How to Conduct an Effective Payroll Audit

A payroll audit should be part of regular business practice. Each organization has unique needs so not all payroll audits are identical. Conducting an effective payroll audit procedure helps businesses maintain control of their finances and prevents wasting time reacting to avoidable issues, such as ghost employees.

Kicking off the Payroll Audit: Pay Rates

Evolving rates, promotions, raises and bonuses can all impact specific pay period record keeping. Pay rates listed in the system should be verified as correct for each employee in the records. Typos do occur and are more common than assumed, so it is recommended to check that an extra 0 didn’t get added or left off of a payment.

Pay Rates Vs. Time and Attendance

Overtime hours, sick days, and vacation time should be verified by:

  • Classifying employees correctly to determine overtime pay eligibility.
  • Confirming proper pay rate and eligibility for paid time off (sick days and vacation time).
  • Reviewing anything that could result in overtime hours exceeding the payroll budget.

Confirm Pay for Active Employees

An effective payroll audit would confirm that those who received a paycheck for the prior pay periods actually worked during those pay periods. It is possible that former employees are still on the payroll due to an oversight even after they’ve stopped working at the company, which is a form of a ghost employee.

Independent Contractors and Vendor Status

A company utilizing a contingent workforce or relying on vendors for certain goods and services should verify the status of the contracts for the pay period to prevent paying for services that aren’t being used.

Also, an evaluation of these relationships is helpful to be sure they are still operating under the correct classification.

Payroll Reports vs. General Ledger

Totals from gross payroll expenses, withheld taxes, and net check amount should all matchup with the general ledger records. A review of any large or unusual amounts may be needed.

Bank Reconciliation

Businesses will need to compare their bank account with internal ledgers, ensuring that the balances align and all checks cleared for the amount they were issued.


Is it very important that businesses submit the proper amount of business and employment taxes. This will involve social security, federal and state unemployment taxes, and medicare/medicaid taxes. The reconciliation of the expenses involved with payroll taxes can be done by comparing tax remittance reports against the business’s payroll system reports. 

About World Wide Specialty Programs

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