Auditing Payroll – An Overview
To assist you in understanding how to audit payroll, let me provide you with an overview of a typical payroll process.
- First, understand that entities have payroll cycles. Then, payments are made at the end of this period Also, understand that most organizations have salaried and hourly employees. Salaried personnel are paid a standard amount each payroll, and hourly employees earn their wages based on time.
- Second, an authorized person (e.g., department head) hires a new employee at a specified rate (e.g., $80,000 per year).
- Third, human resources assists the new-hire with the completion of payroll forms, including tax forms and elections to purchase additional benefits such as life insurance.
- Fourth, a payroll department employee enters the approved wage in the Payroll system. The employee’s bank account number is entered into the system.
- Fifth, employees clock in and out so that time can be recorded.
- Sixth, once the payroll period is complete, a person (e.g., department supervisor) reviews and approves the recorded time.
- Seventh, a second person (e.g., payroll manager) approves the overall payroll.
- Eighth, the payroll department processes payments. (and everyone is happy).
Audits can sound scary, and sometimes they are when a government official shows up at your door to do one. But, most payroll audits are internal checks on the accuracy of the data.
A payroll audit helps you ensure that everyone’s pay is correct and that all deductions and reporting are accurate.
What are the main payroll audit objectives?
Everyone wants accurate pay. Everyone wants taxes withheld properly, health insurance calculated correctly, and all deductions legal and accurate.
Here are your main objectives in conducting a payroll audit.
- Have accurate tax reporting and deposits in place.
- Ensure compliance with employment laws and other regulations.?
- Providing accurate data to Employees.
- Uncovering potential errors and inaccuracies
How to conduct an effective payroll audit
Here is the payroll audit checklist:
- Determine the timeframe for your payroll audit. This can be a single pay period or the whole year–especially if you’re doing year-end tax forms for your personnel.?
- Review employee data. This step of the payroll audit process requires communication between HR and payroll, as you want to ensure that the data payroll matches the information the employee received. Make sure everyone being paid is an active employee. Ensure people who are on leaves of absence receive the proper pay as well. This can vary from their regular paycheck.
- Review hours worked and paid. Verify hours worked against time cards, ensure that employee hours worked are in line with amounts paid. This is especially important for hourly employees.
- Check variable payment and different types of compensation. Overtime hours pay, bonuses, commissions, and piece-rate information needs to be checked.
- Examine and document atypical payroll transactions. This is also an area that has a high potential for fraud. Think signing bonuses, relocation pay, back pay, and previous corrections. If you process reimbursements with payroll, double-check that this is accurate as well.
- Check tax withholdings and deposits. Are you withholding the correct amount for your employees? Are you paying the right amount of income taxes? These numbers can change, especially if people move or the laws change.
- Payroll reconciliation. Review bank activity. Do bank statements match your payroll records? Do you have proper documentation for all direct deposit change requests?
- Consider payroll rules.?If you get audited by the government, this will be a critical piece. These vary by state, so make sure you’re compliant with regulations where you operate.
- Report the findings. Create a payroll audit report and share it with those who need to see it.
- Identify improvement opportunities. Automation is becoming more and more popular in payroll management, helping to remove inaccuracies and reduce errors.
