What is a Payroll Audit?

Mary McMahon
Mary McMahon

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.

Payroll records may be examined by a third party during a payroll audit.
Payroll records may be examined by a third party during a payroll 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.

An audit can be conducted by an internal auditor or an external consultant.
An audit can be conducted by an internal auditor or an external consultant.

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.

The results of an external audit may vary, depending on why it was ordered and what the results were.
The results of an external audit may vary, depending on why it was ordered and what the results were.
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

You might also Like

Readers Also Love

Discussion Comments

anon352847

What if your employer has been informed of an audit from the state labor department and the only record of time kept was the time contracted to a customer for the job? Is this considered a proper time card?

wander

If your company or business has been selected for a payroll audit, this can cause a lot of anxiety for those staffed in the payroll staff. Often governments provide free guidelines online for how to prepare for this process and what to expect when the government officials come into your office.

Any government branch that takes deductions from pay could be responsible for a call to audit. Whether it is to look at tax deductions, pension, health care or unemployment insurance. The auditors job is really just to make sure all deductions are on the up and up. If you have been keeping good books, there is no need to worry.

MrSmirnov

If you have your own business how often should you have an external payroll audit completed? Is it mandatory by law to have this done, or is it more for the peace of mind of those in charge?

For companies who are selected for an external payroll audit, is it usually because someone complained about inaccurate deductions or pay, or is it more randomized, like income tax audits?

I would be concerned if we were chosen for an external audit, as I feel all of our bookkeeping is up to par. But if an employee felt otherwise, I suppose they would be justified in seeking an audit.

Post your comments
Login:
Forgot password?
Register: