THE PAYROLL SYSTEM

Objectives
The main objective of a payroll is to ensure that:
- Wages and salaries are paid at the correct rates.
- Wages and salaries are paid to the right people.
- Wages and salaries are paid on time
- Statutory Deductions to the wages and salaries are appropriate
- Wages and salaries are accurately recorded
- Wages and salaries are paid for work done.
Key terms: 1. Clock cards/ timesheets
2.Payroll sheet – are payroll summaries that provide the detailed
breakdown of the gross pay, deductions, and net pay for each staff,
normally in a spreadsheet format.
3.Pay slips – Details of each staffs wages that are provided to the
staff.
4.Bank Transfer List/payment list (instructions to the bank) – as to
how much must be transferred to each staff.
5. Punch card or swipe card or a biometric system to record the staffs
attendance. And the attendance recording system is normally
supervised.
Appointment/ leavers
- Appointments: All appointment of staff, whether temporary or
permanent, should only be made by the human resources
department, separate from the payroll department and operations
department.
This is to ensure that all employees who are paid are valid as there is
segregation of duties between those who appoint the staff and those
who authorise their salaries, and those who compute the payroll.
- There should be formal procedures requiring the interviews
manager to provide detailed written notification to a responsible
official (for example the wages supervisor) of starters and leavers.
- Update ‘starters and leavers’ details on a timely basis. Procedures
should ensure that ‘starters’ and ‘leavers’ details are added to or
deleted from the master file immediately after starting or leaving the
company’s employment.
This to ensure that the starters are only paid from the month that
they start their employment and before that.
Leavers should only be paid up their final month of employment and
after.
- All increases of pay should be proposed by the HR department and
then formally agreed by the board of directors
Ensure that all increments are properly authorised as well as duly
documented.
Standing data in the master file:
• ‘Read’ and ‘amend’ access to the master file should be available
from specified terminals to responsible officials who have a need and
authorised cause to access the information.
Not all staff can amend the master file, nor access the file.
• Maintain a log of access attempts (Controls should include a
computer log which registers date and time access to the master file
by the various users. This should regularly be reviewed by a senior
responsible official of the company)
• Match standing data to the personnel filed periodically
At random intervals a more senior responsible official of the
company (for example the company accountant), should access the
wages master file and check its contents to the manual records
maintained, input documentation and notifications from the
interviews manager as appropriate.

Calculations
- Clock cards sequentially pre-numbered (which details the employee
number and name)(Some companies may use swipe cards as well.
The difference the attendance is recorded on the clock cards, where
as with swipe cards the attendance are recorded in the system)
- Clock card machine supervised or in open view (Staff attendance
machine kept near the security gate (to ensure that there are no
dummy attendances recorded).
- Head count by area supervisor (attendance matched to actual
employees present)
- Any overtime worked reviewed and then authorized. This should be
evidenced by signature on the employees’ overtime sheets.
- Periodic verification of staff cards with personal files of employees
(to ensure that there are no ghost employees).
- Data input: Use application and general IT controls ( for example
range checks, passwords)
- Gross pay, deductions, net pay:
• Preferably automatically calculated by the payroll system.
• Calculations re checked on a sample basis- A senior member of the
payroll team should recalculate the gross to net pay workings form a
sample of employees and compare their results to the output from
the payroll system.
Payments
- Pay slips to be sequentially pre-numbered
- Segregation of duties (payroll sheet, recording, payment)
- Physical cash payments of wages are still common for temporary
staff.
- Salaries:
• Preferably through bank transfer
• Bank transfer list/payment list matched to payroll sheet prior to
authorising the bank payment.
• When authorising the payments, the responsible official should on
a sample basis perform checks from payroll records to payment list
and vice versa to confirm that payments are complete and only made
to bona fide employees.
• Bank transfer list/payment list preferably authorized by someone
other than the person who authorized payroll ( for example the
Finance Director)
- Wages (cash)/Pay packets
• All cash wages should only be paid upon sight of the employee’s
clock card and photographic identification as this confirms proof of
identity.
All Staff must sign acknowledgement of receipt of pay.
• Uncollected wage packets should be kept in a safe place/ deposited
in the bank after a short period.

Process for purchases

- User department requisition goods which must be authorised
by the department head.
- The requisition is forwarded to the purchasing department who
the check if the necessary goods are in stock.
- If the goods are not in stock then the a purchase order is
generated and sent to an authorised supplier.
- Goods are received from the supplier and are checked for
quality and quantity against the purchase order.
- A GRN is then generated to record the goods received.
- The GRN is then used to update the inventory records.
- A copy of the GRN is also sent to the accounts department as
well as the purchases department.
- An Invoice is received from the supplier, which is numbered on
receipt.
- The invoice is attached to a payment voucher.
- The purchases ledger and GL is up dated
- The invoice is matched to the purchase order and GRN.
- The invoice details are checked for accuracy.
- The payment voucher is authorised, and payment is then made
- The purchase ledger and cash book is updated.
Returns to suppliers
- Goods are returned to suppliers together with a goods returned
outwards note.
- Inventory records are updated.
- A credit note is received from the supplier and the purchase
ledger and GL is up dated.
For all systems the critical controls are
1. Authorisation – All activities and transactions must be
authorised.
2. Documentation for all activities and transactions.
3. Adequate segregation of duties.

REVENUE AND CAPITAL EXPENDITURE

Capital expenditure is incurred when a business spends money either
to buy noncurrent assets or to add to the value of an existing non-
current asset.
Revenue expenditure is that expenditure which is incurred to
maintain the existing capacity of an asset so that it can do its daily
work. Examples of revenue expenditure are cost of raw material and
other stores, salaries and wages, repairs and maintenance, stationery
and printing, advertisements, postage, telephone, travel expenses
etc.
The main control objectives over revenue and capital expenditure are
to ensure that:
a. All expenditure is authorised.
b. Proper segregation of capital and revenue expenses is made.
Appropriate classification.
c. Expenses are properly accounted for.
The transaction cycle for capital and revenue expenditure is quite
similar for purchases. However, certain additional control points,
which are to be ensured, are mentioned below:
a. Am authorized budget is prepared for all expenditure.
b. Preparation of a report of capital budget versus actual
expenditure.
c. Preparation of a periodic variance report of those expenses that do
not match the budget.
d. Orders for capital items should be authorised by appropriate levels
of management.
e. A document may be prepared for showing the distinction between
capital and revenue expenditure and for providing guidance on which
expenses to be capitalised. (Company policy on how capital
expenditures are to be classified)
f. All vouchers of revenue expenditure need to have approval of
relevant manager.
g. A senior person should check the accounting treatment for the
expenses (especially repairs and maintenance).
(To ensure that they are appropriately classified)

Non-Current Asset register

The purpose of a tangible non-current assets register is to list details
of all the non-current assets owned by an entity, in order to facilitate
control over those assets. Typically, the register should record cost,
depreciation and net book value information of each asset along with
identifying details. For example, in the case of plant and machinery –
gross cost, annual depreciation rate, depreciation provision, net book
value, date of acquisition, serial number and description and location
of asset.
 The register should be updated by individuals who are separated
from the acquisition, custody, and disposal of assets.
 Periodical reconciliation of non-current register with the general
ledger to be done and any differences to be investigated.
The reconciliation requires the Carrying amount in the SOFP and the
carrying amount in the non- current asset register,
 Preparation of an exception report if the non-current register does
not match the non-current assets account maintained in accounts
(SOFP) .
 Invoices should bear appropriate ledger code (distinguishing
revenue items from capital expenditure) in order to facilitate correct
recording.
 Depreciation rates should be reasonable and authorised.
IAS 16 requires the use of appropriate depreciation rates.
 Depreciation calculations should be checked
 NCA register should be used to confirm physical existence on a
periodic basis
 To ensure completeness of recording, periodic checks should be
made to ensure that assets in existence are completely recorded in
the register
Bank and Cash
The main objectives of cash and bank transactions are to ensure that:
- All money received is recorded completely and accurately .
- All money received is banked as soon as possible to safeguard
the money.
- Money is properly safeguarded stored in a safe location before
banking in. .
- Payments are made to correct persons and properly recorded.

Main controls on bank and cash

- Segregation of duties between the person receiving the money,
the person depositing it in the bank and the one making the
payments.
- Match bank deposit slips with the cash and cheque receipt
register (This is the cash book) .
- Daily cash receipts immediately recorded in the customers’
accounts.
- Cash receipt register reconciled daily with the customer
accounts.
- Periodical management review of the register is to be
conducted to ensure that cheques are promptly deposited into
the bank.
- Bank reconciliation to be prepared periodically and differences
to be investigated.
- Receivables’ ledger reconciled with Receivable control account.
- Cash kept under the custody of the cashier. And there should be
restricted access to cashier’s room. ( Cashier room should be
monitored using CCTV)
- Security personnel to accompany the cashier while depositing
or withdrawing cash from the bank.
- Minimum cash balance to be maintained needs to be decided.
 - Whenever cash balance exceeds minimum balance, excess
balance deposited to be in the bank.
- Surprise cash counts by personnel other that the accounts
department.
- Cash to be suitably insured for cash in hand, and cash in transit.
- Unused cheques to be kept under lock and key.
- Cheques books to be in the custody of a responsible person

TEST OF CONTROLS
These are tests that are performed by the auditor to confirm that the
controls are operating as prescribed, and as such can be relied on.
If the controls can be relied on then the auditor can reduce the level
of substantive testing.
If the controls are not operating as prescribed then the auditor must
increase the level of substantive testing.

Exam Question
You might be asked to:
- Identify and explain deficiencies in the system
- Recommend a control to address each of these deficiencies
- Describe a TEST OF CONTROL the external auditors would perform
to assess if each of these controls, if implemented, is operating
effectively.
What is a Test of Control? An audit procedure designed to evaluate
the operating effectiveness of controls in preventing, or detecting
and correcting, material misstatements at the assertion level.
Examples of test of controls:
- Inspection of documents (e.g., authorizations or sequentially
checking the documents for completeness)
- Enquiries about internal controls which leave no audit trail (e.g.,
is the person who is SUPPOSED to perform the function actually
performing it or is someone else is doing so)
- Reperformance of control procedures (e.g., reconciliations and
calculations)
- Examination of evidence of management views as well as
authorisation by management. (e.g., minutes of meetings
(BOD))
- Observation of controls (Observing the receipt of goods or
inventory count or cash count) (Observation of physical
activities)
- Using TEST DATA(CAATs)
If you are confused about how to word a TOC, start with “The auditor
should….”

Further to the examples in the notes

1. Transactions are not authorised
Recommendation is that the transaction must be authorised by
a responsible official.
TOC
a. Discuss the Authorisational procedure with the responsible
official
b. Select a sample of the relevant document and review
authorisation by the relevant official.
2. Documents are not prenumbered
Recommendation documents to be pre numbered
TOC inspects the document.
Lack of review
3. The bank transfer list not matched to payroll total
Recommendation – Responsible official must match the transfer
list to the payroll.
TOC - Inspect a sample of transfer list for evidence of the
responsible officials matching.
MANAGEMENT ASSERTIONS, AUDIT PROCEDURES AND AUDIT
EVIDENCE
Management assertions are important to score full marks for
questions on substantive procedures.
Assertions are implications of items in the financial statements.
Audit procedures are the procedures performed by the auditor to
obtain proof the assertions.
Evidence are the results of the procedures.

Consequently, auditors use these assertions when considering the

potential types of misstatements that may occur and when designing
and performing appropriate audit procedures.

Transactions include sales, purchases, and wages paid during the

accounting period. (SOPL)
Account balances include all the asset, liabilities and equity interests
included in the statement of financial position at the period end

Assertions about classes of transactions and events and related

disclosures for the period under audit (SPOL)
a. Occurred – The transaction actually occurred and is not a
fictitious transaction.
b. Completeness – all transactions and events that should have
been recorded have been recorded and all related disclosures
that should have been included in the financial statements have
been included
 c. Accuracy – amounts and other data relating to recorded
transactions and events have been recorded appropriately, and
related disclosures have been appropriately measured and
described
d. Cut–off – transactions and events have been recorded in the
correct accounting period
e. Classification – transactions and events have been recorded in
the proper accounts.

f. Presentation – transactions and events are appropriately

aggregated or disaggregated and clearly described, and related
disclosures are relevant and understandable in the context of
the requirements of the applicable financial reporting
framework
Assertions about account balances and related disclosures at the
period end (SOFP)
a. Existence - – assets, liabilities and equity interests exist.
The risk is that assets may be overstated by including assts that
do not exist.
b. Rights and obligations – the entity holds or controls the rights
to assets, and liabilities are the obligations of the entity.
c. Completeness – all assets, liabilities and equity interests that
should have been recorded have been recorded and all related
disclosures that should have been included in the financial
statements have been included.
d. Accuracy, valuation and allocation – assets, liabilities and equity
interests have been included in the financial statements at
appropriate amounts and any resulting valuation or allocation
adjustments have been appropriately recorded and related
disclosures have been appropriately measured and described.
e. Classification – assets, liabilities and equity interests have been
recorded in the proper accounts
 f. Presentation – assets, liabilities and equity interests re
appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and
understandable in the context of the requirements of the
applicable financial reporting framework.

There are 4 assertions that are common for both SOPL as well as the
SOFP.
1. Completeness
2. Accuracy
3. Classification
4. Presentation
SOFP additional assertions
1. Existence
2. Rights and obligation
SOPL additional assertions
1. Occurrence
2. Cut- off.