Published 2022-04-01 15:40:09

How to conduct an effective payroll audit?
How to conduct an effective payroll audit?

The key objective of auditing the payroll is to ascertain the existence of the actual payments and whether they were made to genuine employees of the company, which is achieved by determining there are proper controls over the payroll function. Payroll auditing identifies compliance problems concerning employment laws, verifies tax withholdings, spots human errors, and prevents payroll fraud. Thus, it is very vital to frequently do a payroll audit. 

Conducting an audit can be time consuming, but you should do so at least annually to uncover errors and reduce business risks. Let’s learn more about an effective payroll audit and its benefits in this blog. 

Table of contents: 

  • What is a payroll audit?
  • How to conduct an effective payroll audit?
  • Benefits of a payroll audit.

What is a payroll audit?

A payroll audit analyzes a company’s payroll process to verify its relevance and ensure accuracy and compliance. The process involves looking into specific aspects like a business’s active employees, wages, pay rates, and tax withholdings. It reviews your company’s payroll software and processes to ensure they are correct. 

How to conduct an effective payroll audit?

Payroll audits often seem overwhelming, but once you start executing them, you’ll likely see that they are straightforward.

  1. Review all your employees on your payroll: Examine the payment history for any employees currently on your payroll who shouldn’t be there. If you see payments after their final date, you may need to address the issue with the former employee by taking measures to retrieve the money. 

  1. Check all your numbers: Check every employee's pay rate to verify that you’ve recorded the correct wages. Update the information on your software if you’ve recently given a staff member a raise, or moved them from an hourly employee to salary. An employee's total pay should equal the product of their wages and entire hours. Their complete hours should also be the sum of all hours worked per paycheck. If both these conditions are met, chances are your numbers are correct.

  1. Account for vacation time: Review your Paid Time Off (PTO) on your software and look at all your employees' days off, to ensure they’re labeled properly. They should be separated for paid vacation, unpaid vacation, personal days, sick leave, parental leave, or bereavement leave. This way your payroll software knows to deduct these vacation days from the employees’ total available hours. 

  1. Examine other payment records: The numbers in your payroll records, ledger, and bank statements should match. If you find discrepancies, you’ll need to look deeper into your records. Once you identify it, only then can you rectify the error. 

  1. Identify your tax reports: When you pay employees, you must withhold income, Medicare and Social Security taxes. Your payroll software should handle this task and have timestamped records of these withholdings. After collecting taxes from your employees, ensure you’ve remitted them appropriately. 

Benefits of a payroll audit:

Regular payroll audits provide a wealth of benefits for your small business. There are fewer compliance errors, your employees are happier and satisfied, fraud identification is much easier too. There are benefits to auditing your payroll more frequently. The sooner you catch errors, the less time and money you’ll spend correcting them. 

Visit and dive deeper into payroll auditing and its importance.


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