What is a Payroll Audit?

A payroll audit is an inspection of payroll records by a third party. The audit can be conducted for a variety of reasons, ranging from a desire to confirm internally that payroll information is correct to an inspection on behalf of an insurance company to determine the appropriate amount of the premium for workers' compensation insurance. Regular internal auditing is recommended, especially in large companies, to ensure that records are accurate and well kept, and to identify problems before they come up on an external audit.

In a payroll audit, the auditor inspects all of the documentation related to the payroll, verifying that it is correct and looking for signs of issues such as employees with incomplete payroll histories, deductions which do not match contributions, and so on. The auditor also identifies which members of the company are responsible for handling payroll procedures, and looks over the company's protocol for handling payroll to identify problem areas and to test employees to confirm that they are using the most recent protocol.

For an internal audit, companies can use their own staff or hire an audit service and request that they conduct the audit. Using a third party can ensure that the results of the payroll audit have more integrity, because a third party should not have any conflict of interest which might skew the audit results. The internal audit results can be used to tighten procedures, confirm that employees are following protocol, and identify areas where inappropriate activities may be occurring.

External audits may be requested by tax authorities and insurance companies. In these cases, the entity requesting the audit handles the audit or hires an auditor to do the payroll audit. Companies should be aware that refusal of an audit is generally viewed as an admission of guilt. Even if nothing is wrong, when the audit is eventually performed, records will be scoured for any signs of wrongdoing. It is advisable to cooperate and to retain legal counsel to learn more about which documents need to be surrendered to the auditor and how the auditing process works.

The result of an external audit can vary, depending on why it was ordered and what the results were. An insurance company, for example, might adjust the amount of a premium on the basis of the audit. If a payroll audit reveals that a company is doing things like collecting tax contributions and not submitting the funds to the government, the company will face legal penalties.