Efficient Tests of Balances Series--No. 44: Key Controls for Payroll and Operating Expenses

Key controls may be performed at both the entity level and the activity level.  Entity level controls are the most effective in preventing errors or fraud from occurring and going undetected.  For smaller entities, key controls are normally performed by owners, managers or other persons charged with governance at the entity level.  Here are some illustrative key and activity-level controls for smaller entities.

PAYROLL—KEY CONTROLS

1.  Owner or manager approves all hires and fires.

2.  Owner or manager authorizes wage rates.

3.  Payroll checks are distributed by the owner or manager.

4.  Owner or manager reviews and signs all payroll tax returns and other related documents.

5.  Owner or manager responds to all inquiries by state and federal regulatory bodies.

PAYROLL—ACTIVITY-LEVEL CONTROLS

1.  Payroll checks are pre-numbered and prepared and recorded with accounting software or by a service bureau.

2.  W-4s. I-9s and other required payroll documents are maintained.

3.  Employees time records are maintained and used to calculate paychecks.

4.  Payroll checks are distributed by department heads or other supervisors.

5.  Hires, fires, wage rates, time off are approved by department heads or supervisors.

EXPENSES—KEY CONTROLS

1.  Owner or manager reviews and approves all disbursements’ supporting documents.

2.  When signing checks, owner or manager determines account classifications are proper.

3.  Owner or manager investigates any unapproved or unusual disbursements.

4.  Owner or manager investigates duplicate payments and inadequate documentation.

EXPENSES—ACTIVITY-LEVEL CONTROLS:

1.  A detailed chart of accounts is used.

2.  Checks are prepared only when appropriate supporting documents have been received.

3.  The person recording and summarizing transactions cannot sign checks.

4.  The person preparing purchase documents and posting vendor payments cannot sign checks.

5.  Vendor invoices are cancelled by the check signer.

Key controls may be tested by auditor inquiries, observations of procedures and inspections of documents.  Such tests may be performed to varying degrees while performing system’s walk-through procedures. More extensive and detailed walk-through procedures result in more  substantive evidence and greater reductions in tests of balances. 

Effective formal or informal tests of controls will reduce the amount of substantive evidence that is required from detailed tests of balances.  The effects of substantive evidence from risk assessment and analytical procedures on payroll and expense accounts auditing procedures will be discussed in a future blog.

More information on auditing payroll and operating expenses can be obtained form my Basic Staff Training Series of webcasts.  The series can be accessed by clicking the appropriate box on the left side of my home page, www.cpafirmsupport.com.

This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

43558

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

76042

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

48519

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

89192
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
20642

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

55730

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

80741

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

24996

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

64209

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

34452
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
102841
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
25964

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

52654
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
27862
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
32176

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

100585

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

33346

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

111593

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

61130

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

39191
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
66520

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

92551

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

53591