## Payroll Audit Procedures
### Overview
The auditor must verify payroll for completeness, accuracy, and statutory compliance. Key focus areas: resigned/retired employees, statutory deductions (PF/ESI), provisions for obligations, and analytical review.
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### 1. Resigned / Retired Employees — Final Settlement Checklist
| Step | Procedure |
|---|---|
| 1 | Verify all dues are correctly computed in the final settlement |
| 2 | Confirm retirement/separation benefits were paid |
| 3 | Obtain employee acknowledgement on the final computation |
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### 2. Statutory Deductions — PF and ESI
If PF (Provident Fund) and ESI (Employees' State Insurance) are applicable:
1. Apply correct rate to Basic Wage to verify contribution amounts.
2. Obtain monthly challans of payment to PF/ESI authorities.
3. Verify timely deposit — late remittance is a statutory violation.
> Note: PF and ESI are computed on Basic Wage, not Gross Salary.
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### 3. Provisions for Employee Obligations
Verify whether provisions have been made for:
- Gratuity — accrued liability even before payment
- Bonus — payable under the Payment of Bonus Act
- Leave Encashment — earned but unavailed leave
These must be provided for in the period they accrue, even if not yet paid.
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### 4. Salary Register & Analytical Procedures
Steps:
1. Obtain Salary Register for all 12 months.
2. Calculate monthly salary per employee independently.
3. Analyze month-on-month differences and investigate anomalies.
Key Analytical Pointers:
| Pointer | What the Auditor Looks For |
|---|---|
| Understanding | Understand the entity's payroll process end-to-end |
| Fictitious Employees | Ghost employees — verify joining documents, bank account details |
| New Hires | Salary should start from actual joining date, not full month |
| Leavers | Salary only till leaving date; full-and-final dues settled |
| PF / ESI | Correct rates applied on correct base; timely challan deposits |
| Analytical Procedure | Month-on-month variance; payroll-to-revenue ratio trends |