Question

You are the internal audit senior responsible for conducting an assurance engagement of the XYZ Company payroll process. This process has not been audited for three years and, as such, is due in the normal audit cycle. There have been no significant changes since the previous audit, that is, there were no system changes, no reorganization of personnel, and no substantive procedural changes. However, during the last assurance engagement, the internal audit function identified several observations, some of which were considered significant. The significant observations related to:

Information pertaining to employees leaving the company was not communicated to the IT department, resulting in extended delays before those employees' systems rights were terminated.

Hours paid to nonexempt employees were not supported by approved timesheets.

Amounts withheld for employees were not consistent with elections made by employees.

The possibility existed that phantom (ghost) employees could be included in the payroll without detection.

Payroll management implemented actions to address all significant observations and the internal audit function conducted limited follow-up procedures to validate that the planned actions were completed. This is the first audit since the follow-up procedures were completed.

The following is pertinent information to the payroll assurance engagement:

"XYZ employs approximately 4,400 employees. Approximately 2,700 of those employees are salaried, the rest are hourly.

Employees are paid biweekly.

Hourly employees earn pay at straight time for the first 80 hours in a biweekly pay period, time and a half for the next 20 hours in a pay period, and double time for any hours exceeding 100 hours in a pay period.

The company utilizes a widely used and market tested payroll package (Pay Right) for processing of all payroll transactions.

The payroll system interfaces with the general ledger system.

XYZ has established a separate payroll imprest account for the processing of payroll checks. Amounts are deposited in this account from the company's general account to cover any checks presented against the imprest account each day.

Certain non-payroll items are deducted from the payroll checks, including: Employee loans to cover the cost of extra benefits or computer purchases. Contributions to long-term retirement plans. Contributions to charitable organizations, such as the United Way. Contributions to political action committees (PACs).

Payroll expenses and the related payroll accruals are considered material to the company.

Based on the above information, perform the following steps to conduct a payroll assurance engagement.

D.Document a potential process flow in a detailed flowchart. Make sure that this flowchart identifies key risks and controls and has at least one potential design inadequacy.

E.Develop potential key performance indicators for the process you documented in step D.

Answer 1

In our case, employee ratio is as under:

SALARIED	2700	61%
HOURLY	1700	39%
TOTAL	4400	100%

Of above 39% are paid hourly basis and their relative pay structure on hourly basis is as under:

Hours	Times pay
<=80	1
80-100	1.5
>100	2

Though the company utilizes a widely used and market tested payroll package (Pay Right), it should have all checks and balances to verify the payroll is running properly or not as per above calculation.

Flow of Audit for Payroll assurance management:

1. Identification of Daily work hours for each employees including overtime.
2. Biweekly total of hours worked for each employee check before booking into the Payroll Imprest Account.
3. Booking of amount payable into Payroll Imprest account.
4. Adjustment of any advances, loan outstanding, statutory dues from the payable amount.
5. Final payment from Payroll imprest account to employees
6. Transfer of statutory dues of employees from Imprest account to paybles.
7. Tallying closing balance that should be equal to NIL or any advances, loan which is deductible in Next biweekly payroll only.

KPI for above process:

• Weekly Hours worked identification - to calculate amount payable 1time / 1.5 time / 2 times as per slab.
• Imprest account balance checking
• Statutory Dues payables.