1. Audit of Payroll Administration 0"
CIT Office of the City Auditor
OF
DENTON Accountability • Transparency • Integrity • Quality
The City of Denton has established
generally effective processes to
ensure employees' payroll payments
are accurately made. Additional
review of adjustments to employees'
timecards and Payroll staff activities
could further mitigate risk.
Audit of Payroll
Administration
Audit Team
City Auditor
Madison Rorschach, CIA, CGAP
Audit Staff
Neeraj Sama, MBA, MS
215 E. McKinney St., Denton, TX 76201 • (940) 349-7228
Audit of Payroll Administration September 2021
Table of Contents
Auditat a Glance .........................................................................................................3
Introduction ...................................................................................................................4
Management Responsibility .......................................................................................4
Audit Objectives, Scope, and Methodology ...........................................................4
Findings & Analysis........................................................................................................6
Payroll Updates Appropriately Processed ................................................................7
Employee Time Adequately Approved; Adjustments Not Always Supported.....8
Payroll Processes Generally Effective; Calculations Accurate ............................ 10
Payroll Payments Generally Authorized Appropriately......................................... 12
Review of Payroll Staff Activities in Timekeeping System Could Further Mitigate
Risks .............................................................................................................................. 14
Appendix A: Management Response Summary..................................................... 16
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Audit of Payroll Administration September 2021
Audit at a Glance
Why we did this Audit: What we Found:
Annually, the City spends about This audit generally evaluated the City's payroll
$129 million on payroll costs for its administration processes including payroll updates,
almost 1,800 employees. As one of payroll calculations, and payroll payments. Findings
the City's most significant single about each of these areas are summarized below:
expenses, it is critical that the Payroll Updates. In general, the City has established
payroll administration process is an effective process to update the payroll with
effective to ensure these payments employee changes such as new hires, terminations,
are accurate. This audit project was and pay rate changes. That being said, these
included on the City's fiscal year changes are entered into the financial system by one
2020-21 Audit Plan as approved by person without review for accuracy; increasing the
the City Council. risk of error and fraud.
What we Recommend: Payroll Calculations. The City has established a
payroll process that generally ensure employees'
Recommendation 1 paychecks are accurately calculated based on their
Consider developing a process to work and leave hours. Under this process employees
periodically verify that employee time is generally approved by their supervisor or
changes entered into the financial timekeeper, who can adjust their employees' hours
system by Human Resources are under certain circumstances. Still, supervisors and
accurate based on information timekeepers should be required to provide comments
received from departments. on these adjustments to ensure they are complying
Recommendation 2 with City policy.
Require supervisors to comment on Payroll Payment. Final payroll payments are generally
all timecard adjustments. authorized appropriately by Finance Department
Recommendation 3 management; however, only one employee is
Consider rounding employees' pay involved in uploading the payroll to the bank,
rates to two decimal places. increasing the risk of fraud.
Recommendation 4 Finally, Payroll staff generally have appropriate
Consider establishing a process for access to the City's financial and timekeeping
processing payroll payments with systems; however, regular review of Payroll staff
the bank involving two employees. activities in the timekeeping system would further
Recommendation 5 mitigate the risk of fraud.
Develop a process to regularly
review timekeeping system audit
trails.
Audit report translations may be requested by emailing InternalAudit@CityofDenton.com.
Audit of Payroll Administration September 2021
Introduction
The Internal Audit Department is responsible for providing: (a) an independent
appraisal' of City operations to ensure policies and procedures are in place and
complied with, inclusive of purchasing and contracting; (b) information that is
accurate and reliable; (c) assurance that assets are properly recorded and
safeguarded; (d) assurance that risks are identified and minimized; and (e)
assurance that resources are used economically and efficiently and that the
City's objectives are being achieved.
The Internal Audit Department has completed a performance audit of the City's
payroll administration processes. We conducted this performance audit in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.
Management Responsibility
City management is responsible for ensuring that resources are managed
properly and used in compliance with laws and regulations; programs are
achieving their objectives; and services are being provided efficiently,
effectively, and economically.
Audit Objectives, Scope, and Methodology
The Internal Audit Department has completed an audit of the City's payroll
administration processes. This report is intended to provide assurance that
payroll changes are being recorded properly and employees are being
accurately paid in accordance with their terms of employment and applicable
regulations and City's policies.
Audit fieldwork was conducted during July and August 2021 . The scope of
review varied depending on the procedure being performed. The following list
summarizes major procedures performed during this time:
➢ Reviewed documentation to develop criteria including industry standards,
best practices, policies, and procedures;
➢ Developed process narratives to identify current control activities in
payroll administration, including processing and verification of payroll
The City of Denton's Internal Audit Department is considered structurally independent as
defined by generally accepted government auditing standard 3.56.
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Audit of Payroll Administration September 2021
updates, payroll review, approval, and calculation, and payroll payment
processes that was certified by the Payroll Supervisor, Assistant Director of
Finance, and Benefits and Human Resources Information System - or HRIS
-Specialist;
➢ Interviewed Payroll Supervisor, Benefits and HRIS Specialist, and Finance
Department staff and reviewed policies and procedures pertaining to
payroll administration;
➢ Reviewed a statistical sample2 of 383 paychecks issued between July 17,
2020, to July 16, 2021 , to verify the effectiveness of payroll processes and
ensure employees are accurately paid for their time worked;
➢ Reviewed a judgment sample of 60 payroll changes including new hires,
terminations, and pay rate changes to verify that they were appropriately
recorded and processed as part of payroll administration;
➢ Reviewed supervisor approval reports for a judgmental sample of three
pay periods to verify that employee timecards are regularly approved by
a supervisor or timekeeper;
➢ Recalculated overtime payments for a judgement sample of 30
paychecks to verify the accuracy of overtime time payments and
compliance with City policies;
➢ Reviewed the payroll documentation and records to evaluate the
appropriateness of record keeping; and
➢ Reviewed user access to the City's financial and timekeeping systems to
verify that access to these systems is appropriately granted to administer
payroll activities.
2 This sample size provides with 95 percent confidence that the true population mean is within ±5
percent of the sample estimate.
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Audit of Payroll Administration September 2021
Findings & Analysis
The City of Denton's annual payroll cost amounts to about $129 million. The
Payroll Division of the Finance Department is primarily responsible for
administering and processing the City's bi-weekly payroll. In general, payroll
administration includes updating the payroll's employee records, verifying and
calculating paycheck amounts, and making the payroll payment as illustrated
in Figure 1 below:
Figure 1: Bi-Weekly Payroll Administration Process
hd •Employees submit changes to the Human Resources including hires,
terminations, & pay rate changes
-Human Resources updates financial system to reflect changes
•Payroll verifies changes in financial system & updates the timekeeping system
'qrA •Payroll reviews employees' timecards for discrepancies & approves
• . •Paychecks are calculated in the financial system
-Finance Department management reviews & approves payroll documents
•Payroll processes payment with the Bank
This audit generally evaluated the City's payroll administration processes,
including processing payroll updates, employees' timecard adjustments and
approvals, overtime payments, tax payments, payroll review and approval
procedures, record-keeping, and payments processing.
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Audit of Payroll Administration September 2021
Payroll Updates Appropriately Processed
Recording and processing payroll updates is critical to ensuring the City is
paying its employees accurately. Specifically, a process should be established
to ensure that new employees are correctly paid for their time worked,
terminated employees are not paid after their termination, and existing
employees' pay rate changes are applied accurately.
What We Found
• The payroll update process allows for appropriate separation of duties.
o Payroll updates are initiated by the City's supervisors and managers
based on submitted Employee Status Sheets or through the new hire
process.
o These updates are entered into the City's financial system by the
Human Resources Department and are forwarded to the Payroll
Division for verification as part of the Pay Period End Report.
o Based on the Pay Period End Report, the Payroll Division creates profiles
in the City's timekeeping system for any new hires. The Payroll Division is
not able to change employee pay rate information.
• Based on review of a judgement sample of 60 payroll changes, the payroll
update process appears to be effective. Specifically:
o All new hires were correctly paid per the terms of employment listed in
their offer letter and Employee Status Sheet.
o All pay rate changes were correctly processed, and employees were
appropriately paid according to their new pay rate; and
o No payments were made to terminated employees after their final
payment was issued.
• That being said, payroll updates were only entered into the City's financial
system by one Human Resources staff member without job rotation which
increases the risk of error and fraud.
• In addition, based on discussion with Payroll staff, supervisors seem
occasionally allow new employees to begin work before providing the
necessary documentation to Human Resources.
o Based on review of two instances of this, these new employees were
paid in the next pay period based on their supervisors account of their
time worked. This increases the risk that employees receive pay for
work not performed as they are unable to use the timekeeping system
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Audit of Payroll Administration September 2021
to track their time; however, the Fair Labor Standards Act requires the
City to pay employees for their hours worked.
o Payroll should ensure that if this occurs in the future, the Human
Resources Department is notified to ensure that these new employees
are appropriately set up in the financial system for the next pay period
and any involved supervisors are appropriately informed of the City's
onboarding procedures.
Why It Matters
An effective process has been developed for updating the payroll with
employee changes. That being said, a single employee records these changes
in the financial system, increasing the risk of error and fraud. Developing a
process to periodically verify that these updates were appropriately authorized
would help to mitigate this risk.
Recommendations:
1. Consider developing a process to periodically verify that employee changes
entered into the financial system by Human Resources are accurate based
on information received from departments.
Human Resources Department Comments: Since May 2021 , the HRIS &
Benefits Specialist has been cross training the Talent Acquisition Coordinator
to assist with and act as the back-up for the HRIS & Benefits Specialist. This
ensure the rotation of tasks between two employees.
Action: To augment the authorization/verification process in place and to
decrease the risk of error and fraud, on a quarterly basis, a sample of 10
status sheets from throughout the quarter will be pulled and audited to
ensure the proper verifications were conducted at the HR level and the
changes were entered accurately in JDE.
Employee Time Adequately Approved; Adjustments Not Always
Supported
The Fair Labor Standards Act requires employers to keep accurate records on
wages and hours worked. In general, City policy requires employees to keep
track of their work hours; however, supervisors or timekeepers can enter or adjust
non-exempt employees' timecards under the following circumstances:
y An employee forgets to clock in or clock out in the automated time
system;
An employee is sick; or
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Audit of Payroll Administration September 2021
➢ A timeclock malfunctions.
In addition, best practices suggest that supervisors should review and approve
their employees' timecards to ensure they are accurate.
What We Found
• As part of the established payroll process, supervisors or timekeepers must
review and approve their respective employees' work hours in the City's
timekeeping system for each pay period.3
o Based on review of the Timecard Sign-off Request and Approval
Report for three pay periods, supervisors and timekeepers generally
approve employees' time records as required.
• City policy does not require supervisors and timekeepers to add comments
when adjusting employees' timecards.
o Based on review of about 400 timecard adjustments made by
supervisors and timekeepers during the last three pay periods,4 about
71 percent were not supported with comments clarifying the reason for
the adjustments.
o Using the City's current timekeeping system, it is difficult to verify
whether timecard adjustments made by supervisors and timekeepers
are allowed under the policy without a detailed review. In addition, it is
generally not feasible to require Payroll staff to perform a detailed
review of these adjustments given the payroll administration processes
time constraints.
o The Payroll Division does provide quarterly training for supervisors and
timekeepers. According to this training, comments should be added to
clarify any corrections to an employee's timecard.
Why It Matters
An effective process is in place for approval of City employees' timecards by
supervisors which provides assurance that employees are only paid for actual
hours worked.
Separately, City policy allows supervisors or timekeepers to enter or adjust their
respective employees' time for certain purposes; however, they are not required
3 Larger Departments generally have a timekeeper who is authorized to review and approve
employee timecards.
4 The pay periods reviewed ended on July 23, August 6, and August 20, 2021.
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to add comments clarifying why the adjustment was made. Without these
comments it is not clear why an adjustment was made without performing a
detailed review. Requiring supervisors or timekeepers to clarify the reason for an
adjustment could improve their awareness of the City's policy and help the
Payroll Division ensure time adjustments are made appropriately.
Recommendation:
2. Formally require supervisors and timekeepers to comment on any corrections
made to employees' timecards in the City's timekeeping system.
Finance Department Comments: The Finance Department concurs with this
recommendation. Each year, the Payroll Team hosts quarterly payroll
trainings that include instructions and requirements for adding comments to
employee's timecards. In response to this recommendation, the Finance
Department plans to continue the city-wide trainings and develop a
standard operating procedure (SOP) outlining the requirement to add
comments when making changes to timecards. It is important to note that
department supervisors and managers play an important role in ensuring
compliance with this recommendation.
Payroll Processes Generally Effective; Calculations Accurate
Effective payroll processes ensure that employees are accurately paid for the
time worked including any authorized overtime or leave. In order to ensure that
the payroll is accurately processed, adequate verification and approval
procedures should be in place for payroll payments, and payroll documentation
should be recorded and stored appropriately. The City's payroll review and
payment process is illustrated Figure 2:
Figure 2: Simplified Payroll Process
Finance
•Approve • • •Verify&Approve •Process Payroll
Timecard •Review& Timecards -Re I view& Payments
Approve •Calculate Authorize Payroll
Timecard Paychecks Payments
. --
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In addition, the Fair Labor Standards Act requires employers to pay non-exempt
employees one and a half times their regular pay rate for each hour worked
over 40 during a work week.5
What We Found
• Based on the review of a statistical sample of 3836 employee paychecks
issued during the last 12 months, the established payroll process appears
effective. All reviewed employees were appropriately paid based on their
recorded work hours and leave.
o Effective verification and approval procedures are in place to ensure
each payroll is appropriately processed and the employees are
accurately paid.
o Payroll-related records and documentation, including approvals,
reports, and registers created during each biweekly payroll process,
are appropriately stored in a central, electronic repository on the City's
shared network.
o The City's timekeeping system effectively interfaces with the financial
system to accurately import employees' work and leave hours into the
financial system for payroll processing.
o Payroll staff members appear to be appropriately instructed and
provided with knowledge and guidance to follow the established
payroll process effectively.
• Based on review of 30 judgmentally selected paychecks, overtime hours are
correctly recorded, and overtime pay is appropriately calculated.
o For five of the paychecks reviewed, there was a difference of about
one cent between the overtime amount actually paid to the
employee and the overtime amount recalculated as part of the audit.
This issue appears to be due to rounding errors as the City's pay rates
are rounded to three decimal places.
o According to the Payroll Supervisor, this pay rate rounding practice
occasionally hinders staff when trying to verify employee retirement
and tax payments.
5 Exempt employees are not eligible for overtime pay except in emergency cases with the
written approval of their supervisors. In addition, civil service employees are eligible for overtime
under different circumstances.
6 Records for 30 pay stubs could not be verified in the timekeeping system because of
employees' separation from the City.
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• Required taxes, including federal, FICA, and MCR taxes calculated during
the payroll process, appear to be appropriately paid to the U. S. Department
of Treasury by the City.
Why It Matters
The City appears to have implemented effective processes and information
systems for recording, verifying, and approving employees' hours and
calculating the various payroll payment and contribution amounts. Rounding
employees pay rates to two decimal places could further facilitate this process
by minimizing rounding discrepancies.
Recommendation:
3. Consider rounding employees' pay rates to two decimals places instead of
three decimal places to facilitate calculating deductions, contributions, and
taxes.
Finance Department Comments: The Finance Department partially concurs
with this recommendation. This recommendation will require additional
research to ensure employees' salaries are not negatively impacted before
implementing. If pay rates are rounded to two decimal points, Finance
recommends implementing this change in conjunction with annual pay
increases (i.e. cost of living adjustment). Since the cost of living adjustment is
already in process for FY 2021-22, Finance and Human Resources
Department staff will work together to implement this recommendation in FY
2022-23.
Payroll Payments Generally Authorized Appropriately
Generally, payroll payments constitute a significant portion of the City's annual
budget. In order to ensure that the City's funds are appropriately used, payroll
payments should be properly reviewed and authorized. Best practices suggest
that the duties of processing the payroll should be appropriately segregated to
ensure that no individual has more than one of the following duties:
Prepare the payroll;
Authorize the payroll; and
Create payroll payments.
What We Found
• As part of the payroll administration process presented in Figure 2 (page 10),
the Payroll Division sends the payroll documents, including pay registers and
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Audit of Payroll Administration September 2021
other verification reports to Finance Department management, for review to
authorize the payment.
o Based on the review of six pay periods' payroll documentation,
Finance management authorized all of the final payroll payments.
o Additionally, all payroll payments were accurately processed based
on the payroll documents authorized by Finance Department
management.
• Once authorized, the Payroll Supervisor processes the payroll payment with
the bank by uploading a separate, text file generated by the financial
system to the bank's website. Allowing one individual to upload the payroll
payment without approval increases the chance for fraud as the text file can
be easily manipulated.
• The bank acknowledges the payroll payment amount to be credited via an
email to Payroll staff and Finance Department management. Once
received, the Payroll Supervisor verifies the total amount acknowledged by
the bank with the total amount indicated in the pay registers.
o Based on a comparison of acknowledgements received from the bank
to the authorized pay register, no discrepancies were observed for the
six reviewed pay periods.
o In addition, Accounting staff perform a monthly bank reconciliation to
verify that paycheck direct deposits are appropriately debited in the
City's bank account.
Why It Matters
Review and approval of payroll payments by Finance Department provides
assurance that the City employees' payroll payments are processed accurately.
That being said, allowing a single employee to generate and upload the payroll
payment to the bank increases the risk that the payroll is manipulated. While
verifying bank acknowledgements and performing monthly bank reconciliations
provides some assurance that payroll bank transactions are appropriately
executed, there is still risk that the payroll could be manipulated.
Recommendation:
4. Consider establishing a process for processing payroll payments with the
bank involving two employees.
Finance Department Comments: The Finance Department concurs with this
recommendation. The Payroll Team currently has two employees verifying
the bank file prior to it being uploaded to the bank. However, only one
person is allowed to upload the file to the bank. The Finance Department
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Audit of Payroll Administration September 2021
plans to rotate this responsibility moving forward to ensure accuracy. The
new process will be outlined in a new standard operating procedure (SOP).
Review of Payroll Staff Activities in Timekeeping System Could Further
Mitigate Risks
Access to the City's timekeeping and financial systems for processing payroll
should be properly controlled to ensure that access is granted to only the staff
who need the access to perform payroll administration duties.
Additionally, Government Accountability Office's Federal Information System
Controls Audit Manual's best practices for government entities suggest that:
➢ Information systems access should be limited to users with a valid business
purpose and should be related to the users' duties and responsibilities; and
Transactions executed by employees in an information system should be
controlled through formal and active supervision.
What We Found
• The Payroll Division uses the payroll module of the City's financial system to
process the City's biweekly payroll.
o Based on review of the user list, access to the financial system's payroll
module has been appropriately granted to Payroll staff members to
perform payroll-related activities. Payroll staff do not have the ability to
grant or remove user access to the payroll module.
o One staff member from Finance Department management
inappropriately had access to the payroll module; this access was
terminated during the audit. Based on this employee's current
responsibilities this inappropriate access did not pose a significant risk
to the City.
• Access to the City's timekeeping system generally appears to be
appropriate.
o Each employee has access to their profiles in the timekeeping system
to record their work and leave hours.
o Supervisors and timekeepers are granted access to review and
approve their relevant employees' timecards.
o The Payroll staff have superuser access rights in the timekeeping system
to perform their functions, including managing pay codes, employees'
profiles, and timekeepers' access.
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Audit of Payroll Administration September 2021
o No formal process is in place to regularly review and monitor the hours'
adjustments or other activities performed by the Payroll staff members
in the timekeeping system.
• The Payroll Division does not have a procedure for adding or deleting access
rights for superusers or timekeepers. As informed by the Payroll Supervisor,
timekeeping system access rights are granted to timekeepers based on
submitted financial system access requests.
Why It Matters
Role-based access rights granted in the financial system's payroll module and
timekeeping system ensure City staff can perform their assigned functions
effectively. Still, superuser access rights granted to Payroll in the timekeeping
system staff allow them to modify employees' hours worked. Without regular
review of Payroll's activities in the timekeeping system, there is an increased risk
of error or fraud as the system stores sensitive data and is the basis for payroll
payments.
Recommendation:
5. Develop a process for regular review of audit trails of activities performed by
the Payroll Specialist in the timekeeping system to ensure the accuracy and
appropriateness of entries and adjustments made.
Finance Department Comments: The Finance Department concurs with this
recommendation. Currently Payroll Specialists process payroll for specific
departments. This process works well, however, staff plans to implement a
process to cross-check work and ensure accuracy. The Finance Department
plans to develop a standard operating procedure (SOP) outlining this new
procedure. The SOP will be complete during the first quarter of FY 2021-22.
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Audit of Payroll Administration September 2021
Appendix A: Management Response Summary
The following summarizes the recommendations issued throughout this report. The
auditors found that staff and the Department were receptive and willing to make
improvements where needed. Management has provided their response to each
recommendation.
Consider developing a process to Expected
periodically verify that employee changes Completion:
1 entered into the financial system by Human Concur 12/31/2021
Resources are accurate based on
information received from departments.
Human Resources Department Comments: To augment the Responsibility:
authorization/verification process in place and to decrease the Human
risk of error and fraud, on a quarterly basis, a sample of 10 status Resources
sheets from throughout the quarter will be pulled and audited to Department
ensure the proper verifications were conducted at the HR level
and the changes were entered accurately in JDE.
Formally require supervisors and timekeepers Expected
2
to comment on any corrections made to Completion:
employees' timecards in the City's Concur Sep. 2022
timekeeping system
Finance Department Comments: The Finance Department Responsibility:
concurs with this recommendation. Each year, the Payroll Team Payroll
hosts quarterly payroll trainings that include instructions and Division
requirements for adding comments to employee's timecards. In
response to this recommendation, the Finance Department
plans to continue the city-wide trainings and develop a standard
operating procedure (SOP) outlining the requirement to add
comments when making changes to timecards. It is important to
note that department supervisors and managers play an
important role in ensuring compliance with this
recommendation.
Consider rounding employees' pay rates to Expected
3 two decimal places instead of three decimal Partially Completion:
places to facilitate calculating deductions, Concur FY 2022-23
contributions, and taxes.
Finance Department Comments: The Finance Department Responsibility:
partially concurs with this recommendation. This Finance and
recommendation will require additional research to ensure Human
employees' salaries are not negatively impacted before Resources
implementing. If pay rates are rounded to two decimal points, Departments
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Audit of Payroll Administration September 2021
Finance recommends implementing this change in conjunction
with annual pay increases (i.e. cost of living adjustment). Since
the cost of living adjustment is already in process for FY 2021-22,
Finance and Human Resources Department staff will work
together to implement this recommendation in FY 2022-23.
Consider establishing a process for Expected
4 processing payroll payments with the bank Concur Completion:
involving two employees. March 2022
Finance Department Comments: The Finance Department Responsibility:
concurs with this recommendation. The Payroll Team currently Payroll
has two employees verifying the bank file prior to it being Division
uploaded to the bank. However, only one person is allowed to
upload the file to the bank. The Finance Department plans to
rotate this responsibility moving forward to ensure accuracy. The
new process will be outlined in a new standard operating
procedure (SOP).
Develop a process for regular review of audit Expected
trails of activities performed by the Payroll Completion:
5 Specialist in the timekeeping system to ensure Concur March 2022
the accuracy and appropriateness of entries
and adjustments made.
Finance Department Comments: The Finance Department Responsibility:
concurs with this recommendation. Currently Payroll Specialists Payroll
process payroll for specific departments. This process works well, Division
however, staff plans to implement a process to cross-check work
and ensure accuracy. The Finance Department plans to develop
a standard operating procedure (SOP) outlining this new
procedure. The SOP will be complete during the first quarter of FY
2021-22.
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