1. Potential errors and irregularities

Can persons other than genuine employees be paid through the payroll? This includes consideration of fraudulent double payment for leavers.

Implications: Overvaluation of stocks by using wrong labour costs, loss to the organization by paying for services never received.

Measures: The personnel department is responsible for hiring and firing personnel. They are also responsible for authorising alterations in rates of pay as a result of promotions or general pay increases. When we have a separate department in existence for personnel matters, then an independent record can be maintained of all personnel in employment and this can provide a very useful check on the work of the wages department. All changes should be notified to the wages department through the use of serially numbered change documents. On the time keeping side, clock card or time sheets are normally used to record the hours worked. In either case the amounts shown by the employee should be verified independently. The clocking in process should be observed by having a time keeper at the gate. This system can be abused and the organization should be alert to this possibility.

Time sheets should be approved by the employees immediate superior and if possible reconciled to production records. The approved clock cards or time sheets are sent to the wages department for them to produce the payroll. Different clerks in the wages department should check the hours worked as calculated by the foreman. Calculate the gross pay by reference to the employee's personal card showing his wage rate, check the calculation of gross pay, calculate net pay by reference to tax tables and employee's personal records, check the net pay calculations, check the casts and cross casts of the payments. The payroll should be approved by a senior member of the management team. In most organizations this is done by the chief accountant, the personnel manager and the managing director. Before approval, the official can carry out a useful review by casting and cross casting the payroll, scanning the payroll for duplicated names or unusually high payments, check the number of employees on the payroll to personnel records, carry out a month to month reconciliation in both numbers and amounts taking into account leavers and joiners and when they actually left or joined.

Once the payroll is approved the cheque can then be drawn. There should be at least two cheque signatories. Preferably the person who approved the payroll should not be one of the signatories. The money can now be collected from the bank and distributed.

The following stages should be followed

• Drawing the cheque - the cashier
• Collecting the money from the bank - security firm
• Filling the pay envelopes - independent employees
• Distributing the cash to the employees - other independent employees and the foreman.

The employees who fill the envelopes should have had no previous dealings with the preparation of the payroll. They should count the money before beginning their work. The exact amount of the payroll should be withdrawn from the bank. Once the envelopes are filled, they should be counted and given to a second batch of independent employees who should check the number of packets handed over before distributing them to employees. The foreman should accompany the pay out in order to identify the correct employee. Where the employee is not present, their pay packet should not be given out to another employee.

2. Potential errors and irregularities

Employees being paid for work not done or unclaimed wages being misappropriated.

Implications: Overstatement of stock values due to using wrong labour rates. Pay to an employee whose salary may have been misappropriated by another employee or thief.

Measures: These have been covered adequately under (1) above under clock cards and time sheets.

3. Potential errors and irregularities

The occurrence of payroll errors: starters, leavers, rate changes.

Implications: Mis-statements of various expense accounts, wrong stock valuations.

Measures: Monthly reconciliations, agreement of payroll records with personnel records, independent clerk checking the calculations of the payroll, review of the payroll by department heads, and budgetary control matters.

4. Potential errors and irregularities

Improper deductions being made or being misappropriated.

Implications: Having to make double payments to the authorities where the deductions have been misappropriated, complaints by employees.

Measures: Requirement that all deductions be documented and the documentation be approved. The documentation should be checked against the payroll to ensure agreement.

5. Potential errors and irregularities

Inflation of the payroll in other ways.

Implications: Unreliable records, mis-statements of expenses and stock costs.

Measures: Monthly reconciliations, checking the payroll by an independent clerk and the review mentioned under (1) above done by the approver of the payroll.

Other matters to be considered

If a proper independent record of employees is not maintained, it becomes possible to insert dummy employees on the payroll. Fictitious names can be invented or employees who have retired or left employment may be retained on the payroll. This type of fraud is usually perpetrated by the wages officer. Overstatement of gross pay can also occur when there is collusion between an employee and the wages officer so that he is deliberately overpaid. Overstating the payroll can also occur but can easily be prevented by casting the payroll at the time of approval.

Other Areas

1. General cash: the worry here is miscellaneous receipts being omitted, non trading or petty cash payments being made and not authorised and the possibility of misappropriation and improper use of cash balances.

2. General ledger: the processing of unauthorised journal entries and the making of errors in subsidiary ledgers.

3. Stocks: the loss or pilferage of stocks, the consumption or wastage without proper recording of stocks, the overstatement or understatement of work-in-progress and

4. Fixed assets: the acquisition or disposal of fixed assets without proper authority or recording.

Other matters to be considered

In the area of stocks and fixed assets the control requirements are primarily concerned with custody procedures. Custody procedures are of great importance because all fraud involves misappropriation of assets. The things to note are:

1. Maintenance of stock records: this should be performed by a person who has not access to the physical stocks and has no responsibility for sales or purchase records.

2. Custody procedures: this can be achieved by using segregated lockable areas under the control of a store man who can be held accountable by means of stock records.

3. Reconciliation of physical quantities to stock records: these reconciliations are vital for the prevention/detection of fraud and to ensure that the stock figure in the accounts show a true and fair view. Internal auditors are the appropriate officials to control the stock count and a subsequent reconciliation. Discrepancies should be referred to the highest level of authority and should be investigated immediately.

4. Writing off damaged, obsolete and slow moving stocks: it is essential that authority for writing off these stocks should come from a senior independent official and only on the basis of appropriate documentary evidence. Such stocks are revealed by periodic stock checks or they come to light during the ordinary course of business.

5. Scrap and waste products: waste products and scraps can have considerable value in certain types of industry. But their control can be difficult. It becomes necessary therefore to have calculations of estimated scrap and waste and this should be compared regularly with actual amounts. Significant differences to be investigated immediately.

6. Concealment of theft by write off: if those who have access to stocks also have the authority to make write offs in the records for damage then theft can be very easily concealed. Similarly people who have access to stocks, if they are permitted to record the stock records or the sales or purchases records then book quantities can be manipulated so that they correspond with the actual quantities of stock in hand.