payroll audit

What is a Payroll Audit, and How do Companies Handle Them?

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.

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George Meszaros is the editor and co-founder of Success Harbor where entrepreneurs learn about building successful companies. Success Harbor is dedicated to document the entrepreneurial journey through interviews, original research, and unique content. George Meszaros is also co-founder of Webene, a web design and digital marketing agency.

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