Your payroll process can be relatively simple or, if your organization is large or growing rapidly, more complex and challenging. Either way, a payroll audit is in order.
One of the common occurrences in many businesses is that time can go by without any significant efforts made to ensure that payroll is being processed accurately. The purpose of an audit is to verify that your financial statements reflect a true and accurate record of your organization's results during the financial year.
Keeping Your Payroll Process Properly Tuned
Internal payroll auditing should be conducted regularly to ensure that your payroll records are accurate and properly maintained, and to identify problems before they become issues.
"Conducting periodic audits at least once or twice per year helps you maintain compliance and strengthen your company’s financial controls. The audit enables you to verify that payroll records are correct and to spot and fix issues that could have led to an external audit. A qualified member of your staff or a third-party auditor can perform the audit."
Basic Steps for a Payroll Audit
Here is an overview of the basic steps of a simple payroll audit.
1. Verify the Employees Included on Your Payroll
Review your employees listed on your payroll. Make sure that the list of employees on your payroll matches your employment records and remove any employees listed who no longer work for you. Because turnover and employee attrition can happen any time during the year, it’s important to ensure that everyone who received their paycheck actually worked during that pay period.
If your organization uses independent contractors or external vendors for certain services, you should confirm the contract period for those entities.
2. Analyze Payroll Numbers
Check that the pay rates listed in your company's existing payroll system is correct for each employee. This includes each individual employee's base salary, overtime rates, tax deductions, withholding, and so on. Make sure the pay rates are up-to-date and that they match the employee’s records. If any employees received a raise or promotion during the audit period, verify that the pay rate was adjusted on the applicable date.
Because promotions, bonuses and salary increases can occur anytime throughout the year, it’s important to ensure that the figures are accurate for each employee for specific pay periods.
3. Verify Correct Time Categories
Most businesses provide paid leave, sick time and other categories of payroll time. These hours need to be labelled correctly as vacation, sick leave, bereavement leave, etc. depending on the payroll time labels you use.
It’s critical to verify and compare pay rates against employee attendance records. During an audit you should check overtime hours, sick leave and vacation days against each employee's record to ensure that worker have not been over or under compensated on their paychecks.
4. Reconcile Your Payroll Records
Start by comparing your payroll records to the company’s general ledger. The payroll expenses in your general ledger should match your payroll audit findings. In addition, part of your audit will be reconciling payroll records with the company’s bank statements. One approach to simplify this step is to have a separate payroll bank account, which makes the bank records reconciliation easier.
Verify that your company's bank account totals with your internal ledgers and ensure that any changes are reflected both internally and with your bank’s records as well.
5. Confirm Accurate Tax Withholding and Remittance
Verify the accuracy of your employment taxes. This is a critical step and can avoid costly mistakes with fines and fees.
Make sure you withheld the correct amount of taxes from each employee’s wages including federal income taxes, Social Security, and Medicare taxes. You may also be required to withhold state and local income tax. Verify the accuracy of your payroll reports such as the IRS Form 941. All wages and tax withholding amounts listed on your payroll reports should match your payroll records.
Where to Go When It's Time for an Audit
Take some time to assess the state of your own payroll management capabilities. If these signs are present and you're finding that your payroll process has become a drain on your company's time and resources, then it's time for a change!
Employee development and engagement, building company culture and workforce management can all be part of the responsibilities of a company's HR staff. And oftentimes the tasks and demands can seem overwhelming. This is where having an alternative for your HR management can be highly beneficial.
Another key step in maintaining HR workload, while increasing your company's cost-effectiveness, is to consider outsourcing. A professional agency such as Accuchex can provide much-needed help with Human Resources needs and questions.
Accuchex is a full spectrum Payroll Management Services provider offering expertise in Time Management, Insurance and Retirement issues, as well. Get your Free Download: Payroll Outsourcing Guide to help you make an informed decision or call Accuchex Payroll Management Services at 877-422-2824.