Conducting a Payroll Audit

Following payroll best practices requires you to have a payroll process as well as an occasional payroll audit to ensure that your processes are performing as they should. You need to check that your t’s are crossed and your i’s are dotted. Below are some tips on how to conduct a payroll audit as well as why you need to do one in the first place.

Payroll managers need to keep track of numbers within an organization. Once a quarter, they should check to ensure everything adds up as it should. Payroll audits should help to maintain accuracy and compliance as well as strengthen financial controls within an organization. Additionally, payroll audits can help to identify potential problems.

Steps to Conduct a Payroll Audit

Below are some steps to help you get started with running regular payroll audits. Not all audits will look the same within each organization.

1. Verify pay rates. Ensure that the pay rate in the payroll system is correct for each employee. Sometimes typos happen so it is important to double check. Be sure any promotions, bonuses and raises are also accurate.
2. Verify time and attendance records. Ensure that overtime hours, vacation time and sick days are all calculated correctly. Also ensure that employees are correctly classified for overtime pay eligibility.
3. Confirm pay for all active employees. Ensure that each employee who received a paycheck for previous pay periods did in fact work those pay periods. It can happen for former employees to hang out on the payroll due to an oversight even after they have stopped working.
4. Double check independent contractor and vendor status. Be sure that the status of all contracts for the certain pay period is up to date. Make sure that you are not paying for services you are not using.
5. Compare payroll reports to the general ledger. Ensure that totals from gross payroll expenses as well as withheld taxes and net check match up with records in the general ledger.
6. Review tax submissions for payroll tax.  Make sure you are submitting the correct amount for business taxes, including federal, state and social security taxes as well as unemployment taxes and Medicare/Medicaid taxes.