Conducting an Internal Payroll Audit

Payroll comprises a good share of a company's total expenses, so for a smooth and efficient system, transactions must be accurate, balances must be recorded properly, and the ledger must remains up-to-date. One of the best methods to ensure accuracy over time is the use of periodic audits of the payroll system. You can conduct a complete audit of payroll accounts more easily in smaller companies, but should work with a smaller sample, called a representative sample, if the company's payroll is larger in volume.

In some instances, a salary employee who is no longer with the company may still be receiving paychecks if the proper internal procedures were overlooked and the payroll department was not notified of the separation. Due to this risk, audit the payroll records periodically to ensure that everyone paid within the period was actively on the payroll roster.

One of the most obvious indicators of an accounting error in the payroll department occurs when an employee is paid at a higher or lower-than-normal rate of pay. To catch these types of errors, you should verify the rate of pay on each employee's pay distribution against the rate of pay in the payroll ledger. For added security, verify the pay rates against each employee's employment contract or most recent review.

Verify that your hourly employees recorded the actual hours paid in the applicable period. Validate the time cards, payroll reporting system and paychecks to ensure that the hours recorded match across all three platforms. Confirm that any vacation pay or sick time that was paid went to employees eligible for that pay with time on the books to receive.

Review the payroll ledger accounts to determine that they accurately reflect the payments that were made. Verify each check against the transactions listed in the ledger, including the paychecks, withholding, insurance and taxes.

Reconcile the bank statements to match the activity in the bank account against the payments and transactions in the payroll ledgers. Confirm that all of the cancelled checks are accurate and match exactly what was issued to each employee.