Following payroll best practices includes having a payroll process and putting together a payroll audit procedure to ensure that process is performing as it should. You have to check (and recheck) that you cross your t’s and dot your i’s. Before we go through the steps of how to conduct a payroll audit, let’s talk about why you should do it in the first place.
Why should you conduct a payroll audit?
Payroll managers keep track of a lot of numbers going in and out of an organization. It’s important to check, about once a quarter, that everything adds up as it should. As a good record keeping practice, payroll audit procedures can help:
- maintain accuracy and compliance.
- identify any potential issues or problems.
- strengthen your financial controls.
Steps for an effective payroll audit procedure
Make your payroll audit a part of your regular business practice. Use these steps as a guide to help you get started. Remember that every organization has different needs so not all payroll audits will look the same.
Verify pay rates
To start off, confirm that the pay rate listed in the system is correct for each employee. Typos happens, so double check that an extra 0 didn’t get added or left off of a payment. Pay rates change. Employees get promotions, raises, and bonuses. Be sure everything is accurate for the specific pay period.
Compare pay rates to time and attendance records
In this step, check overtime hours, sick days, and vacation time. Be sure you’ve classified employees correctly to determine overtime pay eligibility. Confirm proper pay rate and eligibility for paid time off like sick days and vacation time. Review anything a manager may have overlooked that could result in overtimes hours exceeding the payroll budget. During this step, it’s a good idea to report to HR or your benefits manager about any employees who qualify as full-time equivalent employees during the period for ACA compliance purposes.
Confirm pay for active employees
Verify that everyone who received a paycheck for the prior pay periods actually worked during those pay periods. Though it happens more often in larger companies, former employees can hang around on the payroll due to an oversight even after they’ve stopped working at the company.
Check independent contractors and vendor status
If your company utilizes a contingent workforce or relies on vendors for certain goods and services, you want to confirm the status of the contracts for the pay period. You don’t want to pay for services you’re not using! This is also a good time to evaluate your relationship with your independent contractor to be sure they’re still operating under the correct classification.
Cross-check payroll reports to the general ledger
Check that the totals from gross payroll expenses, withheld taxes, and net check amount all matchup with the general ledger records. Review any large or unusual amounts. Be sure all balances are in accord with Generally Accepted Accounting Principles (GAAP).
Validate bank reconciliation for the payroll account
Compare your bank account with internal ledgers. Be sure the balances align and all checks cleared for the amount they were issued.
Review payroll tax submissions
Are you submitting the proper amount of business taxes? This includes social security, federal and state unemployment taxes, and medicare/medicaid taxes. Reconcile payroll tax expenses by comparing your tax remittance reports against your own payroll system reports.
Stay in control of financial management
Conducting an effective payroll audit procedure keeps you in control of your organization’s financial management. When you manage payroll effectively, you don’t have to waste time reacting to problems you could have avoided. If you want to learn more about managing payroll that drives results, get our Guide to Saving Time on Payroll.
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