Question

A new auditor has joined your firm and your job is to provide instruction in the factors most important to completing the auditing cycle for payroll cycle. Prepare a one-page summary based on your learning and understanding.

Answer 1

Factors most important to completing the auditing cycle or payroll cycle:

1. Verify Pay Rates

Make sure that the pay rate for each of your employees is accurate. Track all the pay increases you gave to your employees due to a promotion, and make sure that the pay rate matches that increase. This is also important if your employees work on a bonus or commission system. Every pay rate increase needs to have some type of documentation and paperwork to simplify your auditing.

2. Compare pay rates to time and attendance records.

Whether you use a time clock system or some other type of system that tracks when your employees arrived at work and when they clocked out, compare the hours you paid your staff with the tracking system. Focus on overtime pay and verify that the amount you paid in overtime matches the written records. Overtime is a big expense for a small business, especially one that isn’t profitable. Look for any discrepancies between what you paid and what you actually owed. Pay attention to special items such as paid vacation, and verify that employees that received vacation pay were eligible for it.

3.Verify Payments to Vendors and Contractors

Most small businesses use vendors and independent contractors. Review the payments you made to vendors and contractors, and determine whether those services were absolutely essential. You may find that you’ve paid for services that weren’t necessary, or that the financial status of your business doesn’t justify paying for certain services.

4. Check Payroll Reports With General Ledger Records

Make sure the total from your payroll reports, which includes withheld taxes, gross payroll expenses, and net check amount are in sync with general ledger records. If you divide your payroll into staff specializations such as managerial payroll and marketing payroll, make sure each payroll expense matches with each of these payroll categories.

5. Review Bank Reconciliation Documents

Compare the checks that cleared in your bank reconciliation documents with the information in your payroll report. You may discover that checks you paid to vendors or contractors didn’t clear. You may also discover that a check you wrote for a specific amount was cashed for a greater amount, which will require further investigation.

6. Review Tax Submissions

When you run payroll, you have to factor business taxes such as social security, state and federal unemployment taxes, and healthcare taxes. Compare your tax remittance reports with your payroll reports, to make sure that you’re in compliance with all taxes the Internal Revenue Service requires from your business.