Client Period-end

[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Use Guidance: (Read & Delete Me)

This audit program is designed to be used for reference purposes only. These
programs should be modified to reflect client company policy where appropriate. Also,
consider whether additional tailoring and/or approvals are needed for specific
deployment. Professional judgment, based on individual circumstances, must be used
when considering the information included in this program.

Specific work steps that involve complex GAAP accounting issues or the interpretations
of GAAP accounting are to be expressly avoided. Any specific program work steps
contemplating such matters require the approval of the appropriate risk management
partner in consultation with DPP-RMAS.
 

Internal Audit Objectives

Assist management in determining the following:

1)     Obtain and document an understanding of the payroll process and related internal
controls.

2) Duties are segregated. System access is limited to job requirements.

3) Payroll masterfiles in the payroll system are accurate and complete.

4) Payroll is processed correctly based on accurate time reporting and payroll

masterfile data.
5)     Payroll distributions are accurate and complete.

6) Period end accruals are calculated according to company policy.

7) Payroll activity is accurately reflected in the general ledger and reported

periodically according to company policy.
 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
Internal Audit Objective 1: Obtain and document an understanding of the payroll process and
related internal controls.
1) Obtain and review the following:
 – Existing payroll process documentation (i.e., from
Sarbanes Oxley projects);
 – Organizational Charts for the payroll department;

 – Policies and procedures for the payroll process (e.g.,

the initiation and execution of pay rate changes,
reporting and processing of payroll, accrual policies,
 – Human
tax filingresource
policies including, but etc.)
not limited to,
requirements, disbursements,
vacation/holiday policies, short and long-term disability
policies, 401(k) participation, etc.
 – Electronic downloads of payroll data needed to select
samples.
2) Interview key individuals involved in the payroll process
including the HR Director/VP, Payroll Managers, IT Director
or Manager responsible for Payroll processing, or other
pertinent Payroll personnel. If necessary, prepare flow
charts and/or narratives.

Consider the following questions during interviews:

 – What is the process for authorizing new hire salaries

and existing employee raises and bonuses?
 – How is time reported within the company? What type
of approval process and/or managerial review is
performed each pay period?

 – Do the company's policies and procedures support the

segregation of duties?
 – Do supervisory reviews exist (e.g., payroll register edit
list approvals, manual check approvals, payroll
additions, changes and terminations, etc.)?

 – Do procedures provide an outline of how to develop the

payroll accruals made at period-end? Is there an
independent review process in place for payroll
accruals?

Filename: 527258265.xls Page 2 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
 –  Who reviews and follows up on exception reports and
–error logs other than the payroll clerk?
 –  Are independent written authorizations and approvals
–by supervisors required for time cards or other
documentation of time worked?
 –  Do independent written authorizations and approvals
–required for overtime, shift changes, department
changes, etc. exist?

 –  Is a review and approval of payroll details required by a

–responsible employee independent of paycheck
distribution and unclaimed wages?
 –  Are written authorizations required for individual wage
–or salary rates changes?
 –  Are changes to pay rate and other personnel
–information permitted only if the human resources
sends approved documentation to the payroll
department?

 –  Which bank accounts are funded for payroll and how

–are they funded?
 –  Who has responsibility for transmitting the ACH file for
–direct deposits?

 –  What controls are in place regarding un-issued checks

–(dual control)?
 –  What are the procedures for replenishing the check
–supply?
 –  Is an inventory of payroll checks periodically
–performed?
 –  How are late arrivals, early leaves, extended breaks,
–and other work schedule deviations handled?

 –  Are independent approvals required for non-routine

–(exceptions) payments?
 –   Where systems are not utilized to automatically track
–time, how do managers with a large span of control
manually keep track of exceptions?

Filename: 527258265.xls Page 3 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
 –  How is overtime pre-authorized?
–
3) Inquire about key performance indicators (KPIs) used by
management to evaluate operational performance.
4) Perform a process walk-through to confirm the
understanding of the process and modify process
documentation as needed.

5) Based on the interviews and walkthrough, prepare

observations and recommendations for management
regarding the process and procedures.

6) Based on above procedures, tailor the remaining internal

audit steps.
Internal Audit Objective 2: Duties are segregated. System access is limited to job requirements.

1) Understand by inquiry and observation whether there is

segregation of duties among those that authorize and
record payroll transactions. Inspect the payroll procedures
and make inquiries regarding assigned roles and
responsibilities.

Consider the following:

- Who is authorized to approve the following:

·         Payroll register edit list

·         Payroll manual check

·         Payroll additions, changes and terminations.

Do any of these individuals also have time reporting or

payroll processing responsibilities?
- Do employees with access to time cards, payroll
records, or checks also have access to payroll
preparation, payroll distributions or personnel records?

Filename: 527258265.xls Page 4 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
- Can personnel involved in check preparation sign or
issue payroll checks?
- Can personnel with timekeeping responsibility
participate in payroll processing?
- Are critical payroll records, files, programs and
documentation securely stored in locked facilities or
under continuous surveillance?

2) Test access to the timekeeping and payroll systems as

follows:
 – Inquire about the maintenance process of granting/
limiting access to system/ transaction to appropriate
personnel.
 – Obtain listing of individuals with access to the system/
function and perform system queries to corroborate
understanding of access restrictions.
 – Select sample of __ users and obtain authorization/
approval documents sent to IT for system access to
inspect for evidence of authorization/ approval.
 – Understand by inquiry and observation whether the
user profiles and user access are subject to periodic
management review.
 – Understand by inquiry and observation whether
security violation reports are generated and security
breaches are followed up and investigated. Inspect
3) Perform a knowledge
exception reportsassessment of the individuals
and follow through andofthe
on resolution
tasksexceptions.
they perform.

4) By observation and inquiry identify whether the payroll

system is password-protected.
Internal Audit Objective 3: Payroll masterfiles in the payroll system are accurate and complete.

1) Select a sample of ___ recently-terminated employees from

personnel records, per the company's sampling guidelines.

- Inspect pay history to identify whether disbursements

were made subsequent to the termination date.

- Inspect the individual's last paycheck to identify

whether amounts due to the company were deducted
from the check.

Filename: 527258265.xls Page 5 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
2) Select a sample of ___ of personnel included in the latest
payroll register, per the company's sampling guidelines.

- Trace to personnel files maintained by HR

- Agree to most current organizational chart.
3) If the risk of “ghost” employees is high and physical
paychecks are used, consider manual distribution of
paychecks (or stubs).

Internal Audit Objective 4: Payroll is processed correctly based on accurate time reporting and
payroll master file data.
1) Select a sample of ____ payroll registers per the company's
sampling guidelines. Inspect sample for documented
evidence of management/supervisor review for accuracy in
comparison with time reported.

Inspect evidence of follow up, including names, dates, and

summary of interview and follow up action taken, as well as
supporting documentation evidencing review.

Determine if management has documented their review,

identified unusual items/ trends/ variances and that the
issues noted have been researched and resolved timely.

2) Select a sample of ___ timecards from various

departments, per the company's sampling guidelines and
perform the following:

- Recalculate total hours reported.

- Identify whether the employee's signature is on the
time card.
- -Identify whether the timecard was approved by the
employee's supervisor - evidenced by a signature.
- -Inspect for evidence of alterations (i.e. erasures, pencil
marks, white-out).
- -Trace the hours per the timecards to the hours in the
payroll register.

Filename: 527258265.xls Page 6 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
- -Vouch net pay per the payroll register to either a
cancelled check (endorsements) or direct deposit
detail.
- - Vouch employee's pay to employee's personnel file to
determine that employees’ pay rates are in accordance
with the authorized amounts.

3) Select a sample of ___employees, per the company's

sampling guidelines, receiving a pay rate change in the last
year and agree the following to applicable personnel files:

- Appropriate level of management approved the rate

change according to company policy;
- Subsequent disbursements occurred at the new rate
commencing in the correct pay cycle;
- Documentation supporting rate change is on-file;
- Payroll reports listing pay changes are generated and
approved.
4) Test special payments
Select a sample of ____ employees, per the company's
sampling guidelines, from a listing of employees who
received special payments (e.g., bonuses, frequent flier
payments, out-of-cycle payments, and manual checks for
missed pays) and vouch to supporting documentation.

5) Test voluntary/involuntary deductions

Select a sample of ____ employees, per the company's
sampling guidelines, who have voluntary (such as medical
care deductions)/involuntary (such as IRS back-pay taxes)
deductions and vouch the deductions against the
employees personnel file.

6) Test 401(k) or other pension contributions

Filename: 527258265.xls Page 7 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
- Select a sample of ___ employees with 401(k)
contributions, per the company's sampling guidelines,
and identify whether pension forms have been
completed, and annual contribution amounts do not
exceed federal limit.

Internal Audit Objective 5: Payroll distributions are accurate and complete.

1) Test automated payroll disbursements

Select a sample of ___ direct deposit authorization forms,

per company guidelines, and inspect the forms for evidence
of authorization (e.g., employee signature, etc.).

2) Test manual payroll check disbursements

Obtain recent payroll manual check logs. Select a sample

of ___ manual checks generated in the prior ___ pay
periods, per the company's sampling guidelines, and
recalculate using the employee’s on-line rate of pay,
withholdings and benefits. Inspect supporting
documentation to identify whether the disbursement was
approved by management.

3) Inspect manual check log. Identify whether the number of

checks issued are in line with "normal" levels established in
the company policy. (excessive manual checks could
indicate problems with payroll processing.)

4) Inspect manual check log to identify disbursements in

excess of $ _______ and inspect supporting documentation
for independent request and approval. Inquire about why
the check was issued as a manual check vs. a system
generated check - Ask the requestor, processor and
approver.

5) Test unclaimed wages/checks

Select a sample of _____ unclaimed wages/payroll checks
for the past ____ pay periods, per the company's sampling
guidelines and perform the following:

Filename: 527258265.xls Page 8 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
- Inspect evidence of follow up, including names, dates,
and summary of interview and follow up action taken,
as well as supporting documentation evidencing
review.
- Determine if management has documented their
review, identified unusual items/ trends/ variances and
that the issues noted have been researched and
resolved timely.

Internal Audit Objective 6: Period end accruals are calculated according to company policy.

1) Test compensation and bonus accruals

Inspect the general ledger for accrued compensation

balances, and obtain explanations for these accruals.

- Understand through inquiry and observation the

process for recording accrued compensation/ salaries.

- Inspect supporting detail of the accrued compensation

accounts by employee or by employee groups as of the
period-end date and perform the following:

a) Agree the detail total to the general ledger control

account and investigate significant reconciling items;

b) Compare the accrual to subsequent

disbursements or payroll records and identify
variances in excess of ____%.

c) Inspect supporting detail for unusual items or

amounts and inspect payroll records, which support
amounts accrued.
2) Test payroll taxes accruals

- Inspect the general ledger for accrued payroll taxes

balances, and obtain explanations for these accruals.
- Understand through inquiry and observation the
process for recording accrued payroll taxes.

Filename: 527258265.xls Page 9 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
- Obtain the subsidiary ledger or supporting detail of the
accrued payroll taxes accounts by employee or by
employee groups as of the period-end date and
perform the following:

a) Reconcile the detail in total to the general ledger

control account. Investigate significant or unusual
reconciling items;

b) Reconcile the accruals for selected employees or

employee groups by reference to subsequent
disbursements or payroll records;

c) Inspect supporting detail and payroll records for

unusual items or amounts accrued.
3) Test vacation accruals
- Inspect the general ledger for accrued compensation
balances, and obtain explanations for these accruals.

- Recalculate the accrual and agree the wage rates used

in the calculation to personnel files.

Note: Each state has its own law regulating

employees rights to carry over Personal Time Off
(PTO), that may in conflict with the Company policy.
Be aware of the state requirements before testing PTO
accruals.

- Note any negative balances observed and inquire

about follow-up actions taken.
Internal Audit Objective 7: Payroll activity is accurately reflected in the general ledger and reported
periodically according to company policy.
1) Test the payroll cycle reconciliation process

Obtain the latest payroll reconciliation and perform the

following:
- Compare the reconciliation to the general ledger to
indentify whether the amounts are the same.

Filename: 527258265.xls Page 10 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

Payroll

Procedures Auditor
Initials Date
- Inspect the reconciliation for the date completed.
Identify whether the reconciliation was completed
within ______ of period end date as required by
company policy.

Filename: 527258265.xls Page 11 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref
ll process and

Filename: 527258265.xls Page 12 of 21

Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

Filename: 527258265.xls Page 13 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

ob requirements.

Filename: 527258265.xls Page 14 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

e and complete.

Filename: 527258265.xls Page 15 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

me reporting and

Filename: 527258265.xls Page 16 of 21

Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

Filename: 527258265.xls Page 17 of 21

Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

Filename: 527258265.xls Page 18 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

mpany policy.

Filename: 527258265.xls Page 19 of 21

 Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

ledger and reported

Filename: 527258265.xls Page 20 of 21

Client Period-end
[Client] [Period-end]
Prepared by Date W/P reference
[Name] [Date] [W/P reference]

WP
Ref

Filename: 527258265.xls Page 21 of 21