SU 5: Payroll & personnel cycle

Wages vs salary

Wages Salary
 Calculated based on hours worked  Fixed monthly amount
 Usually paid for overtime  Usually not paid for overtime
 Paid in cash  Direct payment into bank account
 Weekly or every 2 weeks  Monthly

Characteristics of the cycle:

1. Major expense (payroll & personnel cycle is a major expense to a business)
2. May involve cash (moving away from paying in cash, directly into bank account,
minimalizes risks such as armed robbery or theft)
3. Susceptibility to fraud

Functions of payroll cycle

- The number of wages earning employees
- The nature of the business
- The requirements of the workforce
- The location of the business
- Crime

Documents used:
- Employment contract/employee file
- Payroll amendment form
- List of employees
- Clock card
- Batch control sheets and batch register
- Deduction tables and returns
- Payroll (wage journal)
- Pay packets, pay slips, salary advice
- Unclaimed wage register
- Wage (or salary) reconciliation
- Logs, variance reports
Flow of functions:

Personnel

Deductions:
Payment & Timekeeping
recording

Payment
preparation and Payroll preparation
payout
1. Personnel

Documents:
- Payroll amendment form (PAF)
- Employee’s file
- List of employees/ employee register

Risks:
 Recruiting/ retaining unsatisfactory performing or unnecessary employees
 Incorrect dismissal procedures
 Unauthorised amendments to employee records or employee file
 Incorrect/incomplete records

Control activities:

 Requests for the appointment or dismissal of employees should

originate from the section making the request & written motivation should
be provided.
 Requests (written motivation) should be signed by section head (e.g.
financial manager) and countersigned by the section manager (e.g.
financial director) after reference to the budget.
Specifications of the position and the skills required should be agreed
by the section & the personnel department (HR).
 Changes to salaries, pay rates, promotions and any other changes in
service conditions, should be decided upon by the personnel department
(HR)/wage committee (bigger entities) after:
 due consultation with interested parties, e.g. the union
representatives
 consideration of relevant laws and regulations, e.g.
overtime, pay rates, minimum wage regulations.
 Changes should be documented and authorised (signed) by the
authorising body (HR/wage committee)
 Changes / amendments – sequenced payroll amendment forms (PAF)
– cross-referenced to supporting documentation & signed by senior HR
member in personnel
 PAF’s should be reviewed for validity & gaps in sequence by a senior
HR member of the personnel section
 Sound personnel practices – employ honest and competent staff
(perform interviews and do background and reference checks)
 A record or file should be kept for all employees: copy of PAF,
employment contract, performance appraisals & disciplinary warnings,
personal details
 Pre-printed, properly designed (preferably sequenced) clock cards must
be prepared for all employees on the employee list – document controls.
Blank clock cards- stationery controls.
2. Timekeeping function:

Documents:
 Clock cards
 Batch control sheet
 Batch register

Risks:
 Invalid hours recorded (clocking for fictitious employee, employee who is
absent, clock in and leave immediately
 Hours on clock card incorrectly calculated for normal and/or overtime
hours

Control activities:
 Entrances / exits to the workplace must be:
o Limited (preferably one)
o Protected by a tollgate / turn-style mechanism / access card
o Supervision during clocking periods by a security guard
 Clock cards to be prepared by the personnel department (HR) –
according to an authorised list of employees
 At the end of the wage period, the section administration clerk must
collect all the clock cards (or timesheets) and:
o Compare the number of clock cards with the number of employees
in the section
o Compute the ordinary hours worked
o Compute the overtime worked
o Bind the clock cards in batches
o complete a batch control sheet
o Before the batch of clock cards is transferred to payroll preparation, the
section head(s) should check calculations, authorize overtime and sign the
batch control sheet.
Details of the batch should be entered in a batch register, which will
accompany the clock cards to payroll preparation
3. Payroll preparation:

Documents:
 Clock cards
 Deduction tables
 Updated list of employees
 Payroll

Risks:
 Inclusion of fictitious employees
 Use of incorrect or unauthorised pay rates, hours or deduction tables.
 Cast and calculation errors

Control activities:
 On receipt of the batch of wage cards , the wage clerk should check
details of batches received, e.g. number of batches, number of cards,
and sign the register to acknowledge receipt of the batches.
The wage clerk should prepare:
* the payroll and a coinage schedule
 a reconciliation of the difference between the prior periods wages and the
current periods wages
o *a record of control totals including normal hours and overtime
hours per section.

A supervisor or second wage clerk should:

 verify hours and rates used in compiling the payroll against the clock cards and
the employee list
 verify deductions against the relevant tables
 verify amendments to the payroll against the PAFs and vice versa
 re-perform calculations and the wage reconciliation
 sign the payroll.

• The head of payroll preparation should carefully review and sign the
payroll and period to period reconciliation
• The payroll and period to period reconciliation, should be presented to two
payment signatories who should:
• review the payroll for unusual items
• inspect for the presence of control signatures and
sign the payroll and reconciliation.
4. Payment preparation & payout:

Documents:
 Payroll
 Payslips
 Pay packets
 Unclaimed wages register

Risks:
 errors or theft of cash during:
- drawing of cash,
- making up of pay packets, and at the pay-out.
 misappropriation of unclaimed wages.

Control activities:
- Wage packets should be made up by two wage department members
(physical security over all aspects of cash handling should be extremely
tight).
- On delivery of the payroll and pay packets to a section, the section head
should:
* Agree the number of pay packets to the payroll
* Agree control totals e.g., number of cards, total hours, on the payroll to
the batch register and
* Sign the payroll to acknowledge receipt.
- The pay packets and payroll should be locked away until payout.
- The wage payout should be conducted by at least two employees, e.g.,
an independent paymaster and the section foreman, both to be always
present.

Employees should:
 present identification e.g. official staff card, prior to receiving their pay packets
 acknowledge receipt of their wage packet by signing the payroll
 count their cash and immediately report any discrepancies to the paymaster.
These should be recorded on the payroll.

Employees should not be allowed to accept a pay packet on behalf of another

employee.

At the conclusion of the payout, the paymaster and foreman who have conducted
the payout, should:
• agree all unclaimed pay packets to the payroll (employees who have not
signed)
• identify clearly on the payroll, all employees for whom there is an
unclaimed packet
• enter the details of unclaimed wages in an unclaimed wage register
• sign the payroll to acknowledge this control procedure.

 The unclaimed pay packets and payroll should be retained by the

paymaster who should lock them away
 When employees wish to collect their unclaimed wages, they must identify
themselves to the paymaster and acknowledge receipt of their pay packets
 by signing the unclaimed wage register.
 Regular independent reconciliations of unclaimed pay packets on hand and
the unclaimed wage register should be performed and the unclaimed wage
register reviewed for unusual occurrences
 Any wages remaining unclaimed after two weeks, should be banked and a
copy of the deposit slip attached to the unclaimed wage register and cross-
referenced to the relevant entries.
5. Deductions: Payment and recording

Documents:
 General ledger
 Payroll (wage journal)
 Cash payment journal
 Return form

Risks:
 penalties due to non-payment, late payment or underpayment.
 criminal/civil charges due to nonpayment (this is theft)
 incomplete, inaccurate amounts paid over and/or
 return forms incorrectly completed.

Control activities:
 One employee raising and paying over deductions.
 A strict monthly schedule for:
* posting the entries to raise the liabilities for the deductions
* making the necessary payments on a timeous basis, and conducting
* supervisory checks on the above activities should be prepared.
 The payroll and return forms should be presented to signatories for their
scrutiny
 Independent timeous scrutiny of the general ledger accounts for deductions
to confirm that they are being promptly cleared, should be carried out by
the financial accountant.