Audit Procedures for Ghost Employees: Risks, Assertions, and Procedures

Ghost employees are individuals who are recorded in an organization’s payroll as employees, but who do not actually work for the organization. This situation poses a significant risk to an organization, as it can result in financial losses due to fraudulent payroll disbursements.

Audit Risks:

  1. Inadequate control over the payroll system
  2. Lack of segregation of duties within the payroll process
  3. Unauthorized access to payroll systems
  4. Lack of proper documentation
  5. Failure to detect and address inconsistencies in employee data
  6. Inadequate review and approval processes
  7. Lack of proper employee verification
  8. Lack of proper reconciliation between payroll and personnel records
  9. Inadequate follow-up on changes in employee data
  10. Failure to detect and address payroll fraud

Audit Assertions:

  1. The existence and completeness of payroll records
  2. The accuracy of payroll disbursements
  3. The accuracy of employee data
  4. The existence and accuracy of supporting payroll documentation
  5. The existence and effectiveness of payroll controls

Walkthrough Testing:

  1. Obtain a copy of the payroll register and personnel files for a sample of employees
  2. Verify that the employees in the sample are still active and employed by the organization
  3. Review the payroll disbursements made to the employees in the sample to ensure they are accurate and reasonable
  4. Verify that the employee data in the payroll and personnel files is accurate and complete
  5. Ensure that supporting payroll documentation exists and is complete
  6. Evaluate the effectiveness of payroll controls to ensure they are properly designed and functioning

Test of Control:

  1. Review the control environment and assess the risks of fraud and error
  2. Evaluate the design and operating effectiveness of payroll controls
  3. Test the controls to ensure they are operating effectively
  4. Evaluate the results of the control testing to determine the level of control risk
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Substantive Audit Procedures:

  1. Review the payroll register and personnel files for completeness and accuracy
  2. Verify the accuracy of payroll disbursements by reviewing supporting documentation and reconciling to general ledger accounts
  3. Compare payroll records to personnel files to ensure they match
  4. Conduct interviews with key personnel in the payroll department to understand the payroll process and evaluate the effectiveness of controls
  5. Review prior year audit reports and assess any unresolved issues related to payroll
  6. Perform analytical procedures to identify any unusual trends or fluctuations in payroll disbursements
  7. Evaluate the accuracy of payroll accruals and estimates
  8. Review any third-party payroll reports to ensure they are accurate and complete
  9. Conduct a review of payroll transactions processed during the year-end closing process
  10. Compare payroll data to other information, such as employee time records, to ensure accuracy.

The detection of ghost employees is crucial for ensuring the accuracy of payroll records and preventing financial losses due to fraudulent payroll disbursements.

To effectively audit for ghost employees, auditors should perform a combination of walkthrough testing, test of control, and substantive audit procedures.

Through these procedures, auditors can assess the accuracy of payroll records, evaluate the effectiveness of controls, and identify any irregularities that may indicate the presence of ghost employees.

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