Audit: payroll
Test a client’s wages: analytical review, a sample of employees, leavers, and the year-end PAYE liability.
ACCA exams this helps with: AA Audit and Assurance See the ACCA map
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Wages are one of the biggest costs for most businesses, so auditors always test payroll. They check that the total makes sense compared with last year, that the people being paid really work there and are paid the right amount, and that tax deducted from wages is shown as owed to HMRC.
Example. If a business had 42 staff last year and 45 now, and gave everyone a 4% pay rise, wages should be up by about 11%. A much bigger rise needs explaining.
Key words
- Analytical review
- Working out what a figure should roughly be, then comparing it with the actual figure. A big difference needs an explanation.Example: Wages were £1.26m last year. There are 7% more staff and a 4% pay rise, so wages should be about £1.40m. If they are £1.45m, the auditor asks why.
- PAYE
- Pay As You Earn: income tax that an employer takes from employees’ pay and pays to HMRC for them.Example: £21,400 of PAYE is taken from March wages and paid to HMRC by 22 April.
- Employer’s National Insurance
- National Insurance that the employer pays to HMRC on top of employees’ wages. It is an extra cost to the business.Example: An employee earns £3,000 a month. The employer pays its own National Insurance on top, which is not taken from the employee’s pay.
- Ghost employee
- A person being paid through the payroll who does not really work for the business, such as a former employee still being paid, or a fake name. It can be an error or fraud.Example: An employee left in January, but salary payments kept going to a bank account in February and March.
- Management letter
- A letter from the auditor to the client’s management that lists weaknesses in the client’s controls and recommends improvements.Example: “Leavers are not always removed from the payroll promptly. We recommend a monthly check against HR records.”
Your brief and documents
Back on the audit of Harbour & Hale Coffee Roasters Ltd (a fictional company), year end 31 March 2026. Wages are one of the client’s biggest costs.
Hi,
Can you do payroll next? Please:
- Do an analytical review of total wages. Investigate any difference over £25,000.
- Test the March payroll sample against contracts and HR records.
- Check that the year-end PAYE/NIC liability is complete.
- Send me a summary.
Thanks, Sam
Document 1: Wages information
| Item | Last year | This year |
|---|---|---|
| Total gross wages per payroll | £1,260,000 | £1,452,600 |
| Average number of employees | 42 | 45 |
| Pay rise from 1 April 2025 | – | 4% for all staff |
Document 2: March 2026 payroll sample
| Employee | Gross pay in March £ | Annual salary per contract £ | HR record |
|---|---|---|---|
| E101 A. Patel | 3,250 | 39,000 | Active |
| E117 J. Moore | 2,900 | 33,600 | Active; no pay rise approval on file |
| E124 S. Okafor | 3,600 | 43,200 | Active |
| E131 L. Grant | 2,700 | 32,400 | Left the company on 31 January 2026 |
| E140 R. Dunn | 3,100 | 37,200 | Active |
Payroll records show L. Grant was also paid £2,700 in February.
Document 3: March payroll deductions (paid to HMRC on 22 April)
| Item | £ |
|---|---|
| PAYE income tax deducted | 21,400 |
| Employees’ National Insurance | 7,800 |
| Employer’s National Insurance | 13,900 |
| Balance on the client’s “PAYE/NIC payable” account at 31 March | 29,200 |
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How a senior would approach it
- Build an expectation before you look at the actual figure. Last year’s cost, adjusted for changes in headcount and pay rates, gives a figure you can compare with. The difference is what needs explaining.
- A sample tests two things: that each employee is real (HR records, contracts) and that they are paid the right amount (salary ÷ 12).
- Leavers are a classic risk. Someone who has left but is still on the payroll could be an error, or a “ghost employee” fraud.
- The year-end liability for PAYE and National Insurance should include employees’ deductions and the employer’s own National Insurance.
Your tasks
Work through the tasks in order, using the documents in your brief. Each task is checked when you press Check answer.