Key Audit Objectives for a Client's Payroll Function
Auditing a client’s payroll system allows an independent auditor to view the entire payroll system from the inside out. The purpose is to determine -- in the auditors’ opinion -- whether the data in payroll records and statements are truthful and accurate in their accounting. Although adhering to internal control procedures is important in every area of the business, payroll represents a significant expense making it a crucial audit area. Audit objectives define what an independent reviewer expects to accomplish as he works through the steps of auditing a client’s payroll system.
Assessing audit risks is an initial payroll audit objective. The results of an audit risk assessment determine how the rest of the audit will proceed. To accomplish this objective, an auditor first gets familiar with steps in payroll processing and the internal controls the business incorporates into the payroll system. Data transparency as well as the number and quality of internal payroll controls all play a role in a risk assessment. If an auditor feels that internal controls are insufficient to ensure data accuracy or prevent fraud, an audit plan might include more random calculations or increase the time the auditor spends observing payroll processing activities.
Reviewing payroll data includes document inspection, observation and creating a payroll audit trail. An auditor inspects documents for timely reporting and reviews cancelled paychecks to verify amounts, whether paychecks are in sequence and whether any are for an unusual amount. Tax tables are also reviewed to make sure they are up-to-date. Auditors review standard payroll operating procedures, interview the payroll manager and department employees, and observe daily activities. Audit trails document a payroll transaction from start to finish. An auditor can create an audit trail by selecting an employee timecard and tracing all the way through the payroll accounting cycle.
Testing data includes reconciliations, recalculating random sample data and making comparisons. To complete the testing objective an auditor should reconcile the payroll journal to corresponding ledger accounts and the total taxes withheld against total tax payments submitted. An auditor should also test payroll data to ensure employee benefit and withholding calculations are correct. Testing starts by gathering random sample data such as timecards and tax withholding information for a cross-section of employees. Testing procedures include reviewing time cards, recalculating benefits and deductions and verifying the authenticity of any management approved changes to timecard information.
The completion of a payroll audit report is a final key objective. An audit report describes the audit process in detail and acknowledges that the audit was performed according to generally accepted auditing standards. The report also offers an opinion on whether the auditor feels reasonably certain that payroll records are correct and whether they comply with federal and state regulations. It may or may not also include suggestions for correcting or improving payroll internal controls.