Auditing testing of confidentiality

Auditors have to treat all
the information they gather from dealing with a client’s affairs as totally
confidential. This is very much the case when dealing with payroll as matters
such as the rate of pay between individuals can be a very sensitive subject

The payroll system contains
a lot of personal data about employees including

·
Rate of pay

·
Deductions

·
Home address

·
Bank details

·
Birth date

·
National insurance number

All of which is
confidential information and can be used by unscrupulous individuals as raw
material for identity theft

The auditor should be very
much aware of this and it is quite often the case that only the more senior members
of the audit team are allowed access to payroll data.

Care also has to be taken
when documenting tests on the audit files so confidential information about
individual employees should be kept to a minimum. The important thing is to
meet the audit objectives from a company-wide point of view so employees can be
identified by a work number, payroll number or clock number rather than by name.

System controls- payroll

As with the purchases and
sales systems the payroll system will have within it controls and procedures
which are designed to:

·
Achieve the system objectives

·
Minimize the possibility of fraud and error

The payroll system can be
subdivided into two parts

·
Basis of payroll calculation

·
Payment of wages and salaries and accounting

Basis of payroll
calculation

Organizational controls

·
Written procedures

·
Approved wage and salary rate lists

·
Procedures to be adopted for starter and leavers

Segregation of duties

·
Separation of staff responsible for preparing
payroll from those involved in payment

·
Separation of staffs involved in personnel
administration from staff involved with payroll

Physical controls

·
restriction of access to payroll office

·
restriction of access to parts of
accounting/computer system not relating to relevant payroll

Authorization

·
authorization for changes in rates

·
employee authorization for non-statutory deduction

·
authorization of hours worked

·
authorization of bonuses

·
authorization of commission payments

Arithmetical and accounting checks

·
correct basic rates set as basis for calculation
of gross pay

·
correct overtime rates applied

·
piecework payments reconciled to completed
quantities

·
tax code applied for correct tax years as
notified by island revenue

·
computerized payroll upgrades received and
applied following tax rate changes

Calculation and payment of
wages

Organizational controls

·
Written procedures

·
Separate payroll department from personnel
department

·
Individual personnel file for each employee

Segregation of duties

·
Separation of staff responsible for preparation
of wages from those authorizing payment

Physical controls

·
Filling of pay packets by staff not involved
with preparing payroll

·
General security of cash in transit and on
premises

·
Distribution of wage packets by staff not
involved with preparing payroll

·
Controls for security of unclaimed cash wages

Authorization

·
Payroll authorized by responsible officials
before payment

·
Wages cheques signed by two senior officers of
the company not connected with payroll preparation

Arithmetical and accounting
checks

·
Payment of PAYE and NI to HM revenue and customs

·
Comparison and reconciliation with budget
figures

Audit testing – payroll

The test performed on
payroll are basically designed to ensure that

·
Internal controls are working

·
The scope for fraud is limited

Payroll has often been a
vulnerable area to fraud but the decline in the payment of cash wages has
limited the opportunities open to the fraudster and the use of reliable payroll
software has further eroded the possibility of falsifying payroll details in order
to defraud the business.

However this does not
reduce the auditor’s responsibility to ensure that the systems are functioning
correctly.

The key areas of audit
testing are designed to test that:

·
All employees exist

·
All employees are paid at the correct rate

·
All deductions from wages are properly
calculated

·
Net pay and deductions are accounted for
correctly

Again the audit work will
consist of a mixture of compliance and substantive tests. The main procedures
are:

·
Check authorised rates of pay are being used

·
Confirm authorisation procedures operating with
regards to

Ø
Clock card, job cards, time sheets or other
evidence of time worked

Ø
Production records for payments based on
productivity

Ø
Signed lists for bonuses

Ø
Approved lists for commission payments to sales
staff

·
Check calculations of gross to net pay for a
sample of employees verifying authorisation for and calculation of

Ø
Gross pay

Ø
Overtime payment

Ø
Piecework payment

Ø
PAYE and NI using HM revenue and customs documents
eg coding notice

Ø
Holiday pay

Ø
Inspect authorised payment lists for BACS
transfer

Ø
Obtain cancelled cheque from bank and compare to
payroll

Ø
Text non statutory deduction from payroll
authorised by employee

Ø
Test holiday pay calculations

Ø
Observe delivery of pay advice to employees

Ø
Ascertain reasons for any pay advice not
delivered

Ø
Check additions and calculations on payroll

Ø
Reconcile movements in payroll for two different
periods

Ø
Test starters and leavers procedures applied to
payroll i.e ensure leavers removed at correct date and starters started on
correct date

Ø
Check payroll summary to payroll

Ø
Check payroll summary to nominal ledger

Ø
Check any cost analysis reconciles to payroll

Ø
Check salary payments are in accordance with
contracts of employment

For payment of cash wage

Ø
Check the packets to the payroll to ensure has a
packet

Ø
Check
procedures are secure from point of view of staff paying out

Ø
Check unclaimed wages entered the unclaimed wage
book

Ø
Check unclaimed wages details with payroll

Ø
Ascertain reasons for unclaimed wages

More payroll systems
operate on broadly the same principles, although there are frequently special
arrangements for calculating such things as overtime or commission. Auditors
can apply the principles outlined above to their audit of both weekly and
monthly payrolls, adapting them to suit the particular circumstances of each
audit