Internal Controls | Payroll System

Before you can test a client’s internal controls you first need to know which internal controls are in place. The auditor can identify the internal controls by asking the client’s employees to complete a questionnaire and by doing a walkthrough of the payroll cycle.

The walkthrough would involve following a transaction from the initial hiring of an employee all the way through to the recording of a journal entry for payroll. The auditor should also perform a walkthrough of the process for removing a terminated employee from the payroll.

If the auditor notices an area where a misstatement might occur during the walkthrough, the auditor should ask: has the client designed a control that, if operating effectively, would prevent or detect a material misstatement?

The client should consider entity-level controls as well as controls specific to payroll. Segregation of duties is perhaps the most important internal control for the payroll cycle.

0:00 Introduction
0:40 Summary
0:54 Entity-level controls
2:31 Segregation of duties
4:42 Examples of segregation of duties
6:30 List of internal controls for payroll
7:08 Occurrence
9:58 Completeness
10:58 Authorization
12:01 Accuracy
13:08 Cutoff
13:31 Classification
15:01 PDF guide
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