6/17/2023

CHAPTER 8:
EMPLOYEE COSTS
Instructor: Assoc.Prof. Doan Thanh Nga, CPA (Aust.)

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

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

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.

1. CALCULATING WAGES AND SALARIES (cont.)

Risks Controls Tests of controls

• Where new joiners are taken on/ current
employees leave, Human Resources
(HR)/staff manager should complete and
sign a joiners/leavers form which should be
passed to payroll. Payroll must acknowledge
receipt of the form/changes to the payroll
That system should be made and amendments to
fictitious the system subsequently reviewed by a
employees supervisor.
are paid
• Personnel files should be held for all
employees.
• Assign unique employee numbers to each
employee in the payroll master file. Only
employees with valid employee numbers
can be paid
• Obtain a list of joiners/leavers
during the period and trace a
sample through to ensure that
appropriate HR documentation was
completed and the payroll system
amendment was made accurately.
• Select a sample of starters and
leavers during the period and
determine whether they were
genuine employees by tracing
employee details back to personnel
files.
• Review procedures for entering
and removing employee numbers
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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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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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
Cash (rare) • Observation of payment
• Segregate duties between those preparing pay process
packets and distributing them • Review records of employees
• Cash stored in safe signing for wages
• Employees must show ID to claim pay packet • Review reasons for wages
• Employees must sign to confirm they have received being unclaimed and what
People who are wages was done next
not employees Bank transfer
are paid
• Bank transfer lists agreed to payroll (previously
authorised) • Agree a sample of bank
• Cheques and bank transfer lists authorised transfers to payroll records
• Wages and salary control accounts used – reviewed • Review for signatures to
each month to ensure cleared (would highlight show authorisation
where employee bank details wrong and bank
returns payment) 14

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4. DEFICIENCIES

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

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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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