Payroll is the backbone of any business. It is the one financial function of any business that requires timeliness and accuracy. It also has great potential to help other areas of the business.
Even a small delay in paying wages to workers can have a range of consequences, from worker dissatisfaction to a full-blown strike. Underpaying or overpaying workers can be problematic, as workers demand immediate redress and develop a negative view of the company. There may be legal and practical reasons why overpayments cannot be recovered.
All industrialized countries now have detailed legislation on working conditions. Although they often contain similar elements, there are important differences. The omission of legal details can result in severe penalties. Similarly, the omission of certain wage costs can lead to significant calculation errors.
Of course, there are also security risks associated with the payslip. There is a risk of fraud, for example by recording fictitious remuneration. There are also security risks, because the information is confidential.
Reasons to conduct a payroll self-assessment
These are all very good reasons to conduct a payroll self-assessment/internal audit. However, payroll audits are not just about avoiding errors. Payroll can also be a powerful management tool. Employees trust their payroll manager more than other members of the accounting or human resources department. Payroll data can contain useful information about employees that needs to be passed on to other departments. Finally, payroll management can be integrated with other functions.
Companies often view payroll as a simple administrative task and do not consider it as important as cleaning windows.
When auditing wages and salaries, it is not enough to check whether the payslips have been drawn up correctly and whether the legal declarations have been sent in. The payroll audit should ensure that the most efficient methods are being used to determine employees’ wages and that all elements of the payroll are being used with maximum efficiency.
Composition of the audit
A payroll audit should be conducted using the following six steps, which reflect the payroll auditor’s primary considerations These are.
- Payroll in the organization
- Implementation of payroll management
- Provide information
- Resource support for payroll functions
- Payroll Security
- Developing the payroll function
This briefing explains the questions you need to ask at each stage. For more information and to understand how a “Do it yourself” payroll check works, see the article from which it is taken.
Step 1: Payroll in your organization
The payroll audit begins by studying the functions that payroll performs within an organization. Once the function is carefully defined, the various ways in which employees are paid, including issues such as commissions, bonuses, stock options and benefits, should be examined. At the same time, you need to ensure that the salary structure and increases are effective. Finally, at this point, you need to ensure that the correct salary data is entered into the organization’s financial and administrative accounts, so that effective decisions can be made about the organization’s resources.
Here are some important questions to ask. For each phase, these questions are summarized below (these questions are discussed in more detail in the full Payroll Audit text [see box at the end of this article], which also contains guidelines for preparing and conducting an audit).
- Who is responsible for payroll accounting?
- What are the communication channels between line managers and the payroll department?
- How is the authorization to transmit information to the payroll department defined?
- How is this information recorded and stored?
- What tasks other than payroll management are performed by the payroll department?
- Are there any payroll-related tasks that are not performed by the payroll department and, if so, who performs them?
- How are workers’ wages calculated before taxes?
- What checks are performed on piece-rate workers to ensure that their work is properly checked, and what controls are in place?
- How many workers are. Paid weekly, monthly, or at other intervals?
- What is the workers’ take-home pay?
- How are bonuses and commissions paid? Who are they paid to?
- Are bonuses and commissions structured appropriately based on sales and other indicators?
- Are bonus and commission structures linked to business objectives?
- Provisions made for profit and performance-related payments?
- Are the criteria for profit- and performance-based compensation appropriate for the employee?
- Are profit- and performance-based compensation systems equitable?
- Shares or options granted?
- Does the payroll department have complete information on employee stock and option plans?
- Does the payroll department receive detailed information on the exercise of employee stock options?
- What additional benefits are offered?
- Do you offer additional benefits to your employees? If so, are the costs of these benefits properly calculated?
- What analysis has been done regarding the recognition and tax benefits of benefits?
- What systems are in place to ensure that the payroll department is informed of benefits or benefit changes?
- How are salaries set?
- How are pay levels reviewed?
- What systems are in place to provide salary data for financial reporting?
- What analyses of payroll data do you perform for management reporting? Is further analysis useful?
Step 2: Payroll Implementation
When analyzing the implementation and management of payroll, there are four key areas to consider. These are.
- The legal implications of payroll management
- Payroll and compensation policy
- Methods of paying your employees
- Timing of payroll processing.
- Is the payroll department familiar with the laws and practices of the countries in which it operates?
- Are there mechanisms in place for the payroll department to respond to changes in legislation and practice?
- Does the payroll department have adequate training and resources to learn the basics of the law and practice?
- Do you have a comprehensive policy in all areas that affect payroll?
- Is the payment method set up correctly?
- Is there a fixed schedule for payroll processing?
Step 3 – Provide information
Appropriate systems must be in place to control the flow of information to and from the payroll department. Responsibilities for reporting and implementing information should be clearly defined, and there should be a clear policy on what information should be reported and by whom.
- Is there a mechanism for approving payroll data at the appropriate level?
- Are there systems in place to ensure that information is properly reported?
- Are there mechanisms in place to record the information?
- Is there a system in place to ensure that payroll employees can ask questions and get immediate answers?
- Is the payroll system protected against unauthorized commands?
- Are there systems in place to collect relevant personal data from employees and to keep this data up to date?
- Is there a system in place to manage people who leave the company?
- Are payroll records properly maintained? Is there a system for cross-referencing folios or other records to provide an audit trail?
- Are there clear instructions for the payroll department on when and to whom information can be. Disclosed?
- Is the concept of benefit disclosure well understood?
Step 4 – Resource Support for Payroll Functions
Payroll management requires resources.
- Office equipment
- Internal data
Payroll resources must always be considered, as even the slightest delay in payroll management can lead to serious problems within the company.
- Does the payroll department have enough staff?
- How is the integrity of your staff verified on the payroll?
- What systems are in place for staff training and development?
- How is replacement provided in the event of a payroll manager’s absence?
- What computers and equipment are used by payroll staff?
- Is the equipment used to its fullest capacity?
- Was it cost-effective to upgrade existing equipment?
- Do you have sufficient reserves?
- Are sufficient resources available to ensure that all payroll staff are able to deal with hardware and software issues? Are manuals available? Is a help desk available? Are parts of the system that are rarely used regularly tried out by employees?
- Is there an adequate supply of office supplies for payroll accounting? Is there enough inventory to cover the time it takes to order additional office supplies?
- Are copies of old company rules and policies kept so that questions can be answered years later?
Step 5 – Payroll Security
Payroll management requires more security than the company as a whole. Special security concerns.
- Protection against data loss.
- Fraud prevention.
- Cache security.
These issues are addressed on an individual basis.
- How are the computers protected against theft?
- What security measures are in place to restrict access to the payroll office?
- What measures are in place to make copies of payroll data? Are these measures sufficient? Have tests been conducted to ensure that the payroll can be. Calculated based on these copies?
- Are the computer systems protected against viruses, electrical shock and hacker attacks?
- Is there password control? Do they take it seriously?
- Is there a thorough investigation of suspected computer misuse?
- What software is protected? Is it sufficient?
- Does the computer system issue appropriate exception reports? Does anyone pay attention to these reports?
- What are the safeguards against fraud? Are they appropriate?
- Are the cash management measures appropriate?
Step 6: Develop payroll functions
Payroll management should not be. Viewed as an overhead factor that is or should be simply dead.
Payroll can play a much more important role in any business. The scope of payroll should be reviewed when additional resources are made available by the organization.
Step 1 described the routine functions of payroll in financial and business accounting. We also explained how the functions can be. Expanded in management accounting to produce payroll cost analyses for decision-making purposes. The following possible functions increase the possibilities for effective use of payroll.
- Is the payroll function properly. Used by the human resources department?
- Is the payroll function. Linked to time and cash management systems?
- Also, is payroll linked to a personnel administration function?
- Does the payroll department provide explanations and assistance to employees to help them understand their paycheck and answer questions?
- Does the payroll department have the ability to take on non-payroll duties?
- Can the payroll department be. Turned into a profit center?
Tina J. Wagner Phillips is a 31-year-old She enjoys Accounting, working on Ework Force Payroll, and bookkeeping. She has a degree in accounting, politics, and economics, obsessed with films and tank tops.