Question

Question 4 Internal controls are an essential requirement of a payroll system in a large organisation. Evaluate the main relevant functions of the payroll system and explain the role played by internal control procedures. (20 marks)

Answer 1

Functions of payroll system are

Processing Paychecks

While payroll management involves more than just paying people, proper paycheck processing is still a critical function. Employees don’t appreciate paycheck errors, so a payroll manager needs to verify several details that go into an employee’s compensation. This includes verifying salary and hourly rates while also accounting for regular and overtime hours. Additional compensation in the form of vacation time, holiday pay, and other factors may also apply.

Another part of processing paychecks is applying any necessary deductions. Some of these deductions, such as federal income tax, are mandatory. Other are optional depending on the employee. For example, an employee who has opted into a company’s group health insurance and 401(k) plans will have insurance premiums and retirement contributions deducted from his or her paycheck.

Handling Payroll Taxes

Your employees aren’t going to be the only people upset if you don’t correctly process payroll. Roughly 70 percent of the IRS’ annual revenue is made up of payroll taxes. This means failing to pay payroll taxes can be a costly mistake, as businesses are hit with billions of dollars in payroll tax penalties each year.

Payroll managers need to weigh several factors to determine tax deductions, as different regions will have different tax rates. Then they must complete several forms documenting payroll taxes, which includes filing W-2s for each employee by Jan. 31 and completing a 941 form that reports the employment taxes an employer withholds and contributes each quarter. Not only do these files need to be filed accurately, they need to be filed on time, which can be difficult for someone without any training in payroll tax management.

Keeping Records

In addition to payroll tax compliance, payroll management also includes a great deal of recordkeeping. The Fair Labor Standards Act (FLSA) requires employers to keep accurate records for every non-exempt worker. These records include:

1. Employee's full name and social security number
2. Address, including zip code
3. Birth date, if younger than 19
4. Sex and occupation
5. Time and day of week when employee's workweek begins
6. Hours worked each day
7. Total hours worked each workweek
8. Basis on which employee's wages are paid (e.g., "$9 per hour," "$440 a week," "piecework")
9. Regular hourly pay rate
10. Total daily or weekly straight-time earnings
11. Total overtime earnings for the workweek
12. All additions to or deductions from the employee's wages
13. Total wages paid each pay period
14. Date of payment and the pay period covered by the payment

The FLSA also states that payroll data should be kept on file for three years. Records that involve wage computations should be kept for two years, such as work schedules, time cards, and other related documents. A payroll manager can ensure that these documents are stored electronically in case the Department of Labor [DOL] ever decides to check in on a business.

Employee Accessibility

It’s important to have financial documents readily available for the DOL, but employees should also be able to access key payroll information. An online employee portal like GMS Connect gives workers a secure online place where they can access personal information, such as:

• Benefits summaries
• 401(k) summaries
• Check history and deduction totals
• Direct deposit details
• Time clocks
• Paid time off

In addition, GMS Connect allows employees to download and print out important documents such as W-2s, change tax settings, and make payroll inquiries, which gives your employees the power to answer their own questions come tax season.

Internal control procedures are

an effective internal control structure has five interrelated components:

· Control environment

· Risk assessment

· Control activities

· Information and communication

· Monitoring

Each of these components is important in establishing and maintaining an effective control system for payroll.