If your company is going through an audit or will go through an audit soon, you might be asking “What would happen if a company failed audit?”

A company audit doesn’t necessarily result in a “pass” or “fail.” At the end of an audit, both auditor and company want to issue an opinion. You would call an unqualified or ‘clean’ auditor’s report. That’s a pass. If you are not passing, it’s an issue with the SEC. And if the company gets an adverse opinion or disclaimer, the SEC can issue a stop-trade order.

If you think that this is a problem, you would be correct. When the SEC issues a stop trade order, the company can’t trade shares on the stock exchange as a result.

Generally, if an audit fails and a deviation is found, the auditor will propose a ‘correction’ to fix that particular test section. And, normally, the company will agree and accept the recommended changes.

What is a payroll audit?

A payroll audit is essentially an examination of where time is spent by employees, who has access to this system, and what security measures are in place. Generally speaking, you should determine several factors before beginning the audit process.

Once these factors are determined, auditors can use several methods to conduct an audit. Some of these methods include statistical sampling and interviewing employees about their duties. In this article, we will discuss both of these methods and how audits can use them to assist companies in determining whether or not their payroll systems are operating correctly.

Payroll Audits Explained

A payroll audit is an external review of the company’s processes and procedures covering the payroll system, timekeeping records, tax liabilities, labor laws compliance, and compensation management.

These audits are conducted by experts employed specifically for job functions related to auditing. Some experts may also work in the HR department performing other tasks such as recruiting or worker’s compensation, such as using a paystub maker to generate employee pay stubs. A payroll audit is done by an independent third party to investigate the company’s payroll system, not the employees themselves.

The Purpose of a Payroll Audit

Auditors can perform two types of audits on a business’ payroll department. They are financial audits and compliance audits. Financial audits are done for management purposes, while compliance audits are done for other purposes, such as determining whether employees are receiving fair pay.

Both types of audits are performed to ensure that financial records are being produced correctly. Financial audits are a form of accounting for managers to judge the health of the business.

A compliance audit is conducted by a third party, not employees within the company or managers of that company. The presence of a third party means that managers will not be able to adjust anything on the payroll records during the audit process.

Any changes made to the system may lead some experts to believe that the changes were not made by them and may cast some doubt on why those changes were done. Managers of a company will also be unable to alter any records during the audit process as they may be able to do so on their payroll system.

What Happens During a Payroll Audit?

The payroll audit process starts with determining the objectives and scope of the audits. They will then follow a predetermined approach, such as designing a sampling plan or questionnaire to interview employees, reviewing supporting facts and records to determine if they are accurate and reliable before making recommendations to management.

The payroll audit process is closely related to the internal control system of a business, in which it will determine if management directives are followed and completed accurately.

Who Conducts the Payroll Audit?

The payroll audit is conducted by an independent third party, an accounting firm, a firm that specializes in conducting such audits, or an HR consulting group.

These people are paid specifically to perform the tasks of a payroll audit and do not work for employees within the company itself.

How do Companies Handle the Results of a Payroll Audit?

The results of the payroll audit are provided to management and payroll experts of a company. The payroll experts will then investigate the facts of such a case to determine if their payroll system needs to be adjusted or not.

Suppose the conclusion is that changes need to be made, for example, acquiring payroll software or any other useful software. In that case, those changes should be done as soon as possible before another independent audit takes place. Companies should be able to show evidence of changes made in payroll audits for future purposes.

The results of a payroll audit are used to determine if the company’s payroll system is operating correctly or not. The audit itself is done by an independent third party, not employees within the company or management themselves. An objective ensures that all findings are correct and not tampered with prior to being investigated afterward.