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Office of the City AuditorPayroll Testing Audit Report

April 4, 2001
TO: Stockton City Council
FROM: F. Michael Taylor, City Auditor
SUBJECT: LIMITED SCOPE AUDIT - PAYROLL

As part of the City Auditor's annual audit plan, we have performed a Limited Scope Audit of select aspects of the City's payroll system. The results were reported to the responsible management in memorandum format.

PURPOSE:

The purpose of a limited scope audit is to form an opinion, based on testing of individual transactions, as to processing accuracy and compliance with policies and procedures established by management. A limited scope audit generally deals with only a portion of a given system or function. Though not as comprehensive as a standard audit, limited scope audits are intended to provide some insight into the internal controls of the larger system. The insight gained will assist in the planning and timing of future full scope audits.

METHODOLOGY:

The methodology for limited scope audits generally do not include all of the steps used in a full scope audit; however, we are responsible for conducting our audits in accordance with Generally Accepted Government Auditing Standards. We gain sufficient understanding of the audit area to plan and perform the work intended. Limited scope audits vary, and may be designed to answer a single question or to test a specific area.

AUDIT RESULTS:

Payroll Testing - Work performed by Jim Henthorn and Vanessa Muñoz Based on the transactions tested we concluded that payroll was properly authorized, calculated, and paid. We made recommendations to management regarding the clarification of written guidelines for processing, and commented on the handling of payroll vouchers, which contain confidential information.

ORIGINAL SIGNED BY:

MEMORANDUM

As part of the City Auditor's annual audit plan, we performed testing of select aspects of the City's payroll system. The processing of payroll transactions is the responsibility of the Administrative Services Department Payroll Section. Much of the guidance for how City employees are to be paid is the responsibility of the Personnel Services Department. Therefore recommendations have been directed to the responsible department. The audit was conducted in accordance with Generally Accepted Government Auditing Standards.

PURPOSE:

The purpose of this limited scope audit was to confirm the accuracy and completeness of City payroll transactions. We sought to determine whether payroll transactions were properly authorized, supported by required documentation, correctly calculated, and paid. We wanted to determine whether employee authorizations of payroll deductions were documented, and that vacation sellback transactions complied with applicable employee bargaining unit Memorandums of Understanding (MOUs). In addition, we sought to confirm that payroll taxes were transmitted to tax authorities within the required timeframe.

SCOPE/METHODOLOGY:

We were aware of the March 1999 report issued by the Payroll Users Group, which made a number of recommendations for creating uniform Citywide payroll processes. Recognizing that the recommendations of the Payroll Users Group have not yet been fully implemented, we did not include a review of payroll processes performed by the individual departments.

Our review was limited to the documentation maintained by the City's Administrative Services Department - Payroll Section and Personnel Services Department. We gained an understanding of the system through interviews with City employees, observations, and prior audit work. We reviewed documents and online H.T.E. computer payroll module information related to transactions selected. Our testing of payroll transactions focused on the period from July 1999 through October 2000.

The methodology for this audit did not include all of the steps used in a full scope audit. A limited scope audit generally deals with only a portion of a given system or function. Though not as comprehensive as a standard audit, limited scope audits are intended to provide some insight into the internal controls of the larger system.

AUDIT RESULTS:

Based on the transactions tested, we conclude the following:

1. Payroll transactions were properly authorized, calculated, and paid.

2. Employee authorizations of payroll deductions were adequately documented.

3. Payroll tax payments were transmitted within the required timeframe.

4. In general, vacation sellback transactions were in compliance with the requirements stated in the employee's MOU or compensation plan. In a sample of 25 transactions, we noted one instance where we questioned whether the employee sold 80 hours more accrued annual leave than allowed by the applicable MOU. There was confusion over whether to use a calendar or fiscal year measurement when determining if the employee had exceeded the sellback maximum.

During our review of MOUs, which provide guidance for vacation sellback transactions, we noted a number of variations in criteria and in the terminology used. This lack of consistency and clarity makes compliance with vacation sellback requirements unnecessarily confusing for those charged with processing them.

We recommend that the Personnel Services Department clarify the guidelines related to the processing of vacation sellback, and communicate the results to the responsible City employees. As the opportunities arise, an attempt should be made to revise bargaining unit agreements for uniformity. In addition, we recommend that MOUs be available on the document management system to ensure that all City employees have access to the most current agreements in place.

5. Guidance provided by the applicable Administrative Directives did not reflect current processing:

• FIN-004 - Payroll Time Sheets (March 1979), describes a payroll process that is no longer used by the City.

We recommend that the Administrative Services Department review and update the Administrative Directive to reflect current processes.

• PER-003 - Personnel Transaction Forms CS-3 and CS-23 (August 1998), describes software applications and document management processes that are no longer used by the City.

We recommend that the Personnel Services Department review and update the Administrative Directives to reflect current processes.

OTHER COMMENTS:

The March 1999 report of the Payroll Users Group identified the need for the City to protect confidential employee information appearing on payroll checks and vouchers. Payroll checks/vouchers disclose an employee's Social Security number, wage garnishments, and other payroll deductions, which are confidential. Currently, stacks of pay checks/vouchers are picked up at the Payroll Section office by representatives of each department, who may or may not be confidential employees. Once delivered to the department representatives, how securely the documents are handled could vary from department to department. We concur with the recommendation of the Payroll Users Group that the City has a duty to take reasonable steps to protect confidential information during the distribution of paychecks and vouchers.

We would like to express our appreciation to the staff of the Administrative Services Department - Payroll Section and Personnel Services Department for their assistance during this audit.

ORIGINAL SIGNED BY: