Auditing the Expenditure Cycle – Weaknesses in the Payroll System

A 2012 study by the Association of Fraud Examiners revealed that 11 percent of workplace frauds involve payroll. The average cost of this type of fraud was $48,000. On average these types of schemes avoid detection for 36 months.

The creation of false, or “ghost”, employees is one of the most common forms of payroll fraud. Fictitious hours are submitted in the name of the “ghost” employee for work not performed. (Chris Bradford n.d.)

Responsibility for entering payroll data and processing paychecks should be divided between human resources and the accounting department to make sure that multiple people are needed to complete the payroll cycle. This segregation of duties helps prevent possible abuses, such as the creation of “ghost” employees, diverting money to personal accounts, or modifying vacation hours. (Nestor-Harper n.d.)

In most companies, the personnel department uses personnel action forms to designate employees receiving pay checks, what their salary is, job classification and any payroll deductions. Supervisors are not responsible for managing this information because of the potential for abuse. (Hall 2011)

Many organizations use time cards to track the hours that an employee is at work. Or they may ask each employee to enter a unique code into the system to clock in or clock out. Both of these methods are susceptible to potential fraud. One employee could clock in using another employee’s Time Card or code. Reasons for doing this may include covering for a late or absent employee. One method of discouraging this behavior is for supervisors to observe the practice of clocking in.

A payroll preview report should be generated and reviewed before paychecks are printed, or pay transferred into direct deposit accounts. This review should be done by someone other than the person or department responsible for payment processing. This review would look for terminated employees who shouldn’t receive paychecks, inordinate hours worked, or invalid vacation dates posted. (Nestor-Harper n.d.)



Chris Bradford. How Can Internal Control Overcome Payroll Fraud? n.d. (accessed March 29th, 2014).

Hall, James A. “Chapter 9: Auditing the Revenue Cycle.” In Information Technology Auditing and Assurance, Third Edition, by James A. Hall, 647. Mason, Ohio: South-Western Cengage Learning, 2011.

Nestor-Harper, Mary. The Internal Control Weaknesses of a Payroll System. n.d. (accessed March 29th, 2014).

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