Payroll Audit: Meaning, Benefits, and Process to perform Internal Payroll Audit

Introduction

Payroll processing is arguably one of an employer’s most important responsibilities. It poses numerous challenges to HR and payroll professionals. One small error can ruin many things, including one’s reputation. Naturally, finding a reputable payroll service provider who will ensure that the organization’s niche requirements are met is critical. The first step, however, is to conduct regular payroll audits. This article will cover information on Internal Payroll Audit, the Benefits of Payroll Audit, and the Process to perform an Internal Payroll Audit of a Company.

Meaning of Payroll Audit of a Company

A payroll audit is an examination of a company’s payroll process in order to ensure its accuracy. Payroll audits look at things like active employees, pay rates, wages, and tax withholdings. A payroll audit should be performed at least once a year to ensure that your process is up to date and legally compliant.

Payroll audits are typically internal, meaning you or someone in your company conducts them. Internal audits can help you catch errors and avoid potential external audits later on.

Examine your payroll audit report after you have completed the review. Make any necessary changes for future payroll processing. You may also need to make changes retroactively. Common Payroll Issues that Internal Payroll Audit can Help You Solve:  

• Overtime wages were incorrectly calculated.
• Employee hours and overtime are not tracked.
• Records that are incomplete or disorganised
• Misclassification of the number of employees
• Paying incorrect Tax rates

Benefits of an Internal Payroll Audit

Here are some of the reasons why you should conduct an internal payroll audit at least once a year, preferably twice.

• It reveals flaws

During a payroll audit, you are more likely to discover payroll errors than outright fraud.  Regularly checking for payroll errors also reduces the likelihood of breaching IT rules. Early detection of employment tax underpayments can save you money and time. Penalties accumulate on a monthly basis.

• It helps in improving legal compliance

Comparing your payroll policies to central, state, and local government bodies is an essential part of the payroll audit process. Because overtime and state minimum wage laws change on a regular basis, studying compliance laws should always be on your payroll audit checklist.

• It discourages payroll fraud

Payroll fraud affects small businesses disproportionately. Making it known that you perform a payroll account sweep every 6 or 12 months may prevent employees from attempting to defraud you.

The process to perform an Internal Payroll Audit of a Company

1. Time schedule for your Payroll Audit

Establish a time schedule for your payroll audit. This can be a single pay period or the entire year, particularly if you’re preparing year-end tax forms for your employees.

2. Examine employee data

This step of the payroll audit process necessitates communication between HR and payroll, as you want to ensure that the data provided by payroll matches the information provided by the employee. When the systems are linked, there is less chance of error than when sending spreadsheets back and forth. Check that everyone who is being paid is an active employee. Ensure that people who are on leave are properly compensated.

3. Examine the hours worked and the wages received

Check employee hours worked against time cards to ensure that they correspond to the amounts paid. This is especially true for hourly workers. If you notice a large number of employees with identical time cards, the Human Resources department may need to look into it. That could indicate that someone is tampering with the time cards.

4. Examine different types of compensation and variable pay

Overtime pay, bonuses, commissions, and piece-rate information must all be verified. If your employees are tipped, ensure they report their actual earnings for more accurate data. It is also important to check if your company offers vacation pay or shift differentials. Employees rely on this extra pay. Remember that paying too much can be just as stressful as paying too little. No one wants to be asked to repay the money because payroll made a mistake and paid them double the time when they should have received time and a half six months ago.

5. Examine and record unusual payroll transactions

This is also an area with a high risk of fraud. Consider signing bonuses, relocation compensation, back pay, and prior corrections. If you process reimbursements through payroll, double-check that this is also correct. It may be necessary to consult with Finance or whoever handles reimbursements. If an employee receives a large number of reimbursements but does not have a position that requires a lot of travel, this could be a sign of fraud.

6. Reconciliation of payroll

Examine your bank’s activity. Do your bank statements correspond to your payroll records? Do you have all direct deposit change requests properly documented? Getting payroll to deposit someone’s paycheck into the spammer’s bank account is a common scam these days. Check your documentation again.

7. Create a Payroll Audit Report

Create a payroll audit report and distribute it to those who require it. At the very least, this should include the heads of HR and Finance. Regular audit documentation can be useful if problems, such as a lawsuit, arise later.

8. Identify areas for improvement

Automation is becoming increasingly popular in payroll management, assisting in the elimination of inaccuracies and the reduction of errors. Data errors will be significantly reduced if you have an all-in-one HRIS, payroll system, or accounting software. Always look for ways to improve.

Take away 

Payroll audits do more than just assist in determining an organization’s strengths and weaknesses. An audit can result in a more efficient payroll system and a better cost and resource centre. A payroll audit will show you where you stand in terms of payroll efficiency. And these consistent efforts result in an error-free and efficient payroll system, which ultimately improves the organization’s performance.