Financial Management Program

Internal Control for Payroll

GASBO 2016
John G. Hulsey, CGFM, CPFO
[email protected]

1
 Learning Objectives

At the end of this session, the participant will

be able to -
Define the payroll process
Recall components of internal control
Recite best practices for payroll within a
strong internal control framework

2
Payroll Process
Defined

3
 What is Payroll?

The principle purpose of any

payroll department is to pay the
organizations employees.

4
 Employee Earnings
Determined by agreement between employer and
employee
Salary schedule
Type of position
Steps and years of experience
Employees pay examples:
Annual salary/prorated over pay periods
Hourly rates
Pay periods varymonthly, semimonthly,
biweekly or weekly
FLSA150% regular rate for +40 hours with
certain exemptions Continued on next slide

5
 Employee Earnings
Time sheet
Basis of periodic payroll
Contents of time sheet
Employee name and number
Pay period
Dates worked
Number of hours worked
Account distribution
Signatures
Employee
Employer

6
 Payroll Journal

Special Journal
Sometimes call Payroll Register
Common contents:
Name of employee
Expenditure/expense classifications
Gross payroll
Adjustments to gross payroll
Adjusted gross payroll
Net payroll

7
 Payroll Deductions

Social security tax

FIT
SIT
Deferred compensation
Pension plans
Insurance
Other miscellaneous

8
Recording the Payroll

Continued on next slide

9
Recording Employers
Share of Benefits

10
 Payroll
and Internal
Control

11
What Are Internal Controls
 Protect Resources
Assets
Employees

Ensure
Accuracy and
Evaluate Reliability
Levels of Prevents/
Performance INTERNAL Detects
I/C Present Errors and
and CONTROLS Misuse
Functioning Financial
Statements
Accurate

Ensure Compliance
State/Federal Law
Requirement
GAAP/GASB Compliance
How Is Internal Control Organized?

Levels of
organizational structure

Components of
Internal Control
 Objectives for Payroll
Preapproved/authorized transactions

Payroll transactions recorded in proper period (cutoff)

Transactions accurate, agree with source documents, and

recorded in timely manner

Recorded P/R transactions represent events that occurred and are

in accordance with managements authorization

P/R and employee records are controlled and restricted to

authorized personnel

Duties are assigned so that no one individual can control recording

and processing transactions

15
 Control Environment and P/R
Control environment affects payroll by
establishing protocols:
Published code of ethics communicated with
employees
Personnel hired that possess the knowledge and
skills to accomplish P/R tasks
Employees should be supervised by qualified
personnel
Job descriptions that provide for proper
segregation of duties for responsibility and
authority

16
 Control Environment and P/R
Control environment affects payroll by
establishing protocols:
Written procedures that cover all phases of
payroll
Adequate training policies that communicate
roles and responsibilities in the P/R area
Management should exhibit commitment for
ongoing training of employees in the P/R area

17
 Risk Assessment and P/R
Objective No. 1: Authorization

Risks:
Hiring an unapproved employee
Overspending budget
Hiring an unqualified employee
Incorrect classification for benefits could result in
higher costs

Continued on next slide

18
 Risk Assessment and P/R
Objective No. 2: Safeguarding Assets

Risks:
Errors in payroll process due to hiring unqualified
employee
Interest and penalties
Fictitious employees added to payroll system
Incorrect employee classification
Leave taken not properly reported
Continued on next slide

19
 Risk Assessment and P/R
Objective No. 3: Accurate, reliable and timely
information

Risks:
Salary/Pay rate not correct
Hours/pay period inaccurately entered
Deduction entered improperly
Not posted to G/L

Continued on next slide

20
 Risk Assessment and P/R

Objective No. 4: Duties are assigned to individuals

in a manner that ensures that no one individual can
control both the recording function and the
procedures relative to processing a transaction.

Segregation of duties

21
Segregation of Duties
 Duties to be Segregated
Approval of new hires
Authorization Approval of pay rates
Signing of checks

Custody Access to payroll checks/bank accounts

(EFT)
(Access to Asset) Mailing or delivering checks

Preparing source documents

Record Keeping Maintaining journals, ledgers, or other files
Preparing performance reports
Preparing bank reconciliations
Reconciliations Preparing payroll liability reconciliations
(Accountability) Reconciling wage classifications (Federal,
State, Social Security, Medicare)

23
Control Activities for
Payroll
Four Categories of
Control Activities
Hiring
Documentation
Authorization
Reconciliation

Continued on next slide

24
 Control Activities for
Payroll
Written process for hiring
Budget approval
Authority to advertise
Appropriate applicant information
Established selection process
Formal job offering (Letter)
Pay rate
Benefits provided
Status
FLSA classification Continued on next slide

25
 Control Activities for Payroll
Documentationcomplete
the forms
Personal data
Form I-9 (Employment Eligibility
Verification)
Form W-4 (Federal Tax Withholding)
Form G-4 (State Tax Withholding)
Benefit forms
Retirement plan forms
Other forms Continued on next slide

26
 Control Activities for Payroll
Authorization
Required to ensure that only valid
transactions are entered into payroll system
Time sheets signed by employee and supervisor
Supervisors approval = authorization to pay and certifies
time recorded is actual time worked.
Payroll should be authorized by supervisor
Verify that all supporting documentation is present prior
to approving payroll
Could be manual or electronic approval
Continued on next slide

27
 Control Activities for Payroll
Reconciliations
Hours worked on time sheets = summary of
hours worked in payroll system
Adjusted Gross Salary - No variations unless
adjustments to pay
Taxable Wages - Adjusted gross wages less
pre-tax deductions
Benefits and Deductions
# of employees
Continued on next slide

28
 Control Activities for Payroll
Checklist easy way to show
completed tasks
Also need to reconcile general
ledger accounts after
withholdings are paid

29
 Information/Communication and
P/R
Examples:
Enrollment periods for benefits
Pay periods and dates (cutoff)
Holidays
Furlough days
Personnel policies and procedures
Salary information
Benefits payable due dates
Tax withholding due dates

30
 Monitoring and P/R

Supervisory activities:
Initial and date face of
reconciliations
Review all changes to employee
information/forms for accurate and timely
posting

31
 Resources
Internal Control
Committee of Sponsoring Organizations
(COSO)
http://www.coso.org/guidance.htm
Standards for Internal Control in the Federal
Government (Green Book)
http://www.gao.gov/greenbook/overview
GFOA
http://www.gfoa.org/
33
www.vinsoninstitute.org

2015 The Carl Vinson Institute of Government. All rights reserved.