The audit of wages

1. Identify controls that should be in place to ensure that fictitious employees are not included on the payroll.

  • Blank starters and leavers forms should be kept in the HR department and completed when notified by the appropriate senior responsible official of staff changes.
  • Staff implementing these changes should not be involved in the preparation of the payroll or the distribution of pay-packets.
  • Periodic independent checks should be performed from the payroll to contracts of employment maintained in the HR department.

2. List FOUR control objectives of a wages system.
Any four of the following:

  • To ensure that employees are only paid for work done
  • To ensure that wages are only paid to valid employees
  • To ensure that all wages are authorised
  • To ensure that wages are paid at the correct rates of pay
  • To ensure that wages are correctly calculated
  • To ensure all wages transactions are correctly recorded in the books of account
  • To ensure that all payroll deductions are paid over to appropriate third parties

3. Explain the difference between internal control questions (sometimes referred to as criteria questions) and internal control evaluation questions (sometimes referred to as key questions). Illustrate your answer by identifying TWO examples of wage system ICEs and TWO relevant ICQs for each ICE.

ICQs ask detailed questions about the wages system in order to identify if specific controls exist. They are objective questions requiring a simple yes or no answer and form the criteria for answering ICE questions.

ICEs are normally answered using knowledge of the system obtained from the ICQs and evaluate whether sufficient controls exist to prevent the specified error or omission. They are subjective and require the exercise of judgment.

1. ICE Can employees be paid for work not done?

(i) Are clocking on points supervised?
(ii) Are clock cards reviewed by a responsible official before being forwarded to the wages department?

2. ICE Can wages be paid to fictitious employees?

(i) Who is responsible for the control and issue of blank clock cards?
(ii) Are periodic checks made from the payroll master file to HR records?

4. Explain the difference between an error report and an exception report.

Error report
If invalid data is input – for example, an employee number is entered that does not exist, it should be rejected by the data validation controls and will be included on an error report. Items on the error report need to be corrected and re-input.

Exception report
If data is input which exceeds certain pre-determined criteria – for example, employees earning greater than $2,000 per week, it will be processed but included on an exception report. Items on the exception report should be independently checked to supporting evidence as they could indicate fraud or error.