TESTING THE PAYROLL SYSTEM
TESTING THE PAYROLL SYSTEM
The control objectives in respect of a wages and salaries system
are as follows:
(a) Payment of wages and salaries should be made only in respect
of the client's authorized employees.
(b) Payment should be made at authorized rates of pay.
(c) Wages and salaries payments should be in accordance with
records of work performed, e.g. time,
output, commissions on sales.
(d) Payroll and payroll deductions (tax and social security)
should be calculated accurately.
(e) Payment should be made to the correct employees.
(f) Liabilities to the tax authorities for tax and social
security should be properly recorded.
CONTROL PROCEDURES - WAGES AND SALARIES
(a) Approval and control of documents
i) There should be written authorization to employ or dismiss
ii) Changes in rates of pay should be authorized in writing by
an official outside the wages
iii) Overtime worked should be authorized in advance by a
iv) An independent official should review the payroll and sign
v) The wages cheque should be signed by two signatories and
agreed with the signed payroll.
vi) Where weekly pay relates to hours at work, clock cards
should be used. There should be
supervision of the cards and the timing devices, particularly
when employees are clocking-on or
vii) Where a piece work system operates, payment should only be
made for work of an appropriate
quality which has been inspected and approved.
viii) Personnel records should be kept independently of the
payroll department for each employee
giving details of engagement, retirement, dismissal or
resignation, rates of pay, holidays etc, with
a specimen signature of the employee.
ix) A wages supervisor should be appointed who could perform
some of the authorization duties
(b) Arithmetical accuracy
(i) Where appropriate, payroll should be prepared from clock
cards, job cards etc, and a sample
checked for accuracy against current 'rates of pay.
(ii) Payroll details should be checked for '.he accurate
calculation of deductions e.g. tax, social
security, pensions, trade union subscriptions etc
(c) Control accounts
(i) Control accounts should be maintained in respect of each of
the deductions showing amounts
paid periodically to the inland Revenue, trade unions etc.
(ii) Overall analytical checks should be carried out to
highlight major discrepancies e.g. check
against budgets, changes in amounts paid over a period of time,
check against personnel
(iii) Management should exercise overall review and control.
(d) Access to assets and records
Ideally, payment should be made by cheque or by direct transfer
into the employees’ bank account. If payment
is made in cash, the following procedures should be in place:
(i) Employees should sign for their wages.
(ii) No employee should be allowed to take the wages of another
(iii) When wages are claimed late, the employee should sign for
the wage packet and the release of
the packet should be authorized.
(iv) The system should preferably allow the wages to be checked
by the employee before the
packet is opened, by using specially designed wage packets.
(v) The wages department should preferably be a separate
department with their personnel not
involved with receipts or payments functions.
(vi) The duties of the wages staff should preferably be rotated
during the year, and ensure that no
employee is responsible for all the functions in respect of any
(vii) The employee making up the pay packets should not be the
employee who prepares the
(viii) A surprise attendance at the pay-out should be made
periodically by an independent official.
(ix) Unclaimed wages should be recorded in a register and held
by someone outside the wages
department until claimed or until a predefined period after
which the money should be rebanked.
An official should investigate the reason for unclaimed wages as
soon as possible.
Tests of Controls - Wages and Salaries
A suggested program of tests of control is set out below. This
can, of course, be modified to suit the particular
circumstances of the client.
(a) Test sample of time sheets, clock cards or other records,
for approval by responsible
official. Pay particular attention to the approval of overtime
(b) Test authority for payment of casual labor, particularly if
(c) Observe wages distribution for adherence to procedures
ensuring employees sign for
wages, that unclaimed wages are re-banked etc.
(d) Test authorization for payroll amendments by reference to
(e) Test control over payroll amendments.
(f) Examine evidence of checking of payroll calculations (e.g. a
signature of the financial
(g) Examine evidence of approval of payrolls by a responsible
(h) Examine evidence of independent checks of payrolls (e.g. by
(i) Inspect payroll reconciliations.
(j) Examine explanations for payroll expense variances.
(k) Test authorities for payroll deductions.
(l) Test controls over unclaimed wages.