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Preventing and detecting Payroll fraud..
The Payroll Payoff...Edward Nagel
What internal controls are needed for payroll?
Payroll - Risks associated with payroll
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Payroll - Risks associated with payroll
  • Financial loss through invalid or unauthorised payments including fraudulent ones
  • Low morale because of failure to make payments promptly
  • Inaccurate payments start dissatisfaction and potential financial loss through delays or errors in payroll records
  • Censure or fines by the tax authorities because of incorrect calculation or payments
Control of payroll and wages
  • There should be written authorisation to employ or dismiss any employee, in accordance with the organisation’s procedures and legal requirements.
  • Changes in rates of pay should be authorised in writing by a senior member of staff not involved with the payroll.
  • Overtime worked should be authorised by a senior member of staff not involved with the payroll.
  • An independent member of staff should check the payroll and sign it.
  • The wages cheque should be signed by two signatories and checked against the payroll entry.
  • Where pay relates to hours at work, some form of time recording should be used.
  • Direct bank transfers should also be signed and checked regularly against details on personnel files.
  • When an employee has been absent for a significant period, their entitlement to salary should be checked against personnel details.
  • Personnel records should be kept for each employee, giving details of engagement, retirement, dismissal or resignation, rates of pay, holidays etc with a specimen signature of the employee.
Employees Paid In Cash

Wherever possible, employees should be paid either by cheque or direct into their bank accounts. However, where the employees are paid in cash there are a number of specific control procedures:

  • Employees should sign for their wages.
  • No employee should be allowed to take the wages of another employee.
  • The system should preferably allow the wages to be checked by the employee before the packet is opened by using specially designed wage packets.
  • The employee making up the pay packets should not be the employee who prepares the payroll.
  • Normal petty cash controls should apply.
Controls over cheque payments
  • Unused cheques should be held in a secure place.
  • The person who prepares cheques should have no responsibility over purchase ledger or income ledger.
  • Cheques should be signed only when evidence of a properly approved transaction is available. This evidence might be invoices, payroll, petty cashbook and so on.
  • In a large concern, those approving the original document should be independent of those signing cheques.
  • Check signatories should be restricted to the minimum practical number.
  • Two signatories at least should be required, except perhaps cheques of small amount.
  • The signing of blank cheques and cheques in favour of the signatory should be prohibited.
  • The cheques should be crossed before being signed.
  • Supporting documents should be cancelled as soon as they have been paid, to prevent their use to support further cheque payments.
  • Cheques should preferably be dispatched immediately; if not they should be held in a safe place.
Bank reconciliations
  • Bank reconciliations should be prepared at least monthly.
  • The person responsible for preparation should be independent of the receipts and payments function, or alternatively, an independent person should check the reconciliation.
  • If the reconciliation is prepared by independent person, he or she should obtain bank statements directly from the bank and hold them until the reconciliation is completed.
  • The preparation should preferably include a check of at least a sample of receipts and payments against items on the bank statement.
[ Page top ]
1. Preventing and detecting Payroll fraud..
2. The Payroll Payoff...Edward Nagel
3. What internal controls are needed for payroll?
4. Keep ghosts off the payroll
5. Payroll - Risks associated with payroll
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