A payroll audit checklist ensures that your business is paying its employees on time and accurately and that it is following necessary compliance. It also accounts for how much money the business is losing as payroll expense and if it needs to assign any additional stakeholders for payroll management. Let us look at this in some more detail now.
What is a payroll audit?
A payroll audit is a process that helps business leaders determine if the payroll process is working accurately and without any inefficiencies. Any existing gaps or scope for improvement in the payroll process and lack of integrity in payroll records can be determined during a payroll audit. A payroll audit checklist is crucial in India or anywhere else for small or medium sized business, where the payroll process can be a substantial cost.
What should a payroll audit include?
The following information is analysed in an HR payroll audit after the checklist is created.
- Employee rosters – The personal details of the employees as recorded by the business
- Employee pay – basic pay and overtime, incentives, other allowances etc.
- Time clock data – Hours worked, including time spent on system, breaks taken etc.
- Taxes and deductions – Including that towards income, provident fund, other benefits etc.
- Number of payrolls – Including any atypical payrolls or those ported from legacy applications
- General ledger – This also includes bank account reconciliations.
How do you audit payroll records?
An HR payroll audit checklist is a list of things that a business must do to ensure that the payroll audit process goes on smoothly and error-free without any interruptions. It helps minimize issues like employee dissatisfaction due to delays or errors in the payroll process, investor dissatisfaction due to unexpected losses arising from unaccounted for costs in payroll, and general dissatisfaction due to lack of a clear policy governing payroll in the company. A payroll audit checklist should include the following:
Scan your employee list and weed out fake records
Ensure that every employee in your payroll record is a bona fide employee of the company. Also ensure that there are no records of previous employees being reused with different bank accounts. To do this check the payroll records against a secure list of current employees maintained in another encrypted database. It is also possible that the payroll software itself runs a verification of every record it encounters comparing it with actual employees in the company. Check for employee classification as well so that the employee is not awarded any undue benefits or subject to any unnecessary deductions.
Confirm hours worked to ensure accurate pay
Every employee must submit the timesheet for the hours they have worked. If this is not possible, there must be attendance tracking software that specifies a minimum number of hours for login and also helps analyze other productivity tracking metrics. This will help ensure accurate pay in line with the hours worked. If an employee is working overtime, then he/she must be paid the correct dues in line with the company’s own policy and the statutory or regulatory compliances in place.
Account for variable pay
An HR payroll audit checklist must also account for variable pay. Variable pay must be stored in journals and categorized appropriately. The categories are:
- Annual or Holiday Bonuses
- Profit-Sharing
- Commissions
- Special allowances such as vehicle allowance
The final payroll must be compared with the payroll journal and corrections must be made if any to ensure that the employees are all paid the right amount and when it is due to them.
Check the payroll runs
There are two types of payroll runs in a company. The first is on-cycle, which is the regular salary credit that happens every month. If the salary credit happens every 15 days in a company, then there will be 24 payroll runs. Supposing there are 25 payroll runs in a year, you must check why there was an additional payroll run. Did it happen in error or was it deliberately done to siphon off the funds elsewhere? The credit of bonuses and other commissions may happen during off-cycle payroll runs. Check to ensure that there are no liabilities towards any employees. If you notice any, try and settle it right away. This is a very important part of any HR payroll audit checklist and must be carried out.
Matching with the general ledger
In any business, the accounting and payroll activities are managed by two different teams. The payroll team only manages the payroll records, the payroll process and related technologies. The accounting team manages the business’ accounts in general for other activities, such as paying vendors and managing a general statement of accounts receivable from clients and total money spent on payroll, compliance etc. An HR payroll audit checklist must also compare the payroll data with the general ledger, to observe any discrepancies in payroll. This is called payroll reconciliation.
Check tax payments during payroll runs and note any liabilities
This is another very important step in a payroll audit checklist in India. Taxes and book-keeping are the most burdensome of activities, according to 40% of all small businesses. Tax payments due and other deductions must be checked for. Have you underpaid or overpaid towards deductions? Note down any liabilities. The tax deductions may have been missed or overpaid, because of the payroll software itself. Pull up a report from the software to see the tax deductions that happened during each payroll cycle and make sure they were correct.
Check the payroll policy for statutory and regulatory compliance
The Government has instituted some laws for minimum wages, though this might vary from state to state. Make sure every employee is paid at least the minimum, that the overtime dues are settled on time and the right amount is paid. Ensure that if apprenticeship is mandatory, you have the right number on your payroll and that you meet the minimum wage requirements for them.
Why is it essential for companies to conduct payroll audit procedures?
Are you confident that your organization is paying its employees on time and accurately? Do you have processes in place to measure this? If you don’t, then you need to start putting safeguards in place to ensure this happens. Let us look at why it is essential for companies to have a payroll audit checklist in place and ensure that the audit happens.
To protect the brand’s reputation
When it is publicly proven that you have underpaid your employees or delayed the payment of benefits or appraisals due to them, it can affect your reputation as a brand.
To protect the morale of your employees and in turn business growth
Varying pay problems are experienced by 54% of all employees. When employees know they have been underpaid but nothing has been done to change that, their morale goes down, their engagement levels drop, in turn their productivity is affected, which in turn affects business growth.
To prevent damages to be paid for compliance failures
Any failure to comply with statutory or regulatory laws can lead to damages which must be paid by the company. The company may not even be allowed to operate further in the industry.
Are you planning to outsource HR payroll audit?
If you are planning to outsource HR payroll audit and don’t even have a payroll audit checklist in place in 2024, then find a partner who is willing to meet your needs, depending on the number of employees to be supported, the variable pay types to be supported, the regions included in the payroll, and the number of payroll cycles too. An in-house payroll team commits twice as many errors as an outsourced team. So, an outsourced approach towards payroll and payroll audits is better. Alp Consulting, a reputable HR leader for more than two decades, is uniquely positioned to handle compliance and payroll-related issues.
Also Read: Streamline Your Payroll: 5 Essential Tips for Small to Medium Businesses
