## Audit of Employee Benefit Expense (EBE)

### Key Assertions (Frequently Tested in MCQs)

Assertion	Meaning	Risk
Occurrence	EBE actually occurred during the year	Risk of fictitious employees (ghost employees on payroll)
Completeness	All EBE pertaining to the year has been recorded	Risk of omission of salary, bonus, PF, etc.
Measurement	EBE is measured appropriately	Risk of overstatement or understatement

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### Audit Procedures

#### Step 1 – Understand the Entity's Process

Obtain an understanding of the entity's process for capturing attendance.
Identify risks of fictitious employees being on the payroll.

#### Step 2 – Address Risk of Fictitious Employees (Occurrence)

Meet employees in person (select a sample).
Ask the payroll department to share:
Bank account details of sampled employees
ID proof of sampled employees
Verify that salary payments actually reach legitimate employee bank accounts.

#### Step 3 – Employee Movement Analysis

Obtain list of all employees at period end with monthly movement, including:
New hires – joiners during the year
Leavers – employees who resigned/retired
Continuing employees – employees present throughout the year

#### Step 4 – New Hires (Sample)

For sampled new hires:

1. Obtain appointment letter

2. Check first salary payment and subsequent salary payments are processed as per terms stated in the appointment letter

---

### Summary Flow

```

Obtain employee list

↓

Segment: New Hires | Leavers | Continuing

↓

New Hires (Sample) → Appointment Letter → Verify 1st & subsequent salary

↓

Fictitious Employee Risk → Meet employees + Get bank details + ID proof

```

Worked example

### Example 1

Example – Ghost Employee Detection: Auditor selects a sample of 10 employees from payroll. For each:

(1) Requests ID proof from payroll department

(2) Verifies bank account where salary is credited

(3) Cross-checks bank account holder name with employee name

For Employee 'Ramesh Kumar', salary is being credited to a bank account not in his name → indicator of a fictitious/ghost employee → report finding to management.

### Example 2

Example – New Hire Salary Verification: Priya joined on 1 August. Appointment letter states salary = ₹45,000/month. Auditor checks: (i) August salary paid = ₹45,000 (pro-rated for joining date); (ii) September onwards = ₹45,000. If any month shows ₹55,000 without an increment letter, this is a misstatement in EBE.

### Example 3

Example – Completeness Test: Auditor compares total payroll expense for FY 2025-26 with FY 2024-25. Current year = ₹1.2 crore; Prior year = ₹2.5 crore. Significant decrease despite no major headcount reduction → possible understatement (omission). Auditor: (1) Obtain month-wise payroll register; (2) Reconcile with ESI/PF returns filed; (3) Check if any month's salary was not accrued.

⚠️ Common exam mistakes

Confusing Occurrence (no fake employees) with Completeness (no omissions) – these are opposite risks: Occurrence tests for excess/fake, Completeness tests for missing/omitted entries.
Not performing physical verification of employees – reviewing payroll records alone is insufficient when ghost employee risk is high.
Not verifying salary paid to new hires against appointment letter terms – payroll may process an incorrect amount in the first month.
Ignoring employee movement (new hires and leavers) – salary for leavers should stop from the leaving date; salary for joiners should start from joining date.
Not cross-referencing payroll with PF/ESI/TDS returns – statutory returns are independent sources that help verify completeness and accuracy of EBE.

Reference:

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