TSR & Associates, Chartered Accountants, are the statutory auditors of Gama Manufacturing Limited, a company engaged in manufacturing industrial…

Audit procedures generally required to be undertaken while auditing employee benefits expenses: Obtain an understanding of entity's process of capturing employee attendance. There is always a risk that an entity could record expense for fictitious employees. To address this risk, the auditor may choose to meet the employees in person, on a sample basis. Further, the auditor may choose to select a sample of employees and ask the payroll department to share their bank details/ identity proofs of the employees.Obtain a list of employees as at the period- end along with a monthly movement split between new hires, leavers and continuing employees.For a sample (selected randomly) of new hires, obtain the appointment letter and verify whether the salary for first month and subsequent months was processed as per the agreed terms.For a sample (selected randomly) of resigned employees, obtain their full and final computation and verify whether all their dues including post-retirement benefits like gratuity, leave encashment have been paid and whether the respective employee's acknowledgement on final computation has been obtained.Obtain the monthly salary registers for all 12 months. Compile a monthly payroll reasonability by calculating the average salary per employee per month and compare with the previous year and preceding month and analyse the reasons for variance which could be attributable to annual increments, an employee at senior level joining/ leaving the entity, bonus pay-out etc.Verify if accrual/ provision has been made for all employee benefits and obligations like bonus, gratuity, leave encashment, etc.In case provident fund (PF), employee state insurance (ESI) are applicable to the entity, compile a reasonability by applying the rate to the basic wages and comparing to the amount recorded in books and analyse reasons for variance, if any. Also, obtain monthly deposit challans to verify if the month on month liability was subsequently deposited with the authorities and within the defined timelines.Perform analytical procedures to obtain audit evidence as to overall reasonableness of employee benefit expenses which may include production per employee analysis. Auditor should analyse units produced per employee and compare the same with previous years and present industry trends and ask for the reasons from the management, if any significant variations are found.Where employee benefit expenses have increased significantly as compared to the previous year, perform a detailed variance analysis by obtaining a break-up of the increase into components such as increase due to headcount, annual increments, bonus payouts, change in salary structure, actuarial remeasurement losses, or change in statutory contribution rates. Correlate the increase with supporting documentation such as board approvals for increments, bonus declarations, revised employment contracts, actuarial valuation reports, etc., and obtain management explanations for any abnormal or unexplained variances. Thus, in the given case of Gama Manufacturing Limited, considering the significant increase in employee benefit expenses, the auditor should perform the above procedures including detailed variance analysis to ensure the increase is justified and properly supported. If sufficient appropriate audit evidence is obtained and the increase is adequately explained and supported, the auditor may conclude that employee benefit expenses are fairly stated. Otherwise, the auditor shall consider the implications for reporting in accordance with the applicable Standards on Auditing.