Payroll Audit Checklist

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Different people should prepare, process and distribute pay to deter fraud.
Different people should prepare, process and distribute pay to deter fraud. (Image: LDProd/iStock/Getty Images)

Organizations have incentives to monitor their payroll operations. In addition to fraud that drains resources, there are regulations governing taxes, employment, and data privacy that carry legal and financial consequences for noncompliance. Payroll audits confirm payroll accuracy, identify weak links in payroll processing, and ensure that compensation procedures and policies minimize risk. They also serve as a cross-check that previous audit findings were addressed. Whether conducted by an internal team or an outside auditing firm, payroll audit checklists cover key categories.

Verify Employment Records

Payroll centers around each employee's master file and the organization's record of a worker's assigned pay rate. Factors that are taken into account include employee number, benefit eligibility, employment status, and year-to-date earnings. Payroll audits compare file contents against issued pay, track changes and change authorizations, and review security measures such as access. A master file audit also confirms that only active, eligible employees are being paid, and reviews the timeliness of employee separation transactions.

Examine Payroll Liabilities

A payroll auditor wants to ensure that gross pay and any paycheck deductions have been correctly calculated. Tax withholding, retirement contributions, benefit premiums, and garnishments must be verified. Auditors review salary advances and loans to employees, noting the existence of written policy, adequate documentation, and administrative checks and balances. Bonuses and commissions get cross-checked against sales and incentive programs and applicable policies and procedures. Deferred compensation, such as paid holidays taken in a different pay period, also merit an auditor's attention.

Monitor Timekeeping Transactions

Hours worked must be documented, either on paper or electronically, in order for employees to be paid properly. Paid time off may be linked to hours on the job, requiring an audit of sick pay, personal leave, paid military leave, and vacation days. The timekeeping aspect of a payroll audit will reveal overpayments, underpayments, and discrepancies in sign-off procedures that have been put in place to reduce dishonest time reporting.

Verify Employment Expenses

Padded expense reports that inflate payroll cost and possibly violate Internal Revenue Service regulations can be uncovered in a payroll audit. In addition to ensuring that reimbursement requests adhere to company policy and approval procedure, payroll auditors verify receipts and calculate the expense totals for accuracy. Reviewing the accounts or cost centers that correspond to payments for travel and other employment expenses ensures that financial statements present accurate values for cost of goods sold, labor and inventory.

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