Copyright © Daniel Cullinane CPA.
2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778
PAYROLL AUDIT PROCEDURES
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778
Small business owners should audit payroll processing as part of regular business operations. A small business usually has the advantage of fewer employees making a thorough audit possible rather than sampling data for further review. A good time frame for scheduling a payroll audit is at the end of each quarter of business.
Verify Active Employees
For each person that received a paycheck during the quarter, verify that the person was employed during the time period for which the check was issued. Although it is more difficult to commit payroll fraud on a smaller business, one method of financial theft is by cutting checks to terminated employees and then altering the checks for cashing or colluding with the terminated employee to cash the checks and provide a kick back.
Verify Pay Rate
Verify the pay rate entered into the payroll processing system for each employee. Payroll rates should always be in writing, approved by an owner or manager, and filed with other employee paperwork.
Review Hours Paid
Compare the hours paid to employees for each pay period to the time clock reports or other tracking device used to record employee hours worked. Pay special attention to overtime hours as the cost of overtime can add up quickly and push a small business over budget in salaries and wages expense. If you offer paid time off, such as paid holidays, sick time and vacation days, review each entry of paid time off to ensure the employee who received paid time off pay was eligible for the pay.
Compare Payroll Reports to General Ledger
Compare the totals, such as gross payroll expense, taxes withheld and net check amount, to the general ledger to ensure each payroll processing is correctly recorded on the general ledger. If you have multiple salaries and wages accounts, such as manager payroll, administrative payroll and sales payroll, ensure that each category of payroll reflects the correct expense for the employees in those specified positions.
Review Payroll Tax Submissions
Business payroll taxes include Social Security taxes, Medicare/Medicaid taxes, state unemployment taxes and federal unemployment taxes, as well as the remission of federal withholdings for the employee. The total amount of payroll processed determines how often you remit payroll taxes to the respective taxing authorities, but most payroll remissions will occur at least quarterly with the exception of federal unemployment taxes, which can occur once a year if the business has low payroll amounts. Compare the payroll totals on the tax remittance reports with reports generated by the payroll system to ensure proper reporting of all payroll amounts. Perform manual calculations of all computer-generated totals to ensure proper calculation of amounts due. Verify that electronic or check remissions equal the exact amount recorded on tax remittance reports.
Bank Reconciliation Review
Review the bank reconciliation for the payroll account to ensure that all checks cleared for the issued amount and make a note of any stale-dated payroll checks to research. Make sure you receive the hard copy of all payroll checks from your bank, even if you have to pay an additional fee for the service. Review each payroll check to ensure the check does not appear altered in any way.