# Audit of Employee Benefits Expenses
Employee benefits expense typically includes salaries, wages, bonus, gratuity, leave encashment, ESI/PF contributions, and other employee-related costs. The auditor needs to obtain a clear understanding of the entity's hiring, appraisal and retirement processes.
## A. Overall Audit Approach
1. Test of Controls – The auditor tests controls the entity has set around the employee benefit payment process. If controls are effective, substantive testing can be reduced.
2. Sample Examination – Select a random sample of transactions and examine related documents:
- Appointment letters
- Appraisal letters
- Attendance records
- HR policies
- Employee master
3. Substantive Audit Procedures – Performing substantive procedures is a MUST (cannot be entirely replaced by controls testing).
## B. Assertions and Procedures
### Assertions Tested: Occurrence, Completeness & Measurement
### 1. Understanding the Attendance Capture Process
Obtain understanding of entity's process of capturing employee attendance.
> Risk: There is always a risk that an entity could record expense for fictitious (ghost) employees.
### 2. Employee List with Movement
Obtain list of employees as at period-end along with monthly movement split between:
- New hires
- Leavers
- Continuing employees
### 3. Sample Testing – New Hires
For a sample of new hires:
- Obtain appointment letter
- Verify whether salary for first month and subsequent months was processed as per agreed terms
### 4. Sample Testing – Resigned Employees
For a sample of resigned employees, obtain the Full and Final (F&F) computation.
### 5. Monthly Payroll Analytical Review
- Obtain monthly salary registers for all 12 months
- Compile monthly payroll by calculating average salary per employee per month
- Compare with previous year and preceding month
- Analyse reasons for variance