Guidelines for Effective Payroll Audit Preparation

Preparing for a payroll audit can be complicated, especially if your payroll department isn't organized or ready to follow a set procedure. Payroll audit preparation doesn't have to be confusing or stressful. Having a checklist in place can simplify the process.

Following payroll regulations, double-checking your work, and streamlining payroll for audits can help make the process easier and more successful. Following this list regularly helps ensure that your payroll paperwork is accurate and that you're always ready any time an audit occurs.

Guidelines for Effective Payroll Audit Preparation

1. Know What's Included In a Payroll Audit?

When your payroll department experiences an audit, the following documentation and paperwork will be included in that auditing process:

  • Employee pay rates, including overtime and payments that fall outside the typical rate, schedule, or amount
  • Employee rosters, time clock data, hours worked, and time off
  • Number of payrolls
  • Taxes and deductions
  • General ledger information
  • Bank account reconciliations

Any errors, whether a simple transposition of numbers or a much larger error, will be examined in your payroll audit.

2. Determine Who Will Conduct Internal Audits and Timeline

A payroll audit from an outside organization, like a government authority, can happen anytime. The best way to be prepared for these audits is to perform your own audits internally. Engaging in this type of payroll audit preparation will help ensure that your company's paperwork is always ready for scrutiny.

Many companies audit themselves at the end of the fiscal year. If your company has problems with their payroll processes, you may choose to audit your payroll more frequently. Know the team that will be involved, how long you'll take, and what processes you'll delve into to complete the audit.

3. Examine the Data

Once you've gathered a team to perform an internal audit, it's time to gather the data for analysis. You'll need many reports to get your audit off the ground, including employee start and end dates, job titles, deductions, pay rates, tax rates, etc. If you have payroll software, producing these reports should be easy.

Reviewing the reports, internal auditors should identify problems like employees who are no longer active, who still appear on the roster, or perhaps employees who were never hired. In cases like this, this could be a sign of fraud. On payroll reports, employees should look for the correct pay periods and the correct number of pay periods, noting extras and identifying the reason behind these extra pay periods.

In large companies, running a report of all employees and pay periods may not be realistic. In this case, running a random sample of 5 or 10% of the employees and their pay data may be just as effective.

4. Match the Payments to the Hours

Auditors need to pay special attention to ensure that employees are paid for the time worked during the pay period. They also need to ensure that employees are double-checking overtime.

Non-exempt employees must be paid at time-and-a-half if they work over 40 hours in a week. If an employee works over 40 hours per week and is not paid at the appropriate rate, they must be paid the amount owed as soon as the error is discovered.

5. Double Check Tax Withholdings

Employers must pay taxes to government agencies for each employee. Every audit performed should identify whether the appropriate taxes were withheld from employee paychecks and be paid to the proper tax authority. Any money owed that was mistakenly unpaid could incur interest and penalties and in some cases, could even result in severe consequences.

It's important to identify errors as soon as possible. Using an online payroll service can help prevent these errors. Your online payroll service can also make it much easier to identify errors, because the payroll service will provide all the reports you need.

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Make Auditing Easier with Workforce PayHub

Workforce PayHub makes performing regular compliance checks easy to ensure seamless audit processes. Payroll regulations constantly evolve, but we can help your businesses stay informed and prepared by sharing compliance tips and management best practices.

Find out more about how we can help you. Start by consulting with Workforce PayHub, to assess your current payroll systems and compliance readiness. We offer payroll services to medium and small businesses.

Eric Jones
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