Best Practices for Conducting Audit Procedures for Salaries and Wages

Salaries and wages are a significant expense for many organizations. Conducting a thorough audit of these accounts is essential to ensure the accuracy of the financial statements.

This article outlines best practices for conducting audit procedures for salaries and wages.

Accounting Under IFRS:

Under International Financial Reporting Standards (IFRS), the recognition, measurement, and disclosure of salaries and wages are governed by IAS 19, Employee Benefits. 

This standard requires recognizing the expected future cost of salaries, wages, and other employee benefits as an expense in the company’s financial statements.

This cost is measured based on the present value of the expected future benefits to be paid to employees. 

Disclosure requirements include detailed information about the company’s employee benefit plans, the significant assumptions made in calculating the present value of the benefit obligations, and the methods used to determine the expected future benefit payments.

Audit Risks:

The audit risks associated with the salaries and wages account include the following:

  1. Misstatement due to errors in processing payroll or other compensation-related transactions.
  2. Inadequate segregation of duties or lack of control over payroll processing or other compensation-related transactions.
  3. Inaccurate or incomplete record-keeping of employee hours, pay rates, or other compensation-related data.
  4. Failure to accurately account for employee benefits such as pensions, health insurance, or other post-employment benefits.
  5. Misstatement due to fraud or intentional misrepresentation of employee compensation.
  6. Inaccurate or incomplete disclosure of employee compensation-related information in the financial statements.
  7. Inadequate documentation or support for the accounting and disclosure of employee compensation-related information.
  8. Noncompliance with relevant laws and regulations related to employee compensation and benefits.
  9. Inaccurate classification of employee compensation-related transactions in the financial statements.
  10. Misstatement due to changes in accounting policies related to employee compensation and benefits.
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Audit Assertions:

The audit assertions related to the salaries and wages account include the following:

  1. Existence: The salaries and wages reported in the financial statements represent actual transactions that have occurred and have been properly recorded.
  2. Completeness: All salaries and wages earned by employees have been properly recorded and reported in the financial statements.
  3. Valuation: The salaries and wages reported in the financial statements have been accurately valued based on the appropriate accounting principles.
  4. Rights and Obligations: The company has the right to pay the salaries and wages reported, and employees have a valid claim to receive them.
  5. Presentation and Disclosure: The salaries and wages reported in the financial statements have been presented and disclosed appropriately by the relevant accounting standards and disclosure requirements.

Walkthrough Testing:

Walkthrough testing involves tracing a transaction from start to finish to evaluate the controls in place. 

In the case of salaries and wages, this could involve selecting a sample of employees and tracing their pay through the payroll system. This will help to identify any control weaknesses that need to be addressed.

Test of Control

Testing the controls in place to ensure the accuracy of salaries and wages involves evaluating the effectiveness of the organization’s payroll system. 

This can include reviewing the procedures in place for hiring and terminating employees, processing payroll, and reconciling payroll accounts.

It may also involve testing the segregation of duties to ensure that no single individual has too much control over the payroll process.

Substantive Audit Procedures

  1. Analytical procedures: Analyzing trends in salaries and wages over time to identify significant fluctuations that may require further investigation.
  2. Reconciliation: Reconciling payroll records to general ledger accounts to identify any discrepancies.
  3. Confirmations: Confirm payroll data with employees to ensure accuracy and completeness.
  4. Vouching: Vouching for payroll expenses to supporting documentation, such as time sheets and employment contracts.
  5. Inspection: Inspect payroll records to ensure compliance with employment laws and regulations.
  6. Comparison: Comparing payroll records to budgets or industry benchmarks to identify any anomalies.
  7. Observations: Observing the payroll process to evaluate the effectiveness of controls.
  8. Reperformance: Reprocessing payroll calculations to ensure accuracy.
  9. Review of payroll policies and procedures: Review payroll policies and procedures to ensure compliance with regulations and best practices.
  10. Review of payroll tax compliance: Review payroll tax compliance to ensure that all necessary taxes have been paid and that there are no penalties or fines.
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Conclusion:

Conducting a thorough audit of salaries and wages is essential to ensure the accuracy of the financial statements. 

Best practices for conducting audit procedures for salaries and wages include understanding accounting under IFRS, identification of audit risks, evaluation of audit assertions, walkthrough testing, and testing of controls and substantive audit procedures. 

By following these best practices, auditors can ensure that salaries and wages have been accurately recorded and are in compliance with applicable laws and regulations.

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