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Day 28 – Payroll System [Question Practice]

Question 1 [December 2015][Q.5]

You are an audit senior of Scarlet & Co and are in the process of reviewing the systems testing completed on the
payroll cycle of Bronze Industries Co (Bronze), as well as preparing the audit programmes for the final audit.

Bronze operate several chemical processing factories across the country, it manufactures 24 hours a day, seven
days a week and employees work a standard shift of eight hours and are paid for hours worked at an hourly rate.
Factory employees are paid weekly, with approximately 80% being paid by bank transfer and 20% in cash; the
different payment methods are due to employee preferences and Bronze has no plans to change these methods.
The administration and sales teams are paid monthly by bank transfer.

Factory staff are each issued a sequentially numbered clock card which details their employee number and
name. Employees swipe their cards at the beginning and end of the eight-hour shift and this process is not
supervised. During the shift employees are entitled to a 30-minute paid break and employees do not need to
clock out to access the dining area. Clock card data links into the payroll system, which automatically calculates
gross and net pay along with any statutory deductions. The payroll supervisor for each payment run checks on
a sample basis some of these calculations to ensure the system is operating effectively.

Bronze has a human resources department which is responsible for setting up new permanent employees and
leavers. Appointments of temporary staff are made by factory production supervisors. Occasionally overtime is
required of factory staff, usually to fill gaps caused by staff holidays. Overtime reports which detail the amount
of overtime worked are sent out quarterly by the payroll department to production supervisors for their review.

To encourage staff to attend work on time for all shifts Bronze pays a discretionary bonus every six months to
factory staff; the production supervisors determine the amounts to be paid. This is communicated in writing by
the production supervisors to the payroll department and the bonus is input by a clerk into the system.

For employees paid by bank transfer, the payroll manager reviews the list of the payments and agrees to the
payroll records prior to authorising the bank payment. If any changes are required, the payroll manager amends
the records. For employees paid in cash, the pay packets are prepared in the payroll department and a clerk
distributes them to employees; as she knows most of these individuals she does not require proof of identity.

Required:

a) Identify and explain FIVE internal control STRENGTHS in Bronze Industries Co’s payroll system.
(5 marks)
b) Identify and explain SIX internal control DEFICIENCIES in Bronze Industries Co’s payroll system and
provide a RECOMMENDATION to address each of these deficiencies. (12 marks)

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra

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Answer (a)

Factory staff are each issued a sequentially numbered clock card which details their employee number and
name. This should ensure that employees are only paid for hours they have worked and that the payroll records
record completely all employees, as any gaps in the sequence would be identified.

The payroll system automatically calculates gross and net pay along with any statutory deductions. This should
reduce the risk of employees’ wages and statutory deductions being incorrect as there is a reduced risk of errors
occurring. – A sample of the calculations made by the automated system is checked by the payroll supervisor to
ensure the system is operating effectively; this tests the automated controls within the system.

Bronze has a human resources department which is responsible for setting up new permanent employees and
leavers. Having a segregation of roles between human resources and payroll departments reduces the risk of
fictitious employees being set up and also being paid.

The discretionary bonus is communicated in writing to the payroll department. As this is in writing rather than
verbal, this reduces the risk of the bonus being recorded at an incorrect amount in the payroll records.

For employees paid by bank transfer, the list of the payments is reviewed in detail and agreed to the payroll
records prior to authorising the bank payment. This reduces the risk of fraudulent payments being made through
the creation of fictitious employees and other employees being omitted from the payment run.

Answer (b)

Deficiency Control Recommendation

Employees swipe their cards at the beginning and The clocking in and out process should be supervised
end of the eight-hour shift; this process is not by a responsible official to prevent one individual
supervised. clocking in multiple employees.

This could result in a number of employees being
swiped in as present when they are not.
This will result in a substantially increased payroll
cost for Bronze.
Employees are entitled to a 30-minute paid break
and do not need to clock out to access the dining
area.
A supervisor should undertake a random check of
employees by reviewing who has logged in with a
swipe card and confirming visually that the
employee is present.
Employees should be allocated set break times and
there should be a supervisor present to ensure that
employees only take the breaks they are entitled to.

Employees could be taking excessive breaks

resulting in a decrease in productivity and increased
payroll costs.
Although there is a human resources department,
appointments of temporary staff are made by
factory production supervisors.
All appointment of staff, whether temporary or
permanent, should only be made by the human
resources department.

The supervisor could appoint unsuitable employees

and may not carry out all the required procedures
for new joiners. This could result in these
temporary employees not receiving the correct pay
and relevant statutory deductions.
Overtime reports which detail the amount of All overtime should be authorised by a responsible
overtime worked are sent out quarterly by the official prior to the payment being processed by the
payroll department to production supervisors for payroll department. This authorisation should be
review. evidenced in writing.

These reports are reviewed after the payments have

been made which could result in unauthorised

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra


overtime or amounts being paid incorrectly and
Bronze’s payroll cost increasing.
Production supervisors determine the amount of the
discretionary bonus to be paid to employees.
Production supervisors are not senior enough to
determine this as they could pay extra bonuses to
friends or family members.
The bonus is input by a clerk into the payroll system.
There is no indication that this input process is
reviewed.
This could result in input errors or the clerk could
fraudulently change the amounts leading to
incorrect bonus payments.
The payroll manager reviews the bank transfer listing
prior to authorising the payments and also amends
the payroll records for any changes required.
There is a lack of segregation of duties as it is the
payroll team which processes the amounts and the
payroll manager who authorises payments.
The manager could fraudulently increase the
amounts to be paid to certain employees, process
this payment as well as amend the records.
A payroll clerk distributes cash pay packets to
employees without requesting proof of identity.
Even if most employees are known to the clerk,
there is a risk that without identity checks wages
could be paid to incorrect employees.
AA Short Notes Kappan’s School of Accountancy & Management
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The bonus should be determined by a more senior
individual, such as the production director, and this
should be communicated in writing to the payroll
department.
Once the clerk has input the bonus amounts, all
entries should be double checked against the written
confirmation from the production director by another
member of the team to identify any amounts entered
incorrectly.
The payroll manager should not be able to process
changes to the payroll system as well as authorise
payments.
The authorisation of the bank transfer listing should
be undertaken by an individual outside the payroll
department, such as the finance director.
The payroll clerks should be informed that all cash
wages can only be paid upon sight of the employee’s
clock card and photographic identification as this
confirms proof of identity.
Basil Neelambra
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Question 2 {September 2016 [Q.16 (c )]}

Heraklion Co is a manufacturer of footballs and is a new audit client for your firm. You are an audit supervisor
of Spinalonga & Co and are currently preparing for the forthcoming interim and final audit for the year ending
31 October 20X6.

The finance director, Montse Mirabelle, has informed you that a significant fraud took place during the year in
the payroll department. A number of fictitious employees were set up on the payroll and wages were paid into
one bank account. This bank account belonged to two supervisors, who were married, and were employed by
Heraklion Co. One had sole responsibility for setting up new joiners in the payroll system and the other processed
and authorised bank transfer requests for wages and supplier payments. These employees no longer work for
the company and Montse has asked the audit firm for recommendations on how to improve controls in this area
to prevent this type of fraud occurring again. Heraklion Co operates a Human Resources department.

Required:

In relation to the payroll fraud, identify and explain THREE controls Heraklion Co should implement to reduce
the risk of this type of fraud occurring again and, for each control, describe how it would mitigate the risk.
(6 marks)

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra


Answer
Controls
Proof of identity checks should be undertaken by the
Human Resources (HR) department and recorded on
individuals’ personnel files for all new employees set up
on the payroll system.
A count should be undertaken of the number of
employees in each department of Heraklion Co; this
should be reconciled to the number of employees on the
payroll system.
The HR department should initiate the process for setting
up new joiners by asking new employees to complete a
joiner’s form which will be approved by the relevant
manager and HR. This request should then be forwarded
to the payroll department, who should set up the
employee.
All new joiners should be only be set up by payroll on
receipt of a joiner’s form and any additions to the system
should be authorised by the payroll director. An edit
report should be generated and reviewed by HR.
Where possible, employees who are related should not
be allowed to undertake processes which are
interrelated whereby they can breach segregation of
duty controls for key transaction cycles. A regular review
of job descriptions of related employees should be
carried out by HR.
The payroll system should be amended to run an
exception report which identifies any employees with
the same bank account name or number and this should
be reviewed by HR.
All bank transfer requests should be authorised by a
senior responsible official, who is independent of the
processing of payments; they should undertake spot
checks of payments to supporting documentation,
including employee identification cards/records.
Note: Only 3 controls are required.
AA Short Notes Kappan’s School of Accountancy & Management
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Mitigate Risk
This should reduce the risk of fictitious employees
being set up, as in order to be set up on the
system a fictitious set of identification would be
required which would be an onerous process
This would identify if there are extra employees
on the payroll system, which could then be
investigated further.
This control introduces segregation of duties as in
order to set up employees both the HR and
payroll departments are involved. Without
collusion with an HR employee, the payroll
supervisor would be unable to set up fictitious
employees.
As all new joiners would be authorised by the
payroll director, it is unlikely that payroll
employees would risk establishing fictitious
joiners. A further review by the HR department
would also detect any employees without an
authorised joiner form.
This should reduce the risk of related staff
colluding and being able to commit a fraud.
Identifying the same bank account name or
number will prevent multiple fraudulent
payments being made to the same employees.
This would introduce an additional layer of
segregation of duties, which would reduce the
risk of fraud occurring. In addition, the spot
checks to employee identification cards/records
would confirm the validity of payments.
Basil Neelambra
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Question 3 {[June 2014][1 (a)]}

Trombone Co (Trombone) operates a chain of hotels across the country. Trombone employs in excess of 250
permanent employees and its year end is 31 August 2014. You are the audit supervisor of Viola & Co and are
currently reviewing the documentation of Trombone’s payroll system, detailed below, in preparation for the
interim audit.

Trombone’s payroll system

Permanent employees work a standard number of hours per week as specified in their employment contract.
However, when the hotels are busy, staff can be requested by management to work additional shifts as
overtime. This can either be paid on a monthly basis or taken as days off.

Employees record any overtime worked and days taken off on weekly overtime sheets which are sent to the
payroll department. The standard hours per employee are automatically set up in the system and the overtime
sheets are entered by clerks into the payroll package, which automatically calculates the gross and net pay along
with relevant deductions. These calculations are not checked at all. Wages are increased by the rate of inflation
each year and the clerks are responsible for updating the standing data in the payroll system.

Employees are paid on a monthly basis by bank transfer for their contracted weekly hours and for any overtime
worked in the previous month. If employees choose to be paid for overtime, authorisation is required by
department heads of any overtime in excess of 30% of standard hours. If employees choose instead to take days
off, the payroll clerks should check back to the ‘overtime worked’ report; however, this report is not always
checked.

The ‘overtime worked’ report, which details any overtime recorded by employees, is run by the payroll
department weekly and emailed to department heads for authorisation. The payroll department asks
department heads to only report if there are any errors recorded. Department heads are required to arrange
for overtime sheets to be authorised by an alternative responsible official if they are away on annual leave;
however, there are instances where this arrangement has not occurred.

The payroll package produces a list of payments per employee; this links into the bank system to produce a list
of automatic payments. The finance director reviews the total list of bank transfers and compares this to the
total amount to be paid per the payroll records; if any issues arise then the automatic bank transfer can be
manually changed by the finance director.

Required:

In respect of the payroll system of Trombone Co:

i. Identify and explain FIVE deficiencies;

ii. Recommend a control to address each of these deficiencies; and
iii. Describe a test of control Viola & Co should perform to assess if each of these controls is operating
effectively.

Note: The total marks will be split equally between each part. (15 marks)

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra

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Answer

Deficiencies Control Recommendation Test of Controls

The wages calculations are A senior member of the payroll Review a sample of the
generated by the payroll system team should recalculate the gross gross to net pay
and there are no checks to net pay workings for a sample of calculations for evidence
performed. employees and compare their that they are undertaken
results to the output from the and signed as approved.
Therefore, if system errors occur payroll system.
during the payroll processing,
this would not be identified. These calculations should be
signed as approved before
This could result in wages being payments are made.
over or under calculated,
leading to an additional payroll
cost or loss of employee
goodwill.
Annual wages increases are Payroll clerks should not have Ask a clerk to attempt to
updated in the payroll system access to standing data changes make a change to payroll
standing data by clerks. within the system. standing data; the system
should reject this
Payroll clerks are not senior The annual wages increase should attempt.
enough to be making changes to be performed by a senior member
standing data as they could of the payroll department and this Review the log of
make mistakes leading to should be checked by another standing data
incorrect payment of wages. responsible official for errors. amendments to identify
whether the wage rate
In addition, if they can access increases were changed
standing data, they could make by a senior member of
unauthorised changes. payroll.
Overtime worked by employees All overtime hours worked should Review a sample of
is not all authorised by the be authorised by the relevant employee weekly
relevant department head, as department head. overtime sheets for
only overtime in excess of 30% of evidence of signature by
standard hours requires This should be evidenced by relevant department
authorisation. signature on the employees’ head.
weekly overtime sheets.
This increases the risk that
employees will claim for
overtime even though they did
not work these additional hours
resulting in additional payroll
costs for Trombone.
Time taken off as payment for Payroll clerks should be reminded
Select a sample of
overtime worked should be of the procedures to be undertaken
overtime sheets with
agreed by payroll clerks to the when processing the overtime time taken off and
overtime worked report; sheets. confirm that there is
however, this has not always evidence of a check by the
occurred. They should sign as evidence on the payroll clerk to the
overtime sheets that they have overtime worked report.
Employees could be taking agreed any time taken off to the
unauthorised leave if they take relevant overtime report.

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra


time off but have not worked the
required overtime.
The overtime worked report is
emailed to the department
heads and they report by
exception if there are any errors.
If department heads are busy or
do not receive the email and do
not report to payroll on time,
then it will be assumed that the
overtime report is correct even
though there may be errors.
This could result in the payroll
department making incorrect
overtime payments.
Department heads are meant to
arrange for annual leave cover
so that overtime sheets are
authorised on a timely basis;
however, this has not always
happened.
If overtime sheets are
authorised late, then this can
lead to employee dissatisfaction
as it will delay payment of the
overtime worked.
The finance director reviews the
total list of bank transfers with
the total to be paid per the
payroll records.
There could be employees
omitted along with fictitious
employees added to the
payment listing, so that The finance director should sign
although the total payments list the payments list as evidence that
agrees to payroll totals, there he has undertaken these checks.
could be fraudulent payments
being made.
Note: Only 5 deficiencies are required.
AA Short Notes Kappan’s School of Accountancy & Management
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All department heads should For a sample of overtime
report to the payroll department reports emailed to
on whether or not the overtime department heads
report is correct. confirm that a response
has been received from
The payroll department should each head by reviewing
follow up on any non-replies and all responses.
not make payments until agreed by
the department head.
Department heads should be Discuss with payroll clerks
reminded of the procedures with the process they follow
regards to annual leave and for obtaining
arrangement of suitable cover. authorisation of overtime
sheets, in particular
During annual leave periods, during periods of annual
payroll clerks should monitor that leave.
overtime sheets are being
submitted by department heads on Compare this to the
a timely basis and follow up any process which they
late sheets. should adopt to identify
any control exceptions.
The finance director when Obtain a sample of
authorising the payments should payments list and review
on a sample basis perform checks for signature by the
from payroll records to payment finance director as
list and vice versa to confirm that evidence that the control
payments are complete and only is operating correctly.
made to bona fide employees.
Basil Neelambra
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Question 4 {March/June 2018[Q.16]}

Raspberry Co operates an electric power station, which produces electricity 24 hours a day, seven days
a week. The company’s year end is 30 June 20X8. You are an audit manager of Grapefruit & Co, the
auditor of Raspberry Co. The interim audit has been completed and you are reviewing the
documentation describing Raspberry Co’s payroll system.

Systems notes – payroll

Raspberry Co employs over 250 people and approximately 70% of the employees work in production
at the power station. There are three shifts every day with employees working eight hours each. The
production employees are paid weekly in cash. The remaining 30% of employees work at the head
office in non-production roles and are paid monthly by bank transfer.

The company has a human resources (HR) department, responsible for setting up all new joiners. Pre-
printed forms are completed by HR for all new employees and, once verified, a copy is sent to the
payroll department for the employee to be set up for payment. This form includes the staff member’s
employee number and payroll cannot set up new joiners without this information. To encourage staff
to attend work on time for all shifts, Raspberry Co introduced a discretionary bonus, paid every three
months, for production staff. The production supervisors determine the amounts to be paid and notify
the payroll department. This quarterly bonus is entered into the system by a clerk and each entry is
checked by a senior clerk for input errors prior to processing. The senior clerk signs the bonus listing
as evidence of undertaking this review.

Production employees are issued with clock cards and are required to swipe their cards at the
beginning and end of their shift. This process is supervised by security staff 24 hours a day. Each card
identifies the employee number and links into the hours worked report produced by the payroll
system, which automatically calculates the gross and net pay along with relevant deductions. These
calculations are not checked.

In addition to tax deductions from pay, some employees’ wages are reduced for such items as
repayments of student loans owed to the central government. All employers have a statutory
obligation to remit funds on a timely basis and to maintain accounting records which reconcile with
annual loan statements sent by the government to employers. At Raspberry Co student loan deduction
forms are completed by the relevant employee and payments are made directly to the government
until the employee notifies HR that the loan has been repaid in full.

On a quarterly basis, exception reports relating to changes to the payroll standing data are produced
and reviewed by the payroll director. No overtime is worked by employees. Employees are entitled to
take 28 holiday days annually. Holiday request forms are required to be completed and authorised by
relevant line managers, however, this does not always occur.

On a monthly basis, for employees paid by bank transfer, the senior payroll manager reviews the list
of bank payments and agrees this to the payroll records prior to authorising the payment. If any errors
are noted, the payroll senior manager amends the records.

For production employees paid in cash, the necessary amount of cash is delivered weekly from the
bank by a security company. Two members of the payroll department produce the pay packets, one
is responsible for preparing them and the other checks the finished pay packets. Both members of
staff are required to sign the weekly payroll listing on completion of this task. The pay packets are
then delivered to the production supervisors, who distribute them to employees at the end of the
employees’ shift, as they know each member of their production team.

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra

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Monthly management accounts are produced which detail variances between budgeted amounts and
actual. Revenue and key production costs are detailed, however, as there are no overtime costs, wages
and salaries are not analysed.

Required:

a) In respect of the payroll system for Raspberry Co:

i) identify and explain FIVE KEY CONTROLS which the auditor may seek to place
reliance on; and
ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of
these key controls is operating effectively.

Note: Prepare your answer using two columns headed Key control and Test of control respectively.
The total marks will be split equally between each part. (10 marks)

b) Identify and explain FIVE DEFICIENCIES in Raspberry Co’s payroll system and provide a
recommendation to address each of these deficiencies.

Note: Prepare your answer using two columns headed Control deficiency and Control
recommendation respectively. (10 marks)

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra

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Answer (a)

Key Control Test of control

Raspberry Co has a separate human resources Review the job descriptions of payroll and HR to
(HR) department which is responsible for setting confirm the split of responsibilities with regards
up all new employees. to setting up new joiners.

Having a segregation of roles between human Discuss with members of the payroll department
resources and payroll departments reduces the the process for setting up new joiners and for
risk of fictitious employees being set up and confirmation that the process is initiated by HR.
also being paid.
Pre-printed forms are completed by HR for all Select a sample of new employees added to the
new employees, and includes assignment of a payroll during the year, review the joiner forms
unique employee number, and once verified, a for evidence of completion of all parts and that
copy is sent to the payroll department. the information was verified as accurate and
was received by payroll prior to being added to
Payroll is unable to set up new joiners without the system.
information from these forms.
Select a sample of edit reports for changes to
The use of pre-printed forms ensures that all payroll during the year; agree a sample of new
relevant information, such as tax IDs, is obtained employees added to payroll to the joiners forms.
about employees prior to set up.

This minimises the risk of incorrect wage and

tax payments.

In addition, as payroll is unable to set up new

joiners without the forms and employee
number, it reduces the risk of fictitious
employees being set up by payroll.
The quarterly production bonus is input by a If attending Raspberry Co at the time of bonus
clerk into the payroll system, each entry is processing, observe the clerk inputting and
checked by a senior clerk for input errors prior senior clerk checking the bonus payments into
to processing, and they evidence their review via the payroll system.
signature.
In addition, obtain listings of quarterly bonus
This reduces the risk of input errors resulting in payments and review for evidence of signature
over/underpayment of the bonus to by the senior clerk who checks for input errors.
employees.
Production employees are issued with clock Observe the use of clock cards by employees
cards and are required to swipe their cards at when entering the power station.
the beginning and end of their shift, this process
is supervised by security staff 24 hours a day. Confirm the security team is supervising the
process and following up on discrepancies
This ensures that genuine employees are only through discussions with the security staff.
paid for the work actually done, and reduces
the risk of employees being paid but not
completing their eight-hour shift. In addition,
due to the supervision it is unlikely that one
employee could swipe in others.

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra

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The clock card information identifies the Utilise test data procedures to input dummy
employee number and links into the hours clock card information, verify this has been
worked report produced by the payroll system. updated into the payroll system.

As the hours worked are automatically

transferred into the payroll system, this reduces
the risk of input errors in entering hours to be
paid in calculating payroll, ensuring that
employees are paid the correct amount.
On a quarterly basis, exception reports of Select a sample of quarterly exception reports
changes to payroll standing data are produced and review for evidence of review and follow up
and reviewed by the payroll director. of any unexpected changes by the payroll
director.
This ensures that any unauthorised
amendments to standing data are identified and
resolved on a timely basis.
For production employees paid in cash, cash is Enquire of payroll clerks how cash is delivered to
received weekly from the bank by a security Raspberry Co for weekly pay packets.
company.
Review a sample of invoices from the security
It is likely the sum of money required to pay over company to Raspberry Co for delivery of cash.
175 employees would be considerable.

It is important that cash is adequately

safeguarded to reduce the risk of
misappropriation.
The pay packets are prepared by two members Observe the preparation of the pay packets
of staff with one preparing and one checking the ensuring that two members of staff are involved
pay packets and this is evidenced by each staff and that pay packets are checked for accuracy.
member signing the weekly listing.
For a sample of weeks throughout the year,
This ensures there is segregation of duties inspect the weekly payroll listing for evidence of
which prevents fraud and errors not being signature by the two members of staff involved
identified. in the preparation of the pay packets.

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra

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Answer (b)

Deficiency Control Recommendation

Production supervisors determine the amount The bonus should be determined by a
of the discretionary bonus to be paid to responsible official, such as the production
employees. director and should be formulated based on a
written policy.
Production supervisors should not determine
this as they could pay extra bonuses to friends If significant in value, the bonus should be
or family members, resulting in additional formally agreed by the board of directors.
payroll costs.
The bonus should be communicated in writing to
the payroll department.
The wages calculations are generated by the A senior member of the payroll team should
payroll system and there are no checks recalculate the gross to net pay workings for a
performed. sample of employees and compare their results
to the output from the payroll system.
Therefore, if system errors occur during the
payroll processing, this would not be identified. These calculations should be signed as approved
before payments are made.
This could result in wages being over or under
calculated, leading to an additional payroll cost
or loss of employee goodwill.
Student loan deduction forms are completed by The payroll department should maintain a
relevant employees and payments are made schedule, by employee, of payments made to
directly to the third party until the employee third parties, such as the central government as
notifies HR that the loan has been repaid in full. well as the cumulative balance owing.

As the payments continue until the employee On a regular basis, at least annually, this
notifies HR, and employees are unlikely to be statement should be reconciled to the loan
closely monitoring payments, there is the risk statement received from the government and
that overpayments may be made, which then sent to the employee for agreement.
need to be reclaimed, leading to employee
dissatisfaction. In accordance with the schedule, payments
which are due to cease shortly should be
In the case of underpayments, Raspberry Co has confirmed in writing with the third party, prior
an obligation to remit funds on time and to to stopping.
reconcile to annual loan statements. If the
company does not make payments in full and on
time, this could result in non-compliance by
both the company and employee, which could
result in fines or penalties.
Holiday request forms are required to be Employees should be informed that they will not
completed and authorised by relevant line be able to take holiday without completion of a
managers, however, this does not always occur. holiday request form, with authorisation from
the line manager.
This could result in employees taking
unauthorised leave, resulting in production Payroll clerks should not process holiday
difficulties if an insufficient number of payments without agreement to the authorised
employees are present to operate the power holiday form.
plant. In addition, employees taking

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra

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unauthorised leave could result in an

overpayment of wages.
The senior payroll manager reviews the bank The senior payroll manager should not be able
transfer listing prior to authorising the payments to process changes to the payroll system as well
and also amends the payroll records for any as authorise payments.
changes required.
The authorisation of the bank transfer listing
There is a lack of segregation of duties as it is the should be undertaken by an individual outside
payroll team which processes the amounts and the payroll department, such as the finance
the senior payroll manager who authorises director.
payments.

The senior manager could fraudulently increase

the amounts to be paid to certain employees,
process this payment as well as amend the
records.
The pay packets are delivered to the production All pay packets should be distributed by the
supervisors, who distribute them to employees payroll department, directly to employees, upon
at the end of their shift. sight of the employee’s clock card and
photographic identification as this confirms
The supervisor is not sufficiently independent to proof of identity.
pay wages out.
Payroll should undertake a reconciliation of pay
They could adjust pay packets to increase those packets issued to production supervisors, wages
of close friends whilst reducing others. distributed with employee signatures to confirm
receipt and pay packets returned to payroll due
In addition, although the production to staff absences.
supervisors know their team members,
payment of wages without proof of identity Any differences should be investigated
increases the risk that wages could be paid to immediately.
incorrect employees.
Monthly management accounts do not analyse The monthly management accounts should be
the variances between actual and budgeted amended to include an analysis of wages and
wages and salaries; this is because there are no salaries compared to the budgeted costs.
overtime costs.
These should be broken down to each relevant
However, wages and salaries are a significant department and could also include an analysis of
expense and management needs to understand headcount numbers compared to budget.
why variances may have arisen.

These could occur due to extra employees

being recruited which were not budgeted for,
or an increase in wage pay out rates.

The board would need to monitor the wages and

salaries costs as if they are too high, then this
would impact the profitability of the company.

AA Short Notes Kappan’s School of Accountancy & Management Basil Neelambra