Audit testing- the payroll system

The objectives of the payroll system are similar to
those of the purchase and expresses system insofar as the business only wants
to pay for work done and at the correct rate

Although wages and salaries are often mentioned
separately, there are many common features from an audit point of view
The principal differences are that wages tend to be
paid weekly and often vary from week to week with overtime or piecework
payments. Piecework is based on the amount of work an employee completes rather
than the length of time they spend at the work. Salaries on the other hand tend
to be paid monthly, be the same amount each month and only vary with, say,
commission payments or bonuses
In some business wages are paid weekly in cash.
Nowadays this tends to be quite rare in all but the smallest businesses, mainly
for reasons of security, but we will mention a few points relating to wages
paid in cash so you can understand the special issues involved in that
situation
The common features when considering both wages and
salaries are:
a.     All employee have to have a
contract of employment setting out terms and conditions of employment
b.     Rates of pay have to be
agreed
c.     All deduction either have
to be statutory (e.g PAYE and NI) or authorised by the employee (e.g pension
contributions)
d.     Calculations of tax and NI
are basically the same for monthly paid and weekly paid workers
e.     They have to be paid on
time
Where businesses have a mixture of weekly and monthly
paid employee there may be two payrolls. The weekly payroll may be prepared by
specialized staff in a separate department whereas the monthly payroll may be
prepared by a senior official of the company, particularly if it includes
salary payments for senior managers and directors. It may be outsourced to an
independent body in which case the auditors will have to adopt some separate
procedures
In that case the auditor will have to carry out
separate tests on each payroll to ensure both are being operated correctly
It is possible that some of the work that auditors do
can validate both types of payment.

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