- Small business owners should audit payroll processing as part of regular business operations. A small business usually has the advantage of fewer employees making a thorough audit possible rather than sampling data for further review. A good time frame for scheduling a payroll audit is at the end of each quarter of business.
Verify Active Employees
- For each person that received a paycheck during the quarter, verify that the person was employed during the time period for which the check was issued. Pay particular attention to recent changes in job status. Although it is more difficult to commit payroll fraud on a smaller business, one method of financial theft is by cutting checks to terminated employees and then altering the checks for cashing or colluding with the terminated employee to cash the checks and provide a kick back.
Verify Pay Rate
- Verify the pay rate entered into the payroll processing system for each employee. Payroll rates should always be in writing, approved by an owner or manager, and filed with other employee paperwork.
Review Hours Paid
- Compare the totals, such as gross payroll expense, taxes withheld and net check amount, to the general ledger to ensure each payroll processing is correctly recorded on the general ledger. If you have multiple salaries and wages accounts, such as manager payroll, administrative payroll and sales payroll, ensure that each category of payroll reflects the correct expense for the employees in those specified positions.