A basic rule in most business organizations is that every employee must be paid on time, and the payment must be accompanied by a detailed explanation of the computations used in determining the net amount received by the employee. The payroll system must therefore be capable of processing the input data (such as employee names, social insurance numbers, hours worked, pay rates, overtime, and taxes) and producing a prompt and accurate output of paycheques, payroll records, withholding statements, and reports to governmental authorities. In addition, the payroll system must have built-in safeguards against overpayments to employees, the issuance of duplicate paycheques, payments to fictitious employees, and the continuance on the payroll of persons who have been terminated as employees.
Every business needs to establish adequate internal control over payrolls. With such controls, a business has assurance that employees will be paid the correct amounts and that Payroll-related taxes will be computed correctly and paid on time. Failure to pay employees promptly and in the proper amounts is certain to damage employee morale. Failures to remit payroll taxes to tax authorities on schedule may result in fines and penalties. Finally, payroll historically has been an area in which poor internal control has sometimes led to employee fraud. Payroll fraud can take many forms. Small-scale payroll fraud may consist of employees overstating the number of hours (or days) that they have actually worked. “Padding” the payroll—adding fictitious employees to the payroll in order to generate extra paycheques—is a larger-scale payroll fraud. A basic means of achieving adequate internal control over payrolls is an appropriate separation of duties. In most organizations, payroll activities include (1) employing workers,(2) timekeeping, (3) payroll preparation and record keeping, and (4) the distribution of pay to employees. Internal control is strengthened if each of these functions is handled by a separate department.
The work of the human resources department begins with interviewing and hiring job applicants. When a new employee is hired, the department, prepares records showing the date of employment, the authorized rate of pay, and payroll deductions. It then sends a written notice to the payroll department to place the new employee on the payroll. The human resources department also is responsible for notifying the payroll department of changes in employees’ rates of pay and of persons whose employment has been terminated.
Timekeeping For employees paid by the hour, the time of arrival and departure should be punched on time cards. A new time card should be placed in the rack by the time clock at the beginning of each week or other pay period. Control procedures should exist to ensure that each employee punches his or her own time card and no other. The Describe the basic separation of duties in a payroll system, and explain how this contributes to strong internal control.
Timekeeping function should be lodged in a separate department that will control the time cards and transmit these source documents to the payroll department. In a computer-based payroll system, record keeping is simplified if the time clocks are on-line devices—that is, if they are connected directly with the computer system. In this way, the hours worked by each employee are entered automatically into the payroll accounting system.