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Total Number of Subscribers: 1626 |
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Date: 23rd March 2010 |
Compiled by: M Sathya Kumar |
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Background : In the IT Industry, the key asset is the human resource. Payroll
for an information technology company therefore forms the single largest component
of expense. The success of an IT based organisation depends on the size and
quality of its human resource. The activity is performed by these resources
at the client’s site which often is spread over the world and in the
development centres within the country. This results in movement of resources
between clients and development centres. The remuneration packages payable to these resources vary as per
the location of the work execution. Salary and allowances for onsite work
done by them are payable in foreign exchange. In the process the
administrative effort involved in payroll processing is extremely high. The
need for integrity of data during payroll processing is equally critical to
ensure proper disbursement. Considering that the core competence of the organisation is
catering to client’s
soft-ware requirements, a number of organisations
are outsourcing this complex activity to entities that specialise in this
area. The auditee organisation under consideration is one such IT-based
organisation. ABC Softwares Ltd had outsourced its payroll to a third party
service provider. As a part of the cost reduction exercise, the executive
management decided to manage its payroll in-house. Inputs from Audit
Committee regarding the risks involved in managing payroll in-house were also
obtained. The Audit Committee also directed its outsourced internal audit
firm to carry out an internal audit in a short span of time with a view to
comment on the reasonable-ness of internal controls. Any major weakness observed
could be rectified by the Finance and Accounts Departments. The internal
audit would be more in the nature of systems audit as it is to be
carried out in the first month — immediately after the new
in-house system has gone live and the processing of payroll carried out. Methodology : Based on the above background, the partner-in-charge of the
internal audit firm had a meeting with his audit manager to chalk out the
audit programme. As the first step, a flowchart of the payroll processing
activity was prepared. Based on the inputs gathered during the flowcharting process and
arising out of the study of the flowchart and the audit manager’s
experience with the company, a detailed checklist was also prepared for
meeting the audit programme objectives. The checklist identified the
objectives and risk and control issues for this area — Refer Exhibit 1. Considering that this audit involved large volume of
transactions spread over multiple locations/files, the traditional method of
manual vouching would take 15 mandays for the audit. It was therefore decided
to use a data analysis software — IDEA — to carry
out a 100% check on all transactions for the month. (Using IDEA, the audit
for 1500 employees would take only three days). In this way the time
dimension was managed. Additionally back up steps taken in the analysis would
also be available in the software. Observations arising from the internal audit : Following the checklist and using IDEA, the audit was completed
in three days time. Overall the observations on systems and procedures in
payroll showed reasonable internal controls except for the following : Payroll executive had access to the password for change
of Master data. This was a serious internal control weakness. (CFO immediately acted
on this and had the password rights withdrawn from the Payroll executive and
ensured that hence-forth all changes to Master data would be authorised by
him only — weakness occurred due to oversight and he was happy
that it was pointed out by internal audit. This ensured that in the very
first month itself after having payroll being processed in-house, it had been
set right). Other observations — some of which were not
related to changeover but internal processes irrespective of whether the
payroll was processed in-house or out-sourced were : Part A : Issues related with Human Resources Department : 1. In certain cases the documents of new appointees for the
period 1st April’02 to 30th June’02 in the Employee File were
incomplete as regards :
leading to the risk that candidates without requisite skill sets
may join the company or that their previous track record with earlier
organisation may not be clear. 2. On analysing the data captured in the input statements as
prepared by HR Department with the Salary Register, an exception list of
discrepancies in telephone call charges and transport deduction due to
improper processing by Payroll executive was extracted, analysed and
reviewed. As per clarification given by Payroll executive, input
was not given by HR Department in the specified format in case of telephone
deduction. To avoid improper processing in future, matter should be clarified
after discussion with Payroll executive regarding format in which input data
should be provided to him for processing payroll. 3. On an analysis of the input statements prepared by
Administration and Ac-counts Departments for the month of June’02 which
are sent to HR Depart-ment, following exceptional discrepancies were found. (a) Using the criteria check on dates of resignation of
employees, the Input statement regarding Transport Deduction,
prepared by Administration Depart-ment showed names of resigned employees
also. Though this doesn’t have any impact on salary, it appears that
Administration Department had not updated its database regarding employees
availing transport facility. (c) Loan Deduction Statement sent by Accounts Department showed
in-correct employee number in case of employee availing PLA Advance due to
which no deduction of loan amount was made leading to non-recovery of the
instalment. Informed that processes for additional checks and
balances would be introduced to prevent recurrence of such issues. Part B : Issues related with Finance Department : 1. Delay of 1 month in deposit of part amount of TDS on salary
for the month of April’02 leading to non-compliance of Income-tax Act,
1961. Total amount of TDS should be verified from Salary Register before
deposit. 2. As per the Foreign Travel Kit expense policy, if any full
time employee is deputed for an overseas assignment for a period of less than
6 months, he is eligible for Foreign Travel Kit Advance upto Rs.10,000/-.
This advance has to be settled on submission of bills either within 4 days of
taking the advance or within 12 days of returning from the overseas trip,
failing which, the entire amount will be deducted from the next salary due to
the employee, without any prior notification. As on 30th June’02, Travel Kit Advance amounting to
Rs.1,24,950/- was outstanding in 231 cases. Out of these in 4 cases, advance
totalling to Rs.24,000/- was outstanding for more than 6 months as on 30th
June’02. Two of these employees had come to Conclusion : The internal auditor was able to conclusively provide an
assurance on the adequacy of the internal controls to the Senior Management
of ABC Softwares Ltd and its Audit Committee since shifting the processing
from outside vendor to in-house team. The systems were also streamlined in
line with the internal audit observations. Exhibit 1 Internal Audit Objectives for Payroll : (a) To ensure that only valid employees are paid at the correct
and authorised rate; (b) To ensure that the calculations of all payments and
deductions are correct and in accord with the relevant taxation and other
regulations and requirements; (c) To ensure that all deductions are correctly calculated and
accounted; (d) To ensure that unauthorised access to the payroll system and
data is prevented; (e) To ensure that all payroll transactions are accurately
reflected in the accounting system; (f) To ensure that regular and accurate management and statutory
information is produced and (g) To ensure that company is following all statutory laws and
regulations. Risk and Control Issues for Payroll : 1. Is the payroll system adequately protected from either misuse
or unauthorised access ? 2. What mechanisms prevent the set up of fictitious employees on
the payroll system ? 3. How can management be sure that only valid employees are
being paid via the payroll ? 4. What prevents the set up of incorrect or inaccurate payroll
data (i.e. salary rates) ? 5. Are payroll salary rates correct in relation to agreed pay
scales/national rates, etc. ? 6. Are payroll payment transactions (i.e. overtime,
bonus, salary increases, etc.) adequately authorised (prior to data entry)
and correctly entered ? 7. What prevents the entry and processing of duplicated payroll
payment data ? 8. How can management obtain assurance that the payroll system
accurately calculates net salary and accounts for all disbursements ? 9. What mechanisms prevent the incorrect calculation of income
tax and any other statutory deductions ? 10. How can management be certain that all the necessary
taxation and other deductions are correctly accounted for and paid over to
the relevant authorities ? 11. Are all Holidays and Sickness payments accurate, valid and
within both the Company policy and legislative requirements ? 12. Are all exceptional payments adequately authorised ? 13. Are pension and any other welfare deductions accurately
calculated, deducted from salary and accounted for as inputs to their target
systems ? 14. What mechanisms prevent staff fraud or malpractice in
relation to payroll activities ? 15. Are payroll runs adequately reconciled
to the accounting system and anomalies promptly
identified and resolved ? 16. What processes prevent the generation of inaccurate,
incomplete or duplicated Bank credit data (i.e. for automated fund
transfer system such as HDFC account transfer) ? 17. Are payroll payments, automated fund transfer data or salary
cheques subject to adequate levels of authorisation? 18. What prevents payroll payments continuing to be made to
former staff
members who have left the organisation ? 19. Are allowances including Foreign Kit made to the staff based
on their posting — onsite and offshore —correctly
computed and disbursed ? 20. Is sensitive or confidential payroll data adequately
protected from un-authorised access ? 21. Are all the necessary/statutory payroll
outputs and forms accurately produced and distributed in accordance
with the required timetables ? 22. Are comprehensive and up-to-date payroll procedures
available ? Has specific responsibility for the payroll function been
suitably defined and allocated ? Article
by Deepak Singal and Manish Papilia Chartered Accountants |
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