For some of the small businesses, payroll may contribute to about half of their expenses. Thus, it is reasonable for them to audit their payroll regularly. For example, the company may engage an audit firm in Johor Bahru and schedule a payroll audit when each quarter ends, which is a suitable timing to have an audit. Usually, small businesses have the benefit of not having many employees. Hence, they can have thorough payroll audits instead of using the sampling approach, which means the auditor will only audit part of the data.
Listed below are some procedures that the auditors need to perform in a payroll audit (Also see Introduction to Audit Procedures).
Confirm the Active Employees
The auditor needs to verify whether the person who receives a pay cheque within the quarter is employed by the firm when it issued the cheque. They should focus on the recent alterations in the job status of the company’s employee. Even though it is harder for the individual or department which is responsible for the company’s payroll to commit payroll fraud (Also see How Does Internal Control Help in Overcoming Payroll Fraud), they may still achieve this by cutting cheques to terminated staff. Then, they will alter the cheques for cash, or they will collude with the terminated staff to cash the cheque.
Confirm the Pay Rate
Besides, the auditors should also confirm the pay rate for every staff that the company has keyed into its payroll processing system. The company should record the staff’s pay rate and get the approval from its manager or owner before filing it with the paperwork of the staff.
Assess the Hours Paid
The auditors need to compare the hours paid to the staff to the time clock reports or any other devices that help in recording the hours of work of staff. They should pay more attention, particularly to the overtime hours since this expense may add up quickly. Before the business owner realizes it, it may push the small business to become overbudget in the wages and salaries expense.
Besides, if the company provide paid time off, for example, vacation days, personal days and sick days, to its employees, the auditors need to assess every entry of it to make sure that the employees who receive paid time off are eligible for obtaining the pay (Also see Types of Audit – Eligibility Audits).
Make Comparisons Between General Ledger and Payroll Report
The auditors need to compare the general ledger (Also see Accounting – General Ledger Reconciliation) to the sums, for example, net cheque amount, expenses for gross payroll, as well as the amount of withholding tax. By doing so, the auditors can make sure that the company has recorded its payroll processes in its general ledger. If the company possesses a few different salaries and wages accounts, like sales payroll, administrative payroll, and manager payroll, the auditor needs to make sure that every group of payroll shows the right expense for its staff in the respective positions.
Review the Payroll Tax Submission
Also, the auditors should compare between the sum of payroll on the reports of tax remittance and the reports that the payroll system has generated. This is for them to make sure the company has reported all payroll amounts correctly. They may need to perform manual calculations for the totals that the computer has generated so that they can ensure that the computer has calculated the amounts due correctly. The auditors also need to verify that the sum of the cheques or electronic remissions and the amount that the company has recorded in its tax remittance reports are the same.
Review of Bank Reconciliation
The auditors need to review the bank reconciliation for the company’s payroll account to make sure that the company has cleared all its cheques for the issued amount. In this process, they need to pay attention to payroll cheques which are stale-dated for further inspection. The company needs to ensure that it has received the hard copy for every payroll cheque from its bank, although it may need to pay extra fees for that service. The auditor should review all the payroll cheques and make sure that the cheques do not seem to be altered in any way.