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The payroll and personnel cycle begins with hiring employees and ends with paying them for the services they performed and the government and other institutions for withheld and accrued payroll taxes and benefits. In between, the cycle involves obtaining services from employees consistent with company objectives, and properly accounting for the services.
The human resources department provides an independent source for interviewing and hiring qualified personnel. The department is also an independent source of records for the internal verification of wage information, including additions and deletions from the payroll and changes in wages and deductions.
Human Resource Records
Human resource records include such data as the date of employment, personnel investigations, rates of pay, authorized deductions, performance evaluations, and termination of employment.
Employees may submit a form or make online selections that authorize payroll deductions, including the number of exemptions for withholding income taxes, 401(K) and other retirement savings plans, health insurance, and union dues.
A form or other electronic record is used to authorize the rate of pay. The source of the information is a labor contract, authorization by management, or in the case of officers, authorization from the board of directors.
Timekeeping and Payroll Preparation
Timekeeping and payroll preparation are important in the audit of payroll because they directly affect payroll expense for each period. Adequate controls are necessary to prevent misstatements in the following four activities:
Prepare time records by employees
Summarize and calculate gross pay, deductions, and net pay
Payment of payroll
Prepare payroll records
The time record is a document indicating the time the hourly employee started and stopped working each day and the number of hours the employee worked. Time records may be in paper or electronic form, and they may be prepared automatically by time clocks or identification card readers. In many environments, especially retailers, employees enter arrival and departure times using point-of-sale machines that capture time record information daily. In other environments, time records may be submitted weekly.
Job Time Ticket
The job time ticket is a form indicating which jobs an employee worked on during a given time period. This form is used only when an employee works on different jobs or in different departments. Job time tickets are often done electronically by a time and expense reporting system.
Payroll Transaction File
This computer-generated file includes all payroll transactions processed by the accounting system for a period, such as a day, week, or month. The file contains all information entered into the system and information for each transaction, such as employee name and identification number, date, gross and net pay, various withholding amounts, and account classification or classifications.
Payroll Journal or Listing
This report is generated from the payroll transaction file and typically includes the employee name, date, gross and net payroll amounts, withholding amounts, and account classification or classifications for each transaction.
Payroll Master File
The payroll master file is a computer file used for recording payroll transactions for each employee and maintaining total employee wages paid for the year to date. The record for each employee includes gross pay for each payroll period, deductions from gross pay, net pay, check number, and date.
Payment of Payroll
The approval and distribution of payroll must be carefully controlled to prevent theft. To increase control, payroll disbursements are generally processed separately from other disbursements.
Payment of Payroll
Payments are issued to employees in exchange for services performed. Payments may be made by check, but are usually deposited directly into employees’ individual bank accounts. The amount paid is the gross pay less taxes and other deductions withheld.
ndependent bank reconciliation is important for all cash accounts, including payroll, for finding errors and fraud. An imprest payroll account is a separate payroll account in which a small balance is maintained.
Preparation of Payroll Tax Returns and Payment of Taxes
This is a form sent to each employee that summarizes the employee’s earning for the calendar year, including gross pay, income taxes withheld, and FICA (Social Security) withheld.
Payroll Tax Returns
These are forms submitted to local, state, and federal units of government to show payment of withheld taxes and the employer’s tax.