How would you audit payroll expense for a company with 500 employees?

What the interviewer wants to hear

• Understands and tests payroll controls such as joiners, leavers and rate changes
• Performs analytical procedures using headcount and average pay
• Tests a sample of employees to HR records and contracts
• Reconciles payroll to the ledger, bank and statutory returns
• Checks statutory deductions like PF, ESI and TDS

Model answer

I would first understand the payroll process and test key controls: approval of joiners, leavers and salary changes by HR, independent review of each month’s payroll, and restricted access to the payroll master. Then I would perform analytics, comparing monthly payroll cost with headcount and average pay, and investigating unusual months. For details, I would pick a sample of employees and agree their pay to appointment letters, increment approvals and attendance, and recalculate deductions. To test for ghost employees, I would check that leavers were removed on time and look for duplicate bank accounts or PANs. I would reconcile the payroll register to the general ledger, the bank payment file and statutory returns such as provident fund, ESI and TDS on salaries in Form 24Q, and check that dues were deposited on time, which is also a CARO reporting point. Finally, I would review accruals for bonus and leave.

More medium Auditor questions

• You are planning the audit of a new client. How do you understand the business and assess risks?
• Walk me through how you attend a client’s physical inventory count.
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• How do you design an audit sample, and what affects the sample size?
• How do you perform journal entry testing to address the risk of management override?
• How would you audit trade receivables at year end?
• Describe your audit approach for property, plant and equipment.
• Why and how would you reconcile revenue in the books with GST returns during an audit?
• What do you communicate to the audit committee during and at the end of an audit?