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Overview

Upon completion of this lesson, candidates should be able to:

Understand the primary control activities normally associated with an entity's payroll cycle.

Identify the primary accounting documents and internal control objectives associated with an
entity's payroll cycle.

This lesson contains suplemmental documents.

Overview of Payroll

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Study Guide

1. Flow Chart of Typical Internal Controls for Payroll

2. Objectives of Internal Controls over Payroll—The objectives are to provide reasonable assurance that:
1. Payroll withholdings and deductions are based on appropriate supporting authorizations.
2. Compensation is made only to valid employees at authorized rates and for services actually
rendered.
3. Gross pay, withholdings, deductions, and net pay are correctly computed.
4. Payroll costs and liabilities are appropriately classified and summarized in the proper periods.
5. Appropriate comparisons are made of personnel, payroll, and work records at reasonable
intervals.
6. Net pay and related withholdings are remitted to the appropriate employees and agencies.
7. Access to sensitive personnel files and payroll records is limited to authorized personnel.
3. Audit Considerations (Framed by “SCARE”)—The entity's control activities should address the
following matters:
1. Segregation of Duties
1. The following activities should be performed by different personnel when circumstances
permit:
1. Establishing and maintaining employee files in the personnel department
2. Timekeeping
3. Payroll preparation and updating the accounting records
4. Check distribution
5. Reconciling the payroll bank account with the general ledger account
2. The treasurer should typically sign the payroll checks.
3. An appropriate departmental supervisor should distribute the payroll checks to
employees in that department.

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4. Unclaimed checks should be controlled. That is, they should be returned to treasury,
secured, and eventually destroyed, if not claimed within an appropriate time.
2. Controls (Physical Controls)
1. Access to personnel files (containing sensitive information) should be limited to
authorized personnel.
2. Access to payroll checks should be limited to authorized personnel.
3. Personnel with access to payroll checks should be bonded.
3. Authorization—The entity's transactions should be executed as authorized by management.
1. Payroll should be authorized by a responsible official.
2. Payroll computations should be verified by an independent person.
3. Overtime payments should be approved by management.
4. Payroll for management should also be appropriately reviewed and approved.
4. Reviews (Performance Reviews)
1. A company should maintain current and accurate payroll information (which should be
periodically matched with information in the personnel files).
2. The payroll checks written should be reconciled to the payroll register, serving as the
supporting accounting record for each payroll period.
3. Other appropriate reconciliations should be made on a timely basis: for example, in a
manufacturing environment, someone should reconcile the job cost time sheets to time
clock cards. (For strict internal control purposes, a company should use time clocks
where possible.)
5. EDP/IT (Information Processing)
1. Payroll checks should be prenumbered (and the numerical sequence accounted for).
2. A company should maintain a separate checking account specifically for payroll
transactions to establish more accountability and control over these important
transactions.

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Notes

You haven’t made any notes or highlights yet.

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Knowledge Checks

Question 1 (PQ0921)

Throughout the company, payroll checks should ordinarily be signed by the applicable individual
departmental supervisors.
True
False

Question 2 (PQ0928)

The primary accounting record related to payroll is usually referred to as the "payroll register," which lists
amounts owed to individual employees for a given payroll period.
True
False

Question 3 (PQ0926)

Overtime payments should be approved in advance by management.

True
False

Question 4 (PQ0922)

Unclaimed checks should be returned to the treasurer for safekeeping.

True
False

Question 5 (PQ0927)

Payroll checks are usually drawn on the company's general disbursement checking account, since payroll
is similar to other types of payables.
True
False

Question 6 (PQ0923)

Payroll checks should be distributed by the treasurer.

True
False

Question 7 (PQ0924)

The primary purpose of a separate personnel department is to oversee hiring, firing, and maintaining
employee-specific records.
True

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False

Question 8 (PQ0925)

Payroll for salaried employees need not be reviewed by an appropriate supervisor.

True
False

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Slides

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Flashcards

1
Identify three access controls 1. Access to personnel files should be
applicable to the payroll limited to authorized personnel.
2. Access to payroll checks should be
transaction cycle. limited to authorized personnel.
3. Personnel with access to payroll
checks should be bonded.

2
Payroll information should be
What comparisons should be periodically matched to
made within the entity to information in personnel files.
Payroll checks should be compared
ensure the appropriateness of to entries on the payroll register.
payroll transactions? Amounts on the payroll register
should be agreed to the applicable
general ledger accounts.

3
1. A responsible official should review
and approve payroll
Describe management's role 2. An independent person should
in the execution of verify computations.
transactions controls in the 3. Management should approve
overtime payments.
payroll transaction cycle. 4. Payroll for management should be
appropriately reviewed and
approved.

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Supplementary Questions

Question 1 (IC-0119B)
Proper internal control over the cash payroll function would mandate which of the following?
The payroll clerk should fill the envelopes with cash and a computation of the net wages.
Unclaimed pay envelopes should be retained by the paymaster.
Each employee should be asked to sign a receipt.
A separate checking account for payroll be maintained.

Question 2 (IC-0113B)
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to
provide assurance that
Payments to employees are computed at authorized rates.
Employees work the number of hours for which they are paid.
Segregation of duties exist between the preparation and distribution of the payroll.
Controls relating to unclaimed payroll checks are operating effectively.

Question 3 (IC-0120B)
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
Authorization of transactions from the custody of related assets.
Operational responsibility from the recordkeeping responsibility.
Human resources function from the controllership function.
Administrative controls from the internal accounting controls.

Question 4 (IC-0121B)
To minimize the opportunities for fraud, unclaimed cash payroll should be
Deposited in a safe-deposit box.
Held by the payroll custodian.
Deposited in a special bank account.
Held by the controller.

Question 5 (IC-0118B)
In meeting the control objective of safeguarding of assets, which department should be responsible for
Distribution Custody of

of paychecks unclaimed paychecks

Treasurer Treasurer
Payroll Treasurer
Treasurer Payroll

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Distribution Custody of

of paychecks unclaimed paychecks

Payroll Payroll

Question 6 (IC-0115B)
In determining the effectiveness of an entity's controls relating to the existence or occurrence assertion for
payroll transactions, an auditor most likely would inquire about and
Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
Inspect evidence of accounting for prenumbered payroll checks.
Recompute the payroll deductions for employee fringe benefits.
Verify the preparation of the monthly payroll account bank reconciliation.

Question 7 (IC-0122B)
The auditor may observe the distribution of paychecks to ascertain whether
Pay rate authorization is properly separated from the operating function.
Deductions from gross pay are calculated correctly and are properly authorized.
Employees of record actually exist and are employed by the client.
Paychecks agree with the payroll register and the time cards.

Question 8 (IC-0123B)
Which of the following departments most likely would approve changes in pay rates and deductions from
employee salaries?
Personnel.
Treasurer.
Controller.
Payroll.

Question 9 (IC-0116B)
An auditor most likely would assess control risk at a high level if the payroll department supervisor is
responsible for
Examining authorization forms for new employees.
Comparing payroll registers with original batch transmittal data.
Authorizing payroll rate changes for all employees.
Hiring all subordinate payroll department employees.

Question 10 (IC-0114B)
Which of the following is a control that most likely could help prevent employee payroll fraud?
The personnel department promptly sends employee termination notices to the payroll supervisor.
Employees who distribute payroll checks forward unclaimed payroll checks to the absent

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employees' supervisors.
Salary rates resulting from new hires are approved by the payroll supervisor.
Total hours used for determination of gross pay are calculated by the payroll supervisor.

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