9 Essential Reasons to Conduct a Payroll Audit

By Danni White - Last Updated on January 6, 2020
9 Essential Reasons to Conduct a Payroll Audit

Keeping track of numbers going in and out in all areas of your business is an important payroll measure which most managers need to consider. Tiny mistakes or compliant issues could result in dire consequences.

Regular payroll audit will detect the mistakes, giving you enough time to make the necessary corrections. Eventually, the auditor will present an accurate report to the rest of the members.

Essential Reasons for Conducting an Audit Payroll

Here are nine reasons for conducting a payroll audit:

1. To verify the accuracy and update the information

A systematic payroll audit program will allow you to confirm the rate of pay on each employee’s pay distribution against the rate indicated on the ledger. This will reduce cases where an employee is either underpaid or overpaid. If possible, you can involve the auditing payroll process to evaluate the pay rates according to the contractual agreement.

2. To match payments against employees’ input

Employees need to be paid against the actual hours they have worked. You can use time cards, the company’s payroll system and the paychecks against the sick off time and vacation to verify whether they are earning what they deserve.

3. Improving compliance practices

Even though most companies strive to keep accurate records, as required by law, errors are bound to occur. Payroll audit procedures will expose these errors, giving room for correction. It allows you to review the payroll ledger once and verify each against the transactions listed on it.

4. Evaluate and reconcile banking transactions

Whether you are paying your employees through hardcopy paychecks or online banking, it is important to evaluate and reconcile each transaction. Though this process is strictly for accounting purposes, it can also be included in the auditing process. It will also reconcile other bank statements to match the activity as stated in the bank account.

5. To update employee’s employment status

Cases of fired employees that are still receiving paychecks are quite common in firms that don’t conduct regular auditing. A payroll audit program will help in updating the employment status even if specific procedures have been overlooked.

6. To catch manual errors

Manual errors are bound to happen when you are entering numbers into the company’s system. Whenever you are conducting payroll audit, you won’t fail to analyze the numbers as per the pay rate, hours worked, total pay for the period, and withheld taxes. Will capture these errors and make all the necessary corrections. It will also verify if the time indicated on the database is correctly labeled.

7. Record keeping

Payroll audits facilitate business process documentation that can greatly bring significant changes to an organization. It helps to curb malpractices such as corruption and misuse of funds by providing easier access to information by the authorized personnel.

8. Trim the company’s budget

Once an audit has been conducted, the human resource will have the opportunity to plan for the company’s activities. It will also cut on the amount of time and energy taken to process every check once the payroll has been released.

9. Verifying whether tax withholdings, remittance, and reports are accurate

Going through your tax withholdings needs a regular audit process. It is also another critical payroll audit procedure that verifies your employment taxes. Once the right information has been captured in the company’s database, it will be easier to remit your taxes in an appropriate time. As you conduct the audit, ensure you have withheld the accurate amount of taxes from each of the employee’s wages. It is also important to withhold federal income, social security, and Medicare taxes during the process.

Failing to audit your payroll could lead to dire consequences for your company. No matter the size of the company, finding a qualified auditor shouldn’t be an uphill task. In as much as you may want to hire someone an inside man to conduct the payroll audit procedures and produce a full report, cases of biased work are likely to occur. It is important to find an external auditor who is not directly involved in the company’s projects.

Danni White | Danni White is the CEO of DW Creative Consulting Agency, a digital marketing firm specializing in elevating the visibility of small-to-midsize businesses and nonprofits. She is the author of 17 books and hosts the #Hashtags and Habits Podcast, which merges digital marketing, entrepreneurship, and personal growth.

Danni White | Danni White is the CEO of DW Creative Consulting Agency, a digital marketing firm specializing in elevating the visibility of small-to-midsize busi...

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