The payroll and personnel cycle is a concept involved with the employment and payment of all employees disregarding factors such as classification and various other factors that may be used in determining compensation. The various steps include hiring of employees, approving payroll rates and deductions, timekeeping, preparation of the payroll, and payment of payroll. Others include payment of payroll taxes and filling of payroll tax returns. The payroll and personnel cycle is an important undertaking for every organization and it should never be overlooked. The major importance include the fact that employees cost constitute a significant expense for the company in terms of wages, salaries, PAYE (Pay as you earn), medical aid, pension and housing among others that may be unique to an organization. The payroll area is also particularly vulnerable to negative aspects such as fraud, theft and manipulation that may cost an organization a great deal of revenue. This is because payroll payments involve the transaction of huge amounts of cash; there is a tendency by some officials to include ghost workers on the payroll as a way of stealing from the company, some may also overstate working hours or even overstate the amounts due for payment. The payroll system may also suffer from an inefficient management that in most instances may result in loss of revenue by the organization in terms of paying benefits and taxes unnecessarily for employees. The importance of proper management of payroll and personnel cycle can therefore not be overemphasized because it constitutes an important undertaking within an organization. Lack of which may lead to loss of revenue and in some instances unnecessary civil law suits. This research paper will look at the extent of damage that lack of proper management may cause to the well being of a company.
According to Alvin et al (2006) payroll is an area in which a company can lose huge sums of money due to fraud and theft. Audit of the payroll and personnel cycle should involve proper understanding and management of aspects such as internal controls, assessment of control risks, tests of control and substantive test of transactions, analytical procedures and tests of details of balances. The principal aim of auditing the payroll and personnel cycle is to determine whether the account balances affected by the cycle are in harmony with the generally accepted accounting principles. In summary the payroll and personnel cycle begins with employment of the employees ending with the payment of the employees for the services they have rendered to the company and payment of taxes to the government. However for the system to operate efficiently there are other aspects in between such as ensuring that employees work in accordance with the objectives of the company and that they are compensated fairly and the company pays its dues to the government. Proper management of all these aspects may present a problem to a company that has not accorded enough priority and resources towards auditing of the payroll and personnel.
There is a significant relationship between payroll and a huge portion of the inventory system. This mostly occurs in construction companies where improper account classification of the payroll may result in erroneous valuation of assets such as finished goods, the work in progress or the entire construction process. For instance operating cost charged can be overstretched when the salaries of various employees are mistakenly charged as the operating cost. In the same sense the valuation of the inventory may be affected in situations where salaries are paid to the wrong employees or an amount of money meant for another process is issued to a different process. When salaries are paid to the wrong individuals both the inventory and the revenue of the company are affected and this may have a significant implication on the business perspective of the company.
In instances where labor forms important aspect during the valuation of inventory it is imperative that an organization implements proper and effective machinery to evaluate whether the classification system being used for payroll transactions is efficient. Consistency of the classification should be checked from time to time because they can be used to test the relevance of the charts of account and procedure manuals. The system should be designed in a way that tracking a particular employee, the job done and the amount of salary paid to that employee becomes possible and accessible in real time. For instance a system can be created where employees account for their weekly working hours by being assigned a particular job number. This is one aspect where one can ensure that the job cost for every employee is properly recorded. The system can also be interfaced to the employee profile so that it may be easy to determine whether a particular employee on the job cost exists or is just a phantom.
Auditing of the payroll and personnel extends the work of auditors because in the instance where they suspect fraud it is possible for them to extend their investigation towards the personnel records to determine whether payments are being made to ghost workers or whether some employees are being over compensated. One situation which mostly leads to payment of payroll cheque wrongly is where individuals who have been terminated as employees continue to receive payment cheques for work not done. In most instances the persons committing such as fraud are clerks, foremen, fellow employees or the individual who job has been terminated.
The presenting issues associated with management discussed earlier may be approached using the following methods: Inspecting the various documents that have been used for transactions to determine whether they are genuine and valid, these documents include receipts, signature by a clerk that provides verification that a particular transaction has occurred and determining whether the controls have been carried out or not. This includes re-inspection of the internal controls such as sequence of documents. The major area of control where the auditors should particularly concentrate on include undertaking various test controls for the cycle taking into consideration aspects such as division of duties, authorization of payroll revision, efficient personnel records and proper documentation, maintenance of activities procedures, payment of salary, procedures to tackling unclaimed salaries, reconciliation procedures, supervisory procedures and management checks. The major aim of conducting the checks with regard to the cycle is to ensure that employees payroll are valid and not fictitious, the hours worked per week of every employee are real and not overstretched or under stretched, the rates per payroll have been authorized in accordance with the pre determined procedures and the deductions made on every payroll are valid. These procedures are very important to ensure that the records obtained from the inventory are valid and if there is detected any case of fraud during auditing it can be easily tracked and investigated.
The major tests that are performed by the management include clocking procedures and employee wage salary procedures. It is important that the management conducts these controls randomly and in surprise manner to prevent further alteration of the evidence in case of fraud. Areas of observation include management reconciliations of the payment details of using the personnel records, and reviewing of the reconciliations between the salaries account and other bank account to determine the existence of any disparities. The error identified using these controls can therefore be detected and corrected accordingly.
Performing and reviewing the reconciliations records can always be used by the management in maintaining of accuracy during the process and checking for the validity of the records. This will also include using external and independent parties to undertake the payroll calculations. The periodical checking and the supervisory undertakings ensure that the employees are performing their duties accordingly and that there is accurate control and understanding of the process.
The payroll area is also particularly vulnerable to negative aspects such as fraud, theft and manipulation that may cost an organization a great deal of revenue. This is because payroll payments involve the transaction of huge amounts of cash; there is a tendency by some officials to include ghost workers on the payroll as a way of stealing from the company, some may also overstate working hours or even overstate the amounts due for payment. The payroll system may also suffer from an inefficient management that in most instances may result in loss of revenue by the organization in terms of paying benefits and taxes unnecessarily for employees. The importance of proper management of payroll and personnel cycle can therefore not be overemphasized because it constitutes an important undertaking within an organization. Lack of which may lead to loss of revenue and in some instances unnecessary civil law suits.