees should be paid for the work that they have
performed.
• Directors are responsible for ensuring that salaries are calculated
accurately (including the deductions that are made for payroll taxes).
• Not only can staff morale be affected by late or inaccurate pay, but the
business may be subject to penalties if tax deducted at source (PAYE) is
inaccurate.

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1. CALCULATING WAGES AND SALARIES (cont.)

Risks Controls Tests of controls

• Where new joiners are taken on/ current • Obtain a list of joiners/leavers
employees leave, Human Resources during the period and trace a
(HR)/staff manager should complete and sample through to ensure that
sign a joiners/leavers form which should be appropriate HR documentation was
passed to payroll. Payroll must acknowledge completed and the payroll system
receipt of the form/changes to the payroll amendment was made accurately.
That system should be made and amendments to
• Select a sample of starters and
fictitious the system subsequently reviewed by a
leavers during the period and
employees supervisor.
determine whether they were
are paid
• Personnel files should be held for all genuine employees by tracing
employees. employee details back to personnel
files.
• Assign unique employee numbers to each
employee in the payroll master file. Only • Review procedures for entering
employees with valid employee numbers and removing employee numbers
can be paid from the payroll master file.
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1. CALCULATING WAGES AND SALARIES (cont.)
Risks Controls Tests of controls

• Review evidence (ie signature) of

• Hours worked reviewed by
review by appropriate management
Employees management
paid for work • Review/observation of timesheets or
• Timesheets or clocking in/out used to
they haven't clocking in/out
record hours worked
done
• Review timesheets for supervisor
• Timesheets signed by supervisors
signature
• Changes to payroll standing data (ie
hourly rates) authorised • Reperform sample of calculations
Gross pay • Check sample of wage calculations
• Regular checks of payroll to standing
incorrectly back to standing data
data (ie salary)
calculated
• Wages and salary summary approved • Review evidence (ie signature) of
before payment authorisation by appropriate
management
• Review of gross wages against budget 9
1. CALCULATING WAGES AND SALARIES (cont.)

Risks Controls Tests of controls

• Review evidence (ie signature) of

Net pay (ie • Non-statutory deductions (ie authorisation by appropriate
deductions) wrongly pensions) authorised by management
calculated employee and management • Review evidence of authorisation
from employee

Changes to standing
data (joiners, • Changes must be authorised by
• Review forms for evidence of
leavers, pay rates) appropriate management via
authorisation by management
inappropriately made standard forms
or not made

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1. CALCULATING WAGES AND SALARIES (cont.)

Context example: Calculating wages

Workbook: page 201

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1. CALCULATING WAGES AND SALARIES (cont.)

Context example: Tests of controls over calculating pay

Workbook: page 202

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 Interactive question 1: Calculating pay

The following system of time records exists at Shepherd Limited. Staff members are
required to fill in a manual timesheet as they arrive, stating the time of arrival and as
they leave, stating the time of departure. Staff members are then paid an hourly rate
on the basis of this record.
Requirement
Which two of the following outcomes could arise from this system?
A. Employees may be paid at an inappropriate rate
B. Employees may be paid for work they have not done
C. Employees are paid for the hours they have worked
D. Employee deductions may be inappropriate
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2. RECORDING OF WAGES AND SALARIES AND DEDUCTIONS
Risks Controls Tests of controls

Gross and net pay • Reconciliations between pay and

are not accurately deductions from one period to
recorded on payroll the next (differences caused by
leavers, joiners, overtime) • Review reconciliation for evidence
(Various elements of of review by management
pay might not be • Controls over calculations as
recorded correctly in above (Calculating wages and
payroll) salaries)

• Check this reconciliation has been

Wages and salaries done, reviewed by appropriate
• Reconciliation performed management and any discrepancies
not recorded
between nominal ledger and investigated
accurately on the
payroll
nominal ledger • Trace a sample of months’ payroll to
journal entries
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2. RECORDING OF WAGES AND SALARIES AND DEDUCTIONS
Risks Controls Tests of controls

Amounts paid to • Review bank reconciliations for

• Bank reconciliations evidence of review by management
employees might not be
performed and reconciling
reflected in the cash at • Trace a sample of months’ payroll to
items investigated
bank account. journal entries

• Review bank reconciliations for

Wages paid are not • Bank reconciliations evidence of review by management
correctly recorded in performed and reconciling
bank and cash records items investigated • Trace a sample of months’ payroll to
journal entries

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2. RECORDING OF WAGES AND SALARIES AND DEDUCTIONS (cont.)

Context example: Preparation of payroll

Workbook: page 204

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2. RECORDING OF WAGES AND SALARIES AND DEDUCTIONS (cont.)

Context example: Test of controls over recording pay

Workbook: page 204

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 Interactive question 2: Recording pay
Personnel and wages records at Simonston Brothers Limited are maintained by Sam, the wages
clerk, on a personal computer. Sam calculates the hours worked by each employee on a weekly
basis, based on that employee's clock card, and enters them on the computer. The payroll program,
using data from personnel records in respect of wage rates and deductions, produces the weekly
payroll and a payslip for each employee.
Sam uses the payroll to prepare the bank transfer list, which he then sends to the company
accountant. The accountant signs the transfer list and has it countersigned by a director. The wages
clerk then processes the bank transfer on the computer.
Requirement
Which two of the following are deficiencies which exist in the wages system at Simonston
Brothers Limited?
A. Sam records the salaries and organises the payment of wages.
B. There is no review of the payroll.
C. The bank transfer list is countersigned by a director.
D. The payroll and the time recording system are separate.

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3. PAYMENT OF WAGES AND SALARIES

Risks Controls Tests of controls

Wrong amounts are
paid to Her
• Agree gross earnings and tax • Agree sample from tax returns to
Majesty's Revenue
deducted to tax returns bank statement showing payment
and Customs
(HMRC)

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3. PAYMENT OF WAGES AND SALARIES (Cont.)
Risks Controls Tests of controls
Payment of salaries by bank transfer or BACS • Inspect final report of all amounts due to
• Each month, a final report should be be paid to employees for evidence of
generated of all amounts due to be paid to review and ensure unusual items were
employees and reviewed for any unusual followed up.
amounts/employees • Review payroll records, postings and
• Preparation and authorisation of bank transfer records supporting bank transfers/BACs
People who
lists payment to ensure the employee actioning
are not
• Comparison of bank transfer/BACs list with the payments did not prepare the payroll
employees are
payroll records.
paid and those
• Maintenance and reconciliation of wages and • Review the monthly report of bank detail
that are
salaries nominal ledger account changes for evidence they have been
employees are reviewed and each change has been
• The employee actioning the payments should
not paid. investigated.
not be the same individual that prepared the
payroll • for salaries, check that comparisons are
• If possible, generate a report of any changes being made between each month's payroll
in employee bank details made for the month net pay summary and examine a certified
and check the reason for the change was copy of the bank list for bank transfers
genuine showing payments to employees. 20
3. PAYMENT OF WAGES AND SALARIES (cont.)

Context example: Payment of wages

Workbook: page 206

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3. PAYMENT OF WAGES AND SALARIES (cont.)

Context example: Tests of control over payment of wages

Workbook: page 206

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 Interactive question 3: Payment of wages

Which two of the following control activities will reduce the risk of employees
who have left being made up a pay packet which is collected by the leaver or an
accomplice?
A. Check that each employee only collects one pay packet
B. Supervision of payout by member of staff who knows all the employees
personally
C. Authorisation of payroll
D. Comparison of payroll with wage packets to ensure that they match

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4. DEFICIENCIES

it is important to be able to identify the deficiencies of systems.

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 Interactive question 4: Deficiencies of a payroll system

The following describes the payroll system in operation at Whistling Co. For each process indicate
whether the process indicates a strength or a deficiency of the system.

1. Employees each have an electronic card to swipe in order to enter and

leave the factory premises. This 'swipe' system automatically updates time  Strength  Deficiency
records in the payroll system.
2. There is no personnel department. Employees are engaged by
 Strength  Deficiency
department heads with the verbal consent of a director.
3. On leaving, employees are required to return their swipe cards.  Strength  Deficiency
4. The payroll has a variance function which reports items within the
payroll falling outside the expected conventions which must be resolved by
 Strength  Deficiency
an authorised member of staff before the payroll can be finalised. The
ability to resolve this report is controlled by a secret password.

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Summary

Controls in the employee costs system are focused

on the following key points of the cycle

Recording wages and

Setting waages Payment
deductions

Risks: Risks: Risks:

• Employees are • Incorrect recording of wages and cash • Employees are
paid paid not paid
for work not done • Incorrect deductions leading to future • Non-employees
liabilities are paid

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