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Audit and Assurance · The audit of specific items

How to Audit Payroll and Wages in ACCA AA

Updated 11 October 2026 · Fact-checked

Auditing payroll means gathering evidence that wages and salaries expense and related liabilities are complete, accurate and valid. You use analytical procedures first, then substantive tests: agree employees to records and HR files to detect ghost employees, recalculate pay and deductions, and check payments and accruals to the bank and payroll records.

Understand Audit of Payroll

Payroll is usually a significant cost for a business, but it is often low risk for misstatement in the financial statements. It is routine, repetitive and usually computed by software. However, the risk of fraud is high. Payroll is a common target for misappropriation of assets.

The main fraud risk is the ghost employee: someone on the payroll who does not work for the company, so the wages are paid to a fraudster. Other risks are overpaid hours, unauthorised pay rises, and payments continuing after an employee has left.

Substantive procedures for payroll link to the assertions. Occurrence (are the wages real?), completeness (are all wages and liabilities recorded?), accuracy (are gross pay, tax and deductions right?), cut-off (is the right period charged?) and classification (is cost split correctly between production, admin and capitalised labour?). Liabilities such as tax authority amounts, pension contributions and holiday pay accruals relate to completeness and valuation.

Tests of controls cover authorisation of new starters, leavers and pay changes, and segregation of duties. Substantive work then follows. Analytical procedures compare payroll cost to the prior year, budget and headcount, and are powerful because payroll is predictable. Unexpected variances need explanation and corroboration, not just management's word.

In the exam you are usually asked to list procedures for a given scenario, or to say what could go wrong. Tie each procedure to a specific risk or assertion. Never give a vague answer such as 'check the payroll'.

Key rules to remember

Analytical expectation for payroll
Expected payroll cost = prior year cost × (1 + pay rise %) ± change in headcount or hours effect
Use it to build an expectation and compare with the recorded figure. Investigate differences larger than your threshold.
Average cost per employee
Average cost per employee = total payroll cost ÷ average number of employees
Compare across years and between departments to spot ghost employees or unauthorised pay.
Gross to net pay
Net pay = gross pay − income tax − employee social security or pension deductions − other deductions
Used when recalculating pay. Rates depend on local law, so use those given in the question.
Total employment cost
Total cost = gross pay + employer's taxes and contributions + benefits
The expense includes employer contributions. Employee deductions are not an extra cost to the employer.
Ghost employee test direction
Payroll → HR file and personnel evidence (occurrence); HR records → payroll (completeness)
Direction of testing matters. Starting from payroll tests for ghosts; starting from HR tests for omissions.

How to solve Audit of Payroll questions

Use this method for any payroll audit question, whether it asks for procedures, risks or analytical review.

  1. 1Read the scenario and note the facts: number of employees, pay frequency, any new system, casual or overseas staff, weak controls, large changes in headcount.
  2. 2Identify the risk or assertion the question focuses on: existence or occurrence, completeness, accuracy, cut-off, or classification.
  3. 3Choose procedures that fit that risk. For ghost employees, trace from payroll to personnel files, contracts and proof of attendance.
  4. 4State what you do, to what, and what you are looking for. For example: 'Select a sample of employees from the payroll and agree to signed contracts in HR files to confirm they exist and are authorised'.
  5. 5Add recalculation and agreement: recompute gross pay from hours and rates, recompute deductions, and agree totals to payroll summary, nominal ledger and tax authority payments.
  6. 6Use analytical procedures where asked: compare to prior year, budget and headcount, and say what you would do with unexplained differences.
  7. 7Cover the liabilities: accruals for unpaid wages, bonuses, holiday pay and amounts owed to tax and pension bodies. Test holiday pay accruals by recalculating them from untaken leave records and pay rates. Agree tax and pension liabilities to subsequent payments and to returns. Agree year-end wages and bonus accruals to approvals and subsequent payments.
  8. 8Finish by linking any findings to fraud risk or control deficiencies, and say what you would report.

Quickest way: Assertion-and-risk shortcut for payroll

When to use it: Use this when time is short in a Section B constructed response question or an OT case question that asks for payroll procedures.

  1. Name the risk in a few words, such as ghost employees or overpayment.
  2. Write one procedure for each risk using the pattern: select, agree or recalculate, to which document.
  3. Always include one procedure from payroll to HR records, one recalculation and one agreement to payments or the bank.
  4. Add one analytical comparison, such as monthly payroll cost against headcount and prior year.
  5. Check that every point has a clear purpose and stop when you have enough points for the marks.

Common mistakes in Audit of Payroll

  • Writing vague procedures such as 'check payroll is correct' or 'review wages'.

    Students know the topic but do not turn it into an audit action.

    Fix: Use the pattern: select a sample, inspect or recalculate a named document, and state the purpose.

  • Testing ghost employees from HR records to payroll.

    Students mix up the direction of testing.

    Fix: To find ghosts, start with employees on the payroll and trace to HR files, contracts and evidence of attendance. Starting at HR tests completeness.

  • Treating payroll as high risk of material misstatement in all cases.

    Payroll is large, so students assume it is risky.

    Fix: Payroll is often low risk because it is routine and predictable, but fraud risk exists. Judge risk from the scenario facts.

  • Ignoring liabilities and only testing the expense.

    Students focus on gross pay and forget accruals and tax authority balances.

    Fix: Include procedures on year-end liabilities. Recalculate holiday pay accruals from untaken leave records and pay rates. Agree tax and pension liabilities to subsequent payments and returns. Agree wages and bonus accruals to approvals and subsequent payments.

  • Doing analytical procedures without drawing a conclusion.

    Students list comparisons but do not say what a difference means.

    Fix: State the expectation, the possible causes of a difference such as new starters, overtime or pay rises, and say you would seek evidence for explanations.

  • Describing control tests when the question asks for substantive procedures.

    Payroll controls are well known, so students write about them instead.

    Fix: Check the requirement. Substantive procedures test figures and balances directly. Controls are only relevant if asked.

Worked examples

Example 1

Camden Co has 400 employees paid monthly. A new HR system was introduced during the year and the finance director suspects some leavers have not been removed from payroll. Describe substantive procedures the auditor should perform to detect ghost employees. (5 marks)

Show the solution
  1. The risk is the occurrence of wages: payments to people who do not work for the company, such as leavers kept on the payroll.
  2. Select a sample of employees from the payroll and agree each to a personnel file with a signed contract, start date and authorised pay rate.
  3. Compare the payroll to the list of leavers from HR and confirm none were paid after their leaving date. Check for payments after the leaving date.
  4. Inspect bank details on the payroll and look for duplicates or employees sharing the same account, and for accounts not in the employee's name.
  5. Where possible, observe a payout or attend a pay distribution, or agree to evidence of attendance such as clock records or manager confirmation.
  6. Use data analytics to identify employees with no tax code, no leave taken or missing personal details, and follow up exceptions.

Answer: The auditor should trace a sample from payroll to HR files and contracts, compare payroll to leavers lists, check for duplicate bank accounts and payments after leaving, obtain evidence of attendance, and investigate any employees with missing data.

Example 2

Wexford Co's payroll cost was ₹4,80,00,000 last year with an average of 200 employees. This year the cost is ₹5,60,00,000 with an average of 210 employees. A 4% pay rise was given from the start of the year. Assume the auditor investigates any difference of more than 5% of the expected cost. Calculate the expected cost and say what the auditor should do.

Show the solution
  1. Last year's cost was ₹4,80,00,000. Apply the 4% pay rise: 4,80,00,000 × 1.04 = ₹4,99,20,000.
  2. Adjust for headcount. Both figures are average employee numbers, so the comparison is like for like. The average rose from 200 to 210, which is an increase of 5%.
  3. Expected cost = 4,99,20,000 × 1.05 = ₹5,24,16,000.
  4. Actual cost is ₹5,60,00,000. The difference is 5,60,00,000 − 5,24,16,000 = ₹35,84,000, which is about 6.8% of the expected figure (35,84,000 ÷ 5,24,16,000).
  5. The difference of 6.8% is above the 5% investigation threshold, so it needs follow-up. Possible causes are overtime, bonuses, new staff at higher grades, redundancy payments, or fraud such as ghost employees.

Answer: Expected cost is ₹5,24,16,000, using average employee numbers for both years. The actual cost is ₹35,84,000 higher, about 6.8%, which is above the 5% threshold. The auditor should obtain explanations from management, corroborate them to bonus records, overtime records and HR files, and extend testing, including ghost employee tests, if the difference is not explained.

Exam tips

  • Read the verb. 'Describe' needs procedures with detail; 'explain' needs reasons. Match your answer to the requirement.
  • In an objective test case, look for the direction of testing. Payroll to HR tests existence; HR to payroll tests completeness.
  • In analytical review answers, always build an expectation first, then compare, then say how you would investigate the difference.
  • Use scenario facts such as a new system, casual workers or weak segregation to choose your risks. Generic lists score less.
  • Separate tests of controls from substantive procedures. Marks are lost when you answer the wrong one.

Audit of Payroll in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Payroll: frequently asked questions

How do you test for ghost employees in an audit?

Select employees from the payroll and trace them to HR files, signed contracts and evidence of attendance. Also compare the payroll to leaver lists and look for duplicate bank accounts or missing personal data. Follow up every exception.

What analytical procedures are used on payroll?

Compare total payroll cost to prior year, budget and headcount, and compare average cost per employee over time and between departments. Compare monthly cost to look for unusual spikes. Differences need explanations that are backed by evidence.

Is payroll a high-risk area in the audit?

Not always. Payroll is usually routine and predictable, so the risk of material misstatement is often low. The fraud risk, especially ghost employees, can still be significant if controls are weak.

Which assertions matter most for payroll?

Occurrence, completeness, accuracy, cut-off and classification are the main ones. For payroll liabilities, completeness and valuation are also important. Tie each procedure to one of these.