Payments on account of salaries and wages need to be vouched carefully, since amounts which were either not due or in excess of those due may have been paid by the client. The evidence in support of such payments generally is internal. It can, therefore, be relied upon only if it has been produced in the normal course of business and there exists an efficient system of internal control which could be expected to prevent it from being fabricated.
Therefore, before proceeding to verify payment made on account of salaries and wages, the auditor should examine the internal control procedure as regards the following :
- Appointment, promotion, transfer and discharge of employees.
- Recording attendance of workers engaged on the time basis, as well as particulars of jobs performed by piece workers.
- Arrangement for the preparation of wages and salaries bills and their analysis.
- Sanctioning the disbursement of wages and salaries.
- Arrangement for disbursement of wages and salaries for workers and employees not present on the pay day.
- Custody of the wages records.
He should also verify that the system of internal control provides for the following matters :
- Mechanical recording of attendance of workmen by time recording clocks installed at the factory gate, as well as in each department and the reconciliation of the total labour force with the total of workmen in different departments ; also the recording of attendance of the staff departmentally in separate registers.
- Preparation of wages and salary bills by members of the staff, who are not connected with maintaining a record of engagement of workers, recording of their attendance or fixation of their wages.
- Rotation of duties of different clerks employed for preparation of wages and salaries bills so that calculations, additions and extensions are not carried out by the same clerk every month. Also, signing of the statement by persons who have prepared them and indication by each person so employed of the nature of work carried out by him.
- Verification of salaries and wages bills in case of newly appointed persons by reference to orders for appointment, promotions or transfer made during each month and of those payable to old employees by reference to old records and on reference to the record of attendance.
- Verification of the amount of total wages paid with the amount adjusted in the costing record.
- Checking and authorising the overtime and piece work payment by officers who are not associated with the Wages Department.
- Withdrawal by a single cheque from the bank of the exact amount of wages and salaries payable as are entered in the wages and salaries bill, depositing in the bank the undisbursed amounts.
- Recording of unclaimed wages and salaries immediately in the Unpaid Wages and Salaries Register, and their subsequent payment on the employee’s claim to them.
- Payment of advances in lieu of wages and salaries to persons who go on leave on short notice before the end of the month through the Petty Cash.
- Disbursement of wages in the presence of an official who is in a position to identify the worker and ensure that wages are not being paid to persons other than the workmen except under a proper authority.
Provided that the system of internal control has built-in safeguards against payments being made in excess, the auditor should check the wages and salaries bills for one month as follows :
- Check the bill in detail by reference to the record of attendance, schedule of rates, sanctioned by the management for different classes of workers and employees and the sanction for their payment.
- Check the computation of wages and salaries payable to different workers and employees by taking into account the deduction and other factors on a consideration of the following :
- Leave with pay ;
- Loans and advances
- Increments ;
- Fines and penalties ;
- Deduction on account of Provident Fund and Income-tax ;
- Deduction on account of contribution towards Employees’ State Insurance, etc.
3.Verify the addition, extension and classifications of wages and salaries for distributing them among different accounts. 4. Confirm that all payments to workers and other employees have been acknowledged and amounts which have remained undisbursed have been deposited back in the bank and credited to the Unpaid Wages and Salaries Account. Also, check disbursement of unpaid wages and salaries made during the month. 5. See that wage sheets are signed by the persons who have prepared wage sheets and disbursed wages ; also that they have indicated precisely the nature of work carried out by them. 6.Test the correctness of the amount paid by reference to the Annual Return of Salaries, etc., submitted to the Income-tax Authorities and that of wages with Employee’s State Insurance Cards 7. Trace recoveries out of loans and advances, outstanding against employees into the Employees Loans and Advances, outstanding against employees into employees Loans and Advances Register 8. See that names of the same persons do not always appear on the list of unpaid wages if their wages are not, from time to time, adjusted against their loans and advances to prevent their absence being noticed at the time wages are paid. It might provide a clue that the workmen are dummies.
If the aforementioned checking does not disclose significant mistakes, either in the preparation of wages and salaries bill or in their disbursements, the auditor could verify the wages and salary bills for the rest of the period by the application of the following checks :
- Test checking the amount of wages and salaries, shown as payable in the bill, to a selected list of employees by reference to their attendance record as well as Employees Insurance Cards ; also verifying the rate of wages and salaries at which the amount due have been computed on an inspection of the authority under which they were engaged.
- Verifying the disbursement of all wages and salaries by reference to receipts furnished by employees or their authorised representatives on the salaries and wages bill.
- Verifying the amounts withdrawn each month from the bank for payment of the salaries and wages bill.
- Reconciling the amounts deposited in the bank each month with that undisbursed shown in the relevant bill.
- Vouching all payment made on account of wages and salaries that had remained unclaimed on the pay day.