Payroll auditing program

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Use our research library below to get actionable, first-hand advice. Payroll audits help business owners methodically verify the integrity of their payroll records and identify any gaps in their payroll procedures. We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner. A payroll audit verifies that your business is paying employees accurately, timely, and in compliance with the law.

Payroll audits are two-pronged. The first step is making sure your payroll records are accurate, timely, and complete. Business owners should conduct payroll audits at least once a year to identify and remedy problems in their payroll systems.

You can do it yourself or delegate the task to a trusted employee. If your small business budget allows, an outside accounting firm will complete a payroll audit for you. The Association of Certified Fraud Examiners found in its report that payroll fraud is twice as likely to exist in small businesses than large businesses. Payroll fraud disproportionately plagues small businesses.

Making it known that you do a sweep in your payroll accounts every six or 12 months could dissuade employees from trying to get one over on you. Regularly checking for payroll errors reduces the likelihood of run-ins with the IRS, too. Noticing employment tax underpayments early can save you money and hassle.

Penalties pile up monthly. An integral part of the payroll audit process is comparing your payroll policies with federal, state, and local mandates. Overtime and state minimum wage laws can change from time to time, so studying compliance laws should always make it on your payroll audit checklist. Here are the main payroll audit procedures you should complete once or twice a year.

You might want to work with an accountant to devise an internal payroll audit checklist tailored to your company. Check that everyone on the payroll is a bona fide employee and is taking home the correct pay rate. Many payroll fraud schemes involve ghost employees. Rather than haunting your house or your dreams, ghost employees spook your business bank account. Unscrupulous payroll administrators will sometimes add fake employees to payroll and funnel the earnings into their own pockets.

Most payroll solutions have a section that lists every worker on your payroll. Those in charge of payroll might have changed employee pay rates or hours worked to help themselves or a friend take home more than you agreed to pay. They may just as easily adjust the number of hours an employee worked to bump up their total compensation.

Your business should have pay stubs and timesheets for every pay period and every employee. Take some time to review all variable payments for proof of authorization.

Your payroll journal should break out variable pay separately from regular wages and salaries. Holes in internal controls could give payroll clerks the ability to award bonuses unbeknownst to those in charge.

Examples of variable pay include:. Compare the number of payroll runs to how many should have occurred. Double-breasted operations occur when an employer owns both a union and non-union company in the same line of business. Double-breasted operations run a high risk for non-compliance by creating the potential for shifting covered labor from the union to the non-union entity to evade trust contributions.

The audit program should include procedures to identify related entities and notify trustees of potential double-breasted operations. This issue may be more prevalent in the building and construction trades; however, the threat is relevant across most industries.

Carefully examine each area to assess the risk posed to your plans and consult your payroll auditor to determine if procedures have been implemented to address these risks. We recommend reviewing the payroll audit procedures on an annual basis to ensure that procedures are current and address any changes in your plans.

In Part 1 of this series we described the options for selecting an auditor, and in this installment, we described the importance of selecting the right procedures to address problem reporting areas. By continuing to use this website, you agree to this condition of use.

For further information please see our privacy policy. Missing Hours One of the most common reporting errors discovered in payroll audits of hourly trust funds is failing to contribute on all reportable hours.

Missing Weeks A variation of the missing hours problem is a missing week, i. Extended Coverage Health Plan Non-hourly health plans may require employers to pay additional premiums on behalf of employees during periods of disability or layoff. Job Classifications Another common reporting error is failing to report all employees performing work in covered classifications. Non-Employees A fundamental requirement for participation in active benefit plans is that the participant must be a bona-fide employee of the contributing employer.

For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He frequently speaks at continuing education events. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues. For small to medium size organizations, this is a pretty good test. How will this discovery impact on the elements of the audit risk model? Alex, it depends on what the weakness is.

Then your risk of material misstatement Is probably high. This is just an example. There are many ways payroll control weaknesses impact RMM and the audit procedures. Thanks for your helpful feedback I appreciate your help. The questions are as follows:. In the past three years, their financial condition has steadily declined.

Now the auditor have reservations about the ability of the firm Ltd to continue in operation for the next year. Inventory is a material balance sheet item for the company. The auditor have not been able to establish, through alternative procedures, the existence and valuation of inventory at balance date because the company does not keep perpetual inventory records.

What audit opinion should the auditor issue here? I would appreciate again your help in this regard, answering these questions will help me for my CPA exam. Is it fair to say that classification is not a particularly relevant assertion because of government taxation and reporting, that accuracy is not a particularly relevant assertion because employees will check their paystubs to make sure they are getting their due, and that completeness is not a particularly relevant assertion because employees will make sure that all of their hours are being recorded?

Completeness and occurrence can be in play since there is a potential for businesses to intentionally understate their expenses to increase their net income. Completeness and occurence can be in play since there is a potential for businesses to intentionally understate their expenses to increase their net income.

Sounds like you are talking about a payroll service organization like ADP or Paychex. Such a report often includes an audit opinion on the internal controls as they relate to the payroll system; those opinions are usually provided by audit firms such as KPMG or PWC. Please log in again. The login page will open in a new tab. After logging in you can close it and return to this page. Auditing payroll is a critical skill. Today I explain how. Auditing Payroll - An Overview.

In this article, we will cover the following: Primary payroll assertions Payroll walkthroughs Payroll fraud Payroll mistakes Directional risk for payroll Primary risks for payroll Common payroll control deficiencies Risk of material misstatement for payroll Substantive procedures for payroll Common payroll work papers.

Primary Payroll Assertions. The primary relevant payroll assertions are: Completeness Cutoff Occurrence I believe—in general—completeness and cutoff for accrued payroll liabilities and occurrence for payroll expenses are the most important payroll assertions. Payroll Walkthroughs. And ask questions such as the following: Does the company have a separate payroll bank account?

How often is payroll processed? What time period does the payroll cover? On what day is payroll paid? Who has the authority to hire and fire employees?

What paperwork is required for a new employee? For a terminated employee? Is payroll budgeted? Who monitors the budget to actual reports? How often? Who controls payroll check stock? Where is it stored? Is it secure? If the company uses direct deposit, who keys the bank account numbers into the payroll system? Who can change those numbers? Do larger salary payments require multiple approvals?

Who approves overtime payments? Who monitors compliance with payroll laws and regulations? Who processes payroll and how? Who signs checks or makes electronic payments? If physical checks are used, are they signed electronically as checks are printed or physically? How are payroll tax payments made? Who makes them? Who creates the year-end payroll tax documents e.