Protect your Business with Periodic Payroll Audits ~ Symphony Employer Solutions Keeps YOUR Business Compliant

Protect your Business with Periodic Payroll Audits

For many small and medium-sized businesses, processing payroll presents the greatest risk for costly errors and the least protected financial activity when it comes to potential fraud. Both exposures can be well managed with a periodic payroll audit. Use the Symphony Payroll Audit Checklist as a guide.

The purpose of a payroll audit is to verify that your business is paying employees accurately, timely, and in compliance with the law. There are three desired outcomes of the audit:

  1. Uncover Errors: Confidence that your payroll records are accurate, timely, and complete. No one has been underpaid under the rules of the Fair Labor Standards Act. No one has been over-paid for the time worked.
  2. Improve Legal Compliance: All monies deducted from employees or taxes due on wages paid have been remitted on a timely basis to the correct tax jurisdiction or final recipient. Examples include:
    1. Federal, State, and Local taxes are filed on a timely basis
    2. 401K deferrals remitted to the plan trust
    3. Calculated deferrals have been remitted to all active tax-deferred accounts.
    4. Uncashed payroll checks have been dealt with appropriately under applicable
      abandoned property laws. All taxes have been calculated correctly and filed timely with
      the appropriate tax jurisdiction.
  3. Discourage Fraud: Confirm that processes and procedures in place are followed consistently, provide security that errors are identified quickly and that internal controls within the procedures do not invite misdirection of payroll funds. The greatest deterrent to fraud is the knowledge that payroll activity is being monitored and verified.

Payroll audits are not just for large businesses. Small businesses are more likely to experience loss from payroll errors and fraud. According to a report released by The Association of Certified Fraud Examiners, payroll fraud is twice as likely to exist in small businesses than large businesses. Small businesses are more likely to be critically wounded by the loss of cash resources stemming from overpayments, tax filing error penalties, and interest or misdirection of company cash through small but regular unauthorized payroll payments.

Business owners/managers should conduct payroll audits a minimum of once a year to identify any errors that create liability and the certify accuracy of their payroll systems. An audit can be performed internally but should be completed by a trusted employee or consultant who is not part of the regular payroll process. Just like a financial accounting audit, an outside accounting firm is an option for performing a payroll audit.

Small Business Payroll Audit Checklist:

  1. Verify Active Employee Roster
    1. Make sure that all active employees currently work for the business
    2. Verify each employee’s pay rates are correct, recent raises have been authorized. You can also use this review to improve retention by identifying employees that should be considered for a compensation adjustment.
    3. Employee direct deposit accounts are correct as requested in writing by the employee.
    4. Verify employee paid time off accruals are accurate and time off is properly deducting from the available balance.
    5. Verify that any recurring reimbursements have a cap where applicable and the caps are working.
  2. Verify Pay calculations are working correctly
    1. Worked hours are being paid as worked hours
    2. Overtime is being tracked on a weekly basis
    3. The overtime rate is being calculated correctly with a weighted overtime rate based on all eligible compensation.
    4. Paid time off is not being paid as worked time and increasing overtime liability
    5. All manual checks are correctly added to the payroll records to achieve accurate YTD gross pay totals.
  3. Verify that time worked is being tracked correctly by the time collection system (manual or computerized)
    1. Verify that hours are being totaled correctly by pay designation
    2. Shift differentials are being awarded correctly based on differential eligibility
    3. Work hours are being allocated to the correct State in a multi-state environment
    4. Timesheets are signed and accepted by the employee
    5. Timesheets are verified and approved by the direct supervisor PRIOR to payroll entry.
    6. All hours are being properly totaled and transferred to the payroll.
    7. Holiday pay is being properly tracked and paid
  4. Verify that all processed payrolls are scheduled or approved if supplemental to the schedule.
    1. Weekly = 52 scheduled runs; Bi-Weekly=26 scheduled runs; Semi-Monthly = 24
      Scheduled Runs; Monthly = 112 Scheduled Runs
    2. Supplemental runs could be corrections, bonus payrolls, commission payrolls, non-cash
      compensation updates, etc.
  5. Confirm that Steps 1-4 have not uncovered any compliance issues with Federal and State Labor, reciprocity, and recordkeeping laws.
  6. Reconcile internal payroll records with the quarterly IRS tax return forms 940 and 941. Confirm all tax deposits were paid on a timely basis and recorded properly on the returns.
  7. Confirm the payroll reconciliation for each individual payroll run and the resulting journal entry into the financial accounting system is accurate and complete.
  8. Verify existing internal controls are being followed. Track and Improve any processes and procedures that are leading to errors or leaving the business exposed to financial risk.
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