Topic internal control payroll system f8 acca

Topic internal control payroll system f8 acca Topic internal control payroll system f8 acca Topic internal control payroll system f8 acca Topic internal control payroll system f8 acca

Internal Control: Payroll System

Detailed Presentation

Key Topics:

- Payroll Process and Risks

- Internal Control Objectives and Activities

- Audit Tests, Case Studies, and Emerging Trends

Introduction to Payroll Internal Controls

Purpose: Ensure accurate, compliant, and fraud-free payroll

processing

Importance:

Protects company finances from errors and fraud.

Ensures compliance with labor, tax, and social insurance laws Builds trust with employees and stakeholders.

Why Control Payroll?

Risks Without Controls:

Ghost Employees: Fictitious workers added to payroll.

Collusion: HR and accounting falsify payments.

Overpayments: Errors in timekeeping or calculations.

Non-Compliance: Fines for tax or insurance violations.

Consequences:

Financial losses (e.g., millions in fraudulent payments) Legal penalties (up to VND 200 million, Decree 12/2022) Reputational damage and employee distrust.

Example: A factory inflated payroll with 50 ghost employees,

detected by auditors noting insufficient motorbikes in theparking lot

Payroll Process Overview

Payroll Process Flowchart

Recruitment Process

Responsibility: HR or dedicated recruitment team Steps:

Collect hiring needs from departments.

Post job ads, screen resumes, conduct interviews.

Negotiate salary, benefits, and sign contracts.

Control Objectives:

Ensure only authorized and qualified hires.

Verify candidate identity and credentials.

Example: A bank requires background checks for all hires.

Employee Record Management

Responsibility: HR maintains employee files.

Contents:

ID documents, health records, labor contracts.

Confidentiality agreements, salary updates, promotions.

Ensure time records reflect actual hours.

Prevent buddy punching or time theft.

Example: A factory uses facial recognition to eliminate

timecard fraud

Payroll Calculation

Responsibility: HR or dedicated payroll team.

Inputs:

Timekeeping data, contracted salaries, allowances.

Deductions (tax, social insurance, health insurance).

Output: Payroll report with gross pay, deductions, net pay Control Objectives:

Ensure accurate and compliant calculations.

Validate inputs against contracts and laws.

Example: A telecom firm automates deductions per Decree

105/2024/NĐ-CP

Payroll Payment

Responsibility: Accounting department.

Methods:

Bank transfers (preferred for compliance).

Checks or cash (rare, high-risk).

Process: Prepare payment lists, execute transfers, record in

ledger

Control Objectives:

Ensure payments only to legitimate employees.

Prevent unauthorized disbursements.

Example: A logistics firm uses dual-authorization bank

transfers

Termination Process

Responsibility: HR handles contract terminations.

Reasons: Dismissal, contract expiry, resignation.

Process:

Settle final payments (salary, severance).

Update records, comply with Labor Code 2019.

Control Objectives:

Ensure all obligations are resolved.

Prevent fraudulent final payments.

Example: A manufacturer settles terminations within 7 days,

per Article 48, Labor Code

Types of Internal Controls

COSO Framework Components:

Performance Review: Management reviews payroll reports Segregation of Duties: Separate HR, payroll, accounting roles Authorization: Approvals for hires, payments, changes Information Processing: Validate data entry.

Physical Controls: Secure payroll systems and records.

Purpose: Mitigate fraud, errors, and compliance risks Example: A company restricts payroll system access to

authorized users

Control Objectives: Employee Records

Existence: Only real employees in payroll master files Control: Verify changes against approved documents Audit Test: Review approvals, re-perform sample

reconciliations.

Completeness: All new hires added to records.

Control: Use sequentially numbered change forms.

Audit Test: Check form sequence, verify updates.

Example: A firm reconciles HR records with payroll monthly.

Control Objectives: Timekeeping

Existence: Time records reflect actual hours worked Control: Use biometric time clocks with authorized setup Audit Test: Inspect setup process, review time reports. Completeness: All hours worked are recorded.

Control: Reconcile time reports with payroll.

Audit Test: Re-perform sample reconciliations.

Example: A factory supervisor reviews time reports weekly.

Control Objectives: Payroll Calculation

Accuracy: Correct gross pay and deductions.

Control: Recalculate sample payroll entries.

Audit Test: Verify recalculation records.

Compliance: Align with tax and insurance laws.

Control: Reconcile payroll with tax filings.

Audit Test: Check tax reconciliation reports.

Example: A company uses software to ensure compliance

with Decree 105/2024

Control Objectives: Payroll Payment

Existence: Payments only to legitimate employees Control: Segregate HR and payroll duties, use unique IDs Audit Test: Review segregation, verify IDs.

Completeness: All payments recorded.

Control: Reconcile payment lists with payroll.

Audit Test: Trace payments to bank statements.

Example: A firm requires dual signatures for payment

approvals

Control Objectives: Accounting

Accuracy: Correct recording of payroll transactions Control: Reconcile payroll with general ledger.

Audit Test: Verify ledger reconciliations.

Cut-off: Transactions in correct period.

Control: Timely updates for hires/terminations Audit Test: Check update timeliness.

Example: A company reconciles payroll ledger monthly.

Audit Tests Overview

Purpose: Evaluate control effectiveness per ISA 315.

Methods:

Inquiry: Interview HR and payroll staff.

Observation: Inspect biometric systems, approvals.

Re-performance: Recalculate payroll, reconcile records.

Inspection: Review contracts, time reports.

Outcome: Determine control reliance, adjust substantive

testing scope

Example: Auditors observe time clock usage to verify controls.

Common Control Activities

Examples:

Sequential change request forms for record updates.

Biometric timekeeping to prevent fraud.

Dual authorization for payments.

Periodic reconciliations of payroll and ledger.

Restricted access to payroll systems.

2025 Update: AI-driven anomaly detection in payroll systems Example: A firm uses AI to flag irregular payment patterns.

Control Activities Table

Existence (Records) Verify changes with approved

documents

Review approvals, re-perform reconcilia- tions

Completeness (Time) Reconcile time reports with

payroll

Re-perform sample reconciliations Accuracy (Payroll) Recalculate sample payroll

entries

Verify recalculation records

Existence (Payment) Segregate HR and payroll

du-ties

Review segregation policies

Case Study: Payroll System (ACCA F8 Dec 2015)

Task: Identify 5 strengths and 6 weaknesses in a factory’s

payroll system, recommend improvements

Time: 30 minutes (17 marks).

Approach:

Analyze control objectives (existence, completeness, accuracy, cut-off).

Evaluate control activities and risks per ISA 315.

Context: Factory with automated payroll and manual

timekeeping

Case Study: Strengths

Strengths:

Sequentially numbered timecards ensure accurate tracking Automated payroll system reduces calculation errors Supervisor reviews payroll calculations for accuracy Separate HR department handles hiring/terminations Bank payments with reconciliation minimize fraud.

Impact: Reduces risks of errors and ghost employees.

Case Study: Weaknesses (Part 1)

Weakness 1: Unsupervised timecard swiping allows buddy

Case Study: Weaknesses (Part 2)

Weakness 4: Payroll manager approves and edits payroll Recommendation: Transfer approval to accounting. Weakness 5: Cash payments without ID verification Recommendation: Require ID and timecard for payments. Weakness 6: No periodic physical headcounts.

Recommendation: Conduct random headcounts.

Case Study: Practical Implications

Lessons Learned:

Segregation of duties is critical to prevent collusion.

Automation reduces errors but requires manual oversight Regular audits detect weaknesses early.

Application: Companies should tailor controls to their payroll

risks

Example: A factory implemented biometric timekeeping

post-audit, reducing fraud by 90%

Emerging Trends in Payroll Controls (2025)

AI and Machine Learning:

Detects anomalies in timekeeping and payments.

Predicts payroll fraud risks.

Blockchain: Tamper-proof payroll records.

Cloud Systems: Real-time, secure data access.

Regulatory Updates: Enhanced KYC for payments (Decree

88/2019, amended 2024)

Example: A firm uses blockchain to secure payroll data.

Technology Implementation Challenges

Challenges:

High initial costs for AI and blockchain systems.

Staff training for new technologies.

Data privacy compliance (Decree 13/2023/NĐ-CP on personal data).

Solutions:

Phased implementation with pilot programs.

Partner with trusted vendors.

Regular compliance audits.

Example: A company faced data breaches but resolved them

with encryption

Practical Tips for Implementation

Design Controls:

Align with company size, industry, and risks.

Involve HR, payroll, IT, and legal teams.

Test Regularly: Conduct internal audits quarterly.

Train Staff: Educate on fraud risks and compliance.

Leverage Technology: Adopt biometric and cloud systems Example: A firm trains staff annually on payroll compliance.

Compliance and Monitoring

Compliance Requirements:

Timely salary payments (Article 94, Labor Code 2019) Accurate tax and insurance deductions (Decree 105/2024).

Monitoring Strategies:

Internal audits to test controls.

External audits for compliance assurance.

Real-time dashboards for payroll metrics.

Example: A company uses dashboards to track payroll

compliance

Conclusion and Discussion

Summary:

Payroll Process: Recruitment, records, timekeeping,

calculation, payment, termination.

Controls: Ensure existence, completeness, accuracy,

compliance.

Audit: Test controls to optimize audit scope.

Trends: AI, blockchain, and cloud enhance controls.

Future Directions:

Integrate advanced technologies for efficiency.

Stay updated with labor and tax regulations.

Discussion Questions:

How can AI improve payroll fraud detection?

What payroll control challenges exist in your industry?