How to conduct a payroll audit: a complete checklist

What is a payroll audit?

Businesses today face many payroll challenges, making regular payroll audits essential. These help make sure that employees are paid correctly and on time, and they can also protect your business from legal and financial problems. If you have employees complaining about incorrect payments or if new payroll laws have gone unchecked, it’s time to conduct a payroll audit.

This blog article explores everything you need to know to conduct a payroll audit. Get to know its scope and steps with our complete checklist below.

What is a payroll audit?

A payroll audit is a detailed check-up of a company’s payroll processes, records, and procedures. Its main goal is to ensure all payroll-related activities are accurate, efficiently done, and compliant with payroll laws in Australia.

During the audit, discrepancies can be identified, which helps prevent financial performance issues like overpayments or fraud (e.g., ghost employees who do not actually work for the company).

Types of payroll audit

The two main types of payroll audits are internal audits and external audits. Each serves a unique purpose and offers distinct benefits to businesses.

Internal audit

An internal audit is conducted by employees within the organisation. This type of audit focuses on evaluating the effectiveness and efficiency of your payroll set-up, ensuring they follow company policies and legal regulations. Internal audits help identify areas for improvement, detect errors, and enhance overall payroll management.

External audit

An external audit is performed by an independent third party, such as an accounting firm or a certified auditor. This type of audit provides an objective assessment of the company’s payroll processes and compliance with applicable laws and regulations.

External audits are often required for larger organisations or those seeking financing or investment. The goal is to provide assurance to stakeholders that the company’s payroll practices are accurate and lawful. External audits can also help identify potential financial risks or weaknesses in the payroll system that may not be apparent during an internal audit. 

Keep your business
compliant with
ease.

 

Switch to Payroller for reliable and ATO-approved payroll software. Visit our website to get started.

Can small business owners do their own payroll audit?

Yes, small business owners can conduct their own payroll audits. Hiring an external auditor can be expensive, but running an internal audit can help save money. Owners are usually familiar with their payroll systems and can easily identify discrepancies or issues.

Still, there may be specific situations where hiring an external auditor is advisable. Some cases include complex operations (such as multi-location businesses), a high need for regulatory compliance, and credibility for investors and business loans.

Essential components of a payroll audit

Conducting a payroll audit involves several key components. Here’s what you need to focus on during an audit:

Employee records

Reviewing employee records includes verifying personal information such as names, addresses, and contact details to ensure they are up-to-date. It’s important to check each employee’s classification, whether full-time, part-time, or casual, and confirm that the pay rates listed match the agreed-upon amounts in their employment contracts.

Attendance and leaves

Auditing attendance and leave records ensures that employees are getting paid correctly. This involves comparing reported hours worked against submitted timesheets for accuracy. It’s important to verify that leaves taken, such as sick and annual leave, are accurately recorded and that balances reflect each employee’s entitlement.

Tax compliance

Tax compliance is a critical component of a payroll audit. You’ll need to check that the correct amount of income tax is withheld from paychecks and verify that superannuation contributions are made correctly and on time. All necessary tax forms and reports must be submitted accurately and by their deadlines.

Benefits and deductions

Auditing benefits and tax deductions ensure that all employee entitlements are managed properly. This includes confirming that any salary sacrifices and employer-sponsored benefits, such as health insurance, are correctly administered and deducted from pay.

Record-keeping

Employers must ensure that all payroll records are retained for the required period, generally seven years, in Australia. This retention period is crucial for compliance with tax laws and employment regulations. Keeping payroll files organised allows for easy access to information during an audit, making the process more efficient.

How to do a payroll audit: a complete checklist

Conducting a payroll audit involves multiple procedures to ensure accuracy and compliance. Read on below for everything that should be part of your payroll audit checklist.

1. Review employee records

Start your payroll audit by looking at employee records. Check that all personal information is correct and up-to-date. Make sure each employee’s job status—whether they are full-time, part-time, or casual—is recorded correctly. These factors impact their pay and benefits entitlement. 

Confirm that the pay rates match what is written in their employment contracts. If you find any mistakes, fix them right away.

2. Examine timesheets and wages

Next, examine the timesheets and wages carefully. Compare the hours that employees say they worked on their timesheets with the wages they were paid. Make sure they are getting paid correctly for the hours they worked. Investigate any differences and correct them as soon as possible. Note any changes you need to make to address the procedural errors that caused the errors.

3. Track variable payment and compensation

After checking wages, look at variable payments and compensation. Factors like bonuses, commissions, and overtime pay can be a breeding ground for discrepancies. Make sure these payments are calculated correctly according to your company’s rules. If you find any errors in these payments, make the necessary adjustments and keep a record of what you changed.

4. Inspect corrections in payroll transactions

Now, check any corrections made in payroll transactions. Look at changes to payroll records, like updates to pay rates or fixes for previous mistakes. Ensure that all corrections are properly documented so you know why they were made. Any unjustified corrections should be flagged to the right team members.

5. Audit tax withholdings and superannuation

Next, check tax withholdings and superannuation contributions. Verify that the right amount of income tax is taken out of each employee’s paycheck according to Australian tax laws. Also, make sure all eligible employees make superannuation contributions correctly and on time. If you spot any tax withholdings or contributions mistakes, fix them immediately to avoid penalties.

6. Reconcile payroll with your bank activity

Once you’ve completed the previous steps, reconcile your payroll records with your bank activity. Compare your payroll records against bank statements to ensure that all employee payments match what is recorded in your payroll system.

7. Create a report with findings and actions

Finally, create a report summarising what you found during the audit and suggest actions to fix any problems. Write down any issues you discovered and outline a clear plan for correcting them. This report will be helpful for improving your payroll processes in the future. Share this report with relevant people so everyone knows about the findings and what needs to be done.

How to do a payroll audit

The risks of neglecting payroll audits

Without regular audits, mistakes in payroll can go unnoticed. This can result in overpayments or underpayments to employees. For example, if an employee is accidentally paid for extra hours they didn’t work, the business may face financial losses, as seen in cases where companies have paid thousands of dollars due to payroll mistakes.

Regular payroll audits also protect you from costly errors. Fees from missing tax laws and employment regulations can lead to hefty penalties, and employee fraud may continue to go unchecked. These payroll risks can lead to more significant financial loss and damage to the company’s reputation.

Make payroll audits a breeze with the right payroll solution

In conclusion, a payroll audit is essential for evaluating the efficiency and effectiveness of your payroll systems, procedures, and internal controls. This includes assessing how payroll data is entered, how wages and deductions are calculated, how time and attendance are recorded, and the functionality of your payroll software.

Keep your business
compliant with
ease.

 

Switch to Payroller for reliable and ATO-approved payroll software. Visit our website to get started.

For small businesses looking for reliable payroll software that is both accurate and compliant with Australian Taxation Office (ATO) requirements, Payroller is an excellent choice. Small businesses using Payroller to simplify the payroll process benefit from the following features:

  • Automated calculations
  • Up-to-date ATO compliance
  • Flexible payroll reports
  • Complete employee records
  • Built-in timesheet app
  • Roster creation and management
  • Leave management
  • Superannuation management

With its user-friendly interface and robust features, Payroller helps small business owners manage their payroll efficiently while reducing the risk of errors. Consider using Payroller to streamline your payroll operations and maintain compliance with ease.

Payroll made accessible.

Create your free account now.

*By clicking “Try For Free“, you agree to our terms of services and privacy policy.

Summary