As an employer, you are required to comply with wage and
hour and employment tax laws that occur on a federal, state and local level.
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.
Step 1
Verify duties of all workers in the payroll department and
ensure their payroll system access is restricted to the type of work they do.
For example, if an employee’s job description is timekeeping and payroll record
changes, she should not have the system access required to process paychecks.
Step 2
Generate a payroll report that identifies active employees,
and confirm that these employees actually work for the company. Run a report to
identify terminated employees, and ensure that they are not getting paid. This
helps you recognize ghost or phantom employees, which is a type of payroll
fraud. The ghost employee may be a terminated employee who has not been taken
out of the payroll system or a fictitious employee who does not work for the
company.
Step 3
Compare regular and overtime wages with employees’
timekeeping data, which should be approved by their respective supervisors or
managers. Verify salaries, pay increases and supplemental wage payments such as
commissions and bonuses.
Step 4
Confirm that mandatory deductions, such as and payroll taxes
and wage garnishments, if applicable, are being withheld from employees’ wages.
Generate a report that shows the company’s employment tax liabilities, and
verify that your employees’ withholding and your portion of taxes are paid and
reported to the appropriate government agencies.
Step 5
Evaluate employee benefits, such as health insurance and
retirement benefits, and balance payments made to vendors. Review fringe
benefits, including expense reimbursements and vacation and leave procedures.
Step 6
Reconcile amounts paid to employees via live checks and direct
deposit and amounts paid to third parties with the amounts posted in your
company’s financial statements. Ensure accurate coding.
Step 7
Confirm that all wage and hours laws that pertain to your
business are being met. This includes Fair Labor Standards Act policies for
classifying and paying nonexempt and exempt employees and related state and
local policies.
Step 8
Assess record-keeping procedures to ensure compliance with
federal and state record-keeping laws. Verify that payroll records are stored
in secured areas.
Step 9
Review internal payroll policies, such as confidentiality
clauses and policies relating to termination, timekeeping, paycheck
distribution and security breaches.
Step 10
Create a written evaluation of your findings and your
suggestions for improving internal controls.
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