PBL SESSION 3: PAYROLL CYCLE

a) Discuss five (5) internal control weaknesses that exist in the payroll system of the
company and suggest the improvements that can be implemented.

No Weaknesses Improvements

1. There is no monitoring/supervision of the clocking in/out process, and an

employee was witnessed clocking in several employees using their
employee swipe cards.

The employee has clocking in and The supervisor of the department

out process without supervision by should monitor their employees’
anyone. This will have issue in clocking in/out to prevent employee
accuracy of time and attendance from leaving work early and also
data. review their timecards to prevent the
inaccuracy of time and attendance
data.

2. There is no monitoring/supervision of the clocking in/out process and an

employee was witnessed clocking in several employees using their
employee swipe cards.

Only one employee has witnessed The company can start adopting
other employees swipe their cards. biometric authentication. It can save
This will have an issue where the time compared to using cards. It can
employee did not honest about his also keep employees from having a
friends’ clocking in/out. misleading record.

3. These calculations are not checked by anyone as they are generated by the
payroll system.

The calculation might be error due The company should have the
to complexity of payroll processing. supervisory review of payroll register
and other reports and recalculate the
calculation to avoid the errors.

4. During the year the hourly wage was increased by the Human Resources
(HR) department and this was notified to the payroll department verbally

They simply inform the payroll The Human Resources (HR)

department orally about the wage department should issue written notice
 increase. This can lead to errors in of wage increases and report it to the
paying employees’ wages. payroll department for proof of wage
increases.

5. For the night shift workers, the pay packets are given to the factory
supervisor to distribute. If any night shift employees are absent on pay day
then the factory supervisor keeps these wages and returns them to the
payroll department on Monday.

The wages of absent employees Unclaimed wages should be returned

are held for two days by factory to the payroll department to prevent
supervisors. This will be an issue fraud, and all salaries should be picked
when it comes to wage fraud. up by valid employees..

b) Discuss substantive procedures you should now perform to confirm the accuracy and
completeness of Mega Mewah Sdn Bhd’ payroll charge.

Mega Mewah Sdn Bhd must have the correct amount of wages and salaries to
distribute to their employees. The number of wages and salaries also have related to
the paying of taxes and any other expenses. If the company has wrongly recorded
the amount, then the company might be getting into trouble. For the company to have
accurate and correct wages and salaries, they must do some procedures to confirm
the accuracy and completeness of their payroll charge.

The first thing that they must perform is to confirm the overall wages and
salaries expense from the payroll system with the full trial balance and examine any
differences. If there have any differences, they need to find the solution to the
differences. They should set a sample of payroll records to ensure that the payroll
expense is complete and accurate. Then recalculate gross and net pay for a sample
of employees and approve to the payroll records to ensure accuracy and also
statutory deductions to ensure that the correct deductions for the current year be
included in the payroll expense.

The auditor should examine any significant differences between this year's
total payroll expense and the previous year's total payroll expense and review
monthly payroll charges, compare them to previous years and budgets, and address
any significant differences with management. Make total evidence of entire wages
 and salaries, including new employees and leavers, as well as the pay increase.
After that, examine any significant differences between this and the actual wages and
salaries in the financial statements. Select a sample of new and departing
employees, confirm their start working and leaving dates with relevant
documentation, and recalculate to ensure that their first and last pay packets were
computed and entered correctly.

In the case of salaries, check the total net pay from the payroll records to the
bank transfer payment list and the cashbook. To ensure completeness and accuracy,
verify that the total cash withdrawn for wage payments matches the weekly wages
paid plus any surplus cash subsequently banked. To validate completeness, agree
on the year-end tax liabilities to the payroll records and the following payment to the
post-year-end cash book. The last procedure is to confirm individual wages and
salaries per payroll, as well as records of worked hours per clocking in cards, in
personnel records.

The auditor should perform all the procedure to get the accuracy and
completeness of Mega Mewah Sdn Bhd’ payroll charge.

c) Elaborate any two (2) possible risks that associated with payroll management
system.

The payroll management system is the system where software allows users to
easily and automatically handle all of their employees' financial records. Employee
wages, deductions, other expenses, net pay, bonuses, and pay-slip generation are
all managed by this payroll management system.

There will have any risks associated with the payroll management system. The
loss or destruction of master data is one of the risks. The data could be lost as a
result of a computer virus or an environmental disaster such as a flood. This will
make it more difficult for the payroll management system to retrieve all of the
information.

Another risk is incorrect payroll master data updates. This occurs when the
company's internal control is inadequate for a supervisory review. As a result, the
data of the employees will be incorrectly recorded. Taxes that must be paid to the
government may also have difficulty estimating the exact amount.