Payroll Accounting – Ultimate Guide (Part-2)

In previous part we discussed Payroll Accounting. Here are some more discussion on the topic:

Internal control over payroll

There are 2 primary controls for payroll;

  • 1) Controls for efficiency
  • 2) Control to safeguard assets of company against unauthorized payrolls

Controls for efficiency

Bank account reconciliation can be time consuming since there is a possibility of lots of outstanding paychecks. Most companies use two payroll bank accounts to limit the number of checks outstanding. The payroll for the current month is paid using one account, while the next payroll is paid with the other payroll account, for the coming month.

This way, reconciliation can easily be done for each account every other month, which decrease the accounting expenses. Employer™s data on payroll are stored in a file. The computer does the calculations, printing of pay checks and payroll recording and afterwards electronically makes the adjustments in the employee earning records.

Controls to safeguard payroll disbursements (unauthorized payrolls)

Irregularities often arise due to tax internal control system. Some of the common frauds involved in payroll include unauthorized Pirates, continued termination of employees on payroll, addition of fictitious employees on payroll, overstated hours and distribution of duplicated payrolls.

To guard against such practices, strict internal controls for payrolls should be maintained.’ Hiring and firing of employees should be treated separately from passing out paychecks and from accounting. Use of photo ID™s ensures that no ghost workers get payments.

How to improve the control system for payroll

  • Employee advances: It™s common for employees to ask for advances on the next paycheck or have the cost of next trip covered on company™s behalf. Either way, possibility of losing track of advance is high.’ Hence, the following controls are important to ensure that such advances are eventually paid back;
  • Continual review of outstanding advances: When employees get paid, it™s important that continuous review and follow up of such advances be done. A simple way to control is where a company has a policy that requires automatic deduction of all advances from the next payback.
  • Prior approval of employees advances by management: When employees request for such payments, it™s best that the same should be communicated to their supervisors, for a formal signing and approval. The reason is that some advances are short-term loans and would require management deliberation and approval.
  • Payroll checks: Problems in storage, printing and distribution associated to any type of check also apply to payroll checks. If employees are to be paid through direct deposits, then the following controls may not apply;
  • Control check stock: The check stock shouldn™t be stored along with papers ad pens as a person my remove a stack and use it with forged signature from stealing funds from the company. Add relevant features to check stock: checks can be easily copied or modified. To prevent this from happening, the company should purchase security such as void copyright that appears when such check is copied.
  • Control signature plates: When unauthorized person gets access to signature plates of a company, it™s not only to forge pay checks but can also pave way for other legal documents from the company to be stamped.






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