Internal Audit of Rural Council’s Payroll System

Internal Audit of Rural Council’s Payroll System

Introduction

Rural Council employs about 300 staff and operates a payroll system to make the monthly salary payment to each member of staff.  You have been asked to carry out an internal audit of the payroll system.  So far, you have completed the following tasks:

• Agreed the relevant system risks with the Director of Finance;
• Interviewed staff and documented the system;
• Carried out walk-through testing to confirm the initial understanding of the system; and
• Obtained a download of key data from the payroll system.

You are carrying out your internal audit work in early December after the November salaries have been paid.

Agreed System Risks

You have agreed the following system risks with the Director of Finance.

1. Staff are paid the wrong gross salary
2. Tax deductions are wrong
3. Net salaries are incorrectly calculated
4. Payments are made to those who are not employees of the Council
5. Staff are paid less than the legal minimum wage
6. Fraudulent payments are made through the payroll system

The internal audit of other aspects of the system will be undertaken next year.

Internal Audit of Rural Council’s Payroll System

Income Tax and Other Payroll Deductions

All staff have an annual income tax allowance of £12,000 and all earnings above this level are taxed at 25%.  A twelfth of the tax allowance is applied each month.

Example

Annual salary                                             £18,000

Monthly salary                                            £18,000/12 = £1,500

Annual tax allowance                                 £12,000

Monthly tax allowance                              £12,000/12 = £1,000

Monthly salary subject to income tax        £1,500 – £1,000 = £500

Income tax deducted                                 £500 x 25% = £125

Net salary paid to employee                      £1,500 – £125 = £1,375

No other deductions from salary are made or required to be made.

Your System Notes

1. Notes from discussion with the Financial Services Manager (Wade Bonaparte)

The payroll system operates within the Finance Department.  It is administered by the Payroll Assistant (Fatima Rundell), who reports to the Financial Services Manager (FSM).

The Payroll Assistant has been in her post for ten years and has received extensive training.  She previously worked for HM Revenue and Customs (HMRC) carrying out income tax compliance inspections at smaller companies.  The FSM is a qualified accountant who manages all accounting and exchequer functions and reports to the Director of Finance.

All staff are recruited through the HR Department and issued with a contract of employment.  On the first day in the new job, staff report to the HR Manager (Jamison Benning) for an initial induction.  The HR Manager then e-mails the Payroll Assistant with the name and other details for the new member of staff.  The Payroll Assistant then sets up the member of staff on the computerised Payroll System as instructed by HR.

Staff are paid on the last working day of each month and the total income tax deducted is paid to HM Revenue & Customs early the following month.  The tax year runs from April to March.  The tax calculations are done by the Payroll System.

The Payroll Assistant produces the required regular tax information for HMRC.  These are checked by the FSM before being sent electronically. HMRC have never queried a return and a deadline has never been missed.

You have carried out walk-through testing for two randomly selected members of staff and the results appear to confirm the above system notes.

2. Notes from discussion with the Human Resources Manager (Jamison Benning)

There is a scale of salaries linked to seniority grades.  All staff are paid on this scale.  The salary levels that are below the legal minimum wage are not used.

Staff are recruited through the HR Department and issued with a contract of employment.  On the first day in the new job, staff report to the HR Manager for an initial induction.  The HR Manager then e-mails the Payroll Assistant with the name and other details for the new member of staff.  Staff turn-over is low and there are typically only 3 or 4 new members of staff each month.

The legal minimum wage is currently £8.00 per hour and staff are required to work 37 hours per week.

In accordance with legal requirements, public holidays and annual leave are paid at the same rate as periods of active work.

Salaries are paid by direct credit into employees’ bank accounts.

3. Other system notes

Once a month, five names on the payroll are randomly selected by the Director of Finance’s Personal Assistant (Regenia Carrell) and she then goes and independently checks that they are current members of staff.

You subsequently confirm with Regenia Carrell that she does this and she shows you a sheet she completes to record the checks.  This checking process has been in place for 20 months and 94 different members of staff have been checked: four members of staff have been randomly selected twice and one has been selected three times over the twenty months.  She is particularly proud that her random selection process, which uses the random number function in Excel and a list of staff from the Payroll System, threw up the Chief Exec (Colton Montoro) as one of the people to check last month.

Regenia is not otherwise involved in HR or the Payroll system beyond being an employee of the Council and receiving her own salary each month.

Once a year, the Director of Finance (Evelia Corriveau) accompanies her PA when this check is carried out.

You have not yet carried out any testing using the data in the downloaded Payroll data file.

In the Payroll download file, “ytd” is short for “Year to Date” and is the cumulative value of all transactions of that type so far this financial year.

Internal Audit of Rural Council’s Payroll System

Salary Scales

All staff have a contract of employment which states their grade (1-8).  As shown below, each grade has three salary points.  Staff are normally appointed at the lowest salary point for their grade and are then awarded an annual increment on 1^st April if the outcome of their annual staff appraisal is positive.  Once at the top of the scale for their grade, staff cannot progress further unless they are promoted into a more senior role.

Internal Audit of Rural Council’s Payroll System