Steps of conducting an Internal Payroll Audit?

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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