Wages normally paid weekly in cash to employees working in departments such as production, whereas salaries are paid monthly to employees normally working in administrative departments through electronic transfers to their bank accounts. With the development of technology, many hourly paid employees are now paid through bank transfer also.

There are some common payroll frauds, as follows:

•The inclusion of fictitious (ghost) employees on the payroll – this can happen in circumstances where blank clock-cards are kept by factory supervisors who also distribute wage packets to employees. There is also a risk of this type of fraud if staff who update the master file for changes are also involved in the preparation or distribution of wage packets.

•Deliberate timing errors – a variation on the above fraud is to include new employees on the payroll before they actually commence work or to leave them on the payroll after they have left.

•Requesting a cheque for net wages in excess of the required amount. This type of fraud is generally easier to perpetrate in manual wages systems. Alternatively, if employees are paid by bank transfer a lack of controls could provide staff with the opportunity to make changes to the list before it is sent to the bank.

•Payment of unauthorised/invalid overtime – this can happen in circumstances where the authorisation of overtime is not properly controlled or details of overtime input during the preparation of the payroll are not independently reconciled to authorised totals for the week.

Typical tests of control and substantive tests

1.To ensure that employees are only paid for work done.

•Test of control – observe clocking on procedures and the level of supervision.

•Substantive procedure – select a sample of employees from the payroll and agree hours paid to individual clock cards.

2. To ensure that wages are only paid to valid employees.

•Test of control - attend the wages pay out.

•Substantive procedure – select a sample of employees from the payroll and vouch to individual contracts of employment in HR department.

3. To ensure that all wages are authorised.

•Test of control – review overtime forms/lists for authorised signatures.

•Substantive procedure – compare overtime costs each month with the prior year and investigate significant variances.

4. To ensure wages are paid at the correct rates of pay.

•Test of control – review log of amendments to master file for evidence of independent review.

•Substantive procedure – obtain printout of employee wage rates and compare to HR records.

5. To ensure that errors do not occur in payroll calculations.

•Test of control – review payrolls for signatures as evidence of independent calculation checks.

•Substantive procedure – select a sample of employees and check calculations of gross and net pay.