Management Essay on Internal Audit Plan

Test plans for internal controls for payroll of Greater London Authority

The internal audit department is among the major areas that affect the performance of a business. It is through the activities of the internal auditors that businesses are able to define the threats facing the performance of the company and define the best strategies to solve the issues. The internal auditors help in detecting and preventing losses in the company should a risk occur. They also help the business in overcoming the losses in cases a risk occurs. Among the areas that the internal auditors concentrate on is the payroll where ineffective audit may fail to detect and prevent fraud that may lead to huge losses by the company.

It is the duty of the finance department to prepare and process the payroll for the employees. There are various loopholes that may allow fraud in the processing of payroll and thus leading the company to incur huge financial losses. One of the organizations that needs internal audit in its payroll department is the Greater London Authority.  It wishes to have an internal audit on the payroll process to ascertain the accuracy of the management information and the staff payroll records. The audit is set to take a maximum of five days thus the audit plan must consider the timeframe in the work.  The internal auditors need to carry out preventative, detective and corrective test plans as follows.

Preventative controls test plan

This type of control is carried out to ensure that the possible risks faced by a business do not occur. They include measures to prevent improper use of the organization’s assets. The controls are crucial to the organization, as they will enhance the accuracy of management information thus meeting the objectives of the audit. The test plan for this type of control can be carried out as follows.

Audit Title: Payroll Auditor: A Auditor
Audit Ref.: 2009/10 Business Contacts: Finance Advisor
Date: November 2015 Finance Manager

 

Risk Inaccurate processing of payroll
Control Separation of the duties performed by the personnel in the payroll department
Evaluation of control ·       Ensure that the preparation, disbursement and distribution functions carried out by the payroll personnel are segregated.

·       Monitor the payroll expense of the company to avoid paying non-existent employees. A wide variation in the payroll expense may be an indication of inaccurate payroll.

·       Observe payroll processing to detect any loopholes in the preparation of the payroll.

·        Examine cancelled pay check carefully to detect any variation in the names or amounts payable.

Test Assessing the accuracy of the payroll records WP Ref:
 

Obtain from the head of payroll operations a list of all the payments made within the past six months.

From this list use the use the acceptance sampling technique to select the right sample size. The method is effective since it is possible to measure a representative sample with a specific degree of statistical certainty.

For each payroll records you have selected, ensure that the following information is available:

–        Date of the payments

–        Total amount paid

–        Overtime wages

–        Mode of payment

–        The persons authorized to process payroll

–        Other roles that the authorized personnel play in the organization

–        The signatures of the authorized personnel

 

 

Once the information is received scan the dates to identify outliers. This might include:

–        The payment that had errors for example, related to personal identification numbers

–        The payments that was not done on

–        The record with erroneous dates

Also compare each payroll record to the timescales described in the system description and procedure manual to identify those that did not comply with the stated timescales.

 

Once you have analyzed the information take the anomalies and discuss them with the finance managers to identify the reasons for these. For each one consider if the reason is justified or not and also if there are common reasons for the issues.

 

payroll System Description

 

Payroll records for the last six months received

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll records Analyzed

 

 

 

 

 

 

 

 

Interview meeting notes with the finance manager.

Test designed by:  

 

 

Test approved by:  
Test Findings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Test Records:  

 

 

 

Performed By:   Reviewed By:  

 

Detective Controls test plan

The controls are meant to mitigate risks that the company faces by identifying the challenges that already exist in the company. This helps in formulating the most suitable strategies to minimize the losses incurred because of current challenges faced by the company.

Audit Title: Payroll Auditor: A Auditor
Audit Ref.: 2009/10 Business Contacts:  Finance Advisor
Date: November 2015 Finance Manager

 

Risk Payroll data input errors
Control Audit of payroll disbursements
Evaluation of control ·       Request all the payroll disbursements from the payroll personnel.

·       Ensure that all the paychecks in the samples have accurate deductions.

·       Check the records carefully to identify any duplicate names. The use of employee’s personal identification numbers may be helpful.

·       Occasional personal handling of the paychecks to the employees is important in ensuring positive identification.

·        Review payroll registers

Test The test is meant to detect any errors in the payroll records WP Ref:
 

Obtain from the head of payroll operations a list of all the payments made within the past six months.

Use the discovery technique of probability sampling to select the most appropriate sample size and detect any errors in the sample. The technique is crucial in determining the confidence level too.

 

For each payroll records you have selected ask finance manager to provide the following information:

–        Date that the payment was made

–        Personnel who authorized the payment

–        The amount of payment

–        Employee classification

–        Amounts paid to each class of employees

–        Dates paid to each class of employees

–        Tax deductions made to the payments

–        Amount of payroll processing tax

 

Once the information is received scan the dates to identify outliers. This might include:

–        The amount of payment that differs significantly from the rest

–        Payment made after the date of payment

–        Similar personal identification numbers in different classes

–        Lack of tax and payroll processing deductions

–        Lack of authorization from the person responsible

–        Unauthorized records

–        Different number of employees in the records

 

Also compare each payroll record to the timescales described in the system description and procedure manual to identify those that did not comply with the stated timescales.

 

Once you have analyzed the information take the anomalies and discuss them with the finance advisor to identify the reasons for these. For each one consider if the reason is justified or not and also if there are common reasons for the issues.

 

payroll System Description

 

payroll spreadsheet received

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll records Analyzed

 

 

 

 

 

 

 

 

Interview meeting notes with Finance advisor

Test designed by:  

 

 

Test approved by:  
Test Findings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Test Records:  

 

 

 

Performed By:   Reviewed By:  

 

Corrective controls test plan

The corrective controls are implemented after the occurrence of a risk to ensure that the same does not recur. They are useful s they help the company get back to the financial position it had prior to the occurrence of the risk. The Greater London Authority has in the past incurred financial losses through incorrect payments mainly due to failure to detect the errors early enough.

Audit Title: payroll Auditor: A Auditor
Audit Ref.: 2009/10 Business Contacts: Finance Advisor
Date: November 2015 Finance Manager

 

Risk Failure to identify unauthorized or incorrect payments
Control The finance department  has a responsibility of ensuring that the payroll records are accurate
Evaluation of control        i.          Reviewing the accounting records related to the payroll to ensure that the amount paid matches the amount in the payroll bank statements and payroll report.

ii.          Ensure controls to avoid wrong tax declarations that may lead to inaccurate payroll records.

iii.          Design effective payroll control reports to ensure accurate processing of the payroll.

iv.          Ensure that all the payroll records are retained to enable easy access if the records are required in future.

·        Random checks on the payroll using simulation methods outside the payroll system.

Test The test is meant to examine the accuracy of the payments records to detect any unauthorized payments WP Ref:
 

Obtain a list of employees from the finance department over the past six months and make a comparison. The comparison should be based on the amount paid, the dates and the recipients.

From this list select the sample size using the attribute method of sampling to ensure that the suitability of the sample used. Through the technique the auditor is able to estimate the proportion of sample that is suitable to carry out the test due to similarity of the characteristics

For each recruitment you have selected ask finance manager to provide the following information:

–        The persons authorized to process payroll

–        Date of payment

–        Amounts paid

–        Reimbursement policies

–        Taxation policies

–        Number of employees who have joined the organization in the last six months

–        A list of employees who have left the organization in the last six months

–        Date that the employees joined

–        Recruitment procedures

–        Date that the employees left

–        Reasons for leaving

–        A record of the benefits paid to the employees

 

Once the information is received scan the dates to identify outliers. This might include:

–        The number of employees who do not work with the company yet they are still in the payroll

–        The number of employees who are not in the payroll but they work in the organization

–        The differences in dates of employment

–        Different reasons for leaving the company

 

Also compare each payroll to the timescales described in the system description and procedure manual to identify those that did not comply with the stated timescales.

 

Once you have analyzed the information take the anomalies and discuss them with the finance advisor to identify the reasons for these. For each one consider if the reason is justified or not and also if there are common reasons for the issues.

 

payroll System Description

 

payroll Spreadsheet received

 

 

 

 

 

 

 

 

 

 

 

 

 

payroll Spreadsheet Analyzed

 

 

 

 

 

 

 

 

Interview meeting notes with Finance advisor

Test designed by:  

 

 

Test approved by:  
Test Findings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Test Records:  

 

 

 

Performed By:   Reviewed By: