Ten steps to efficient payroll audits
Audit objectives: To evaluate the internal and business environment surrounding payroll
to ensure that internal controls are in place and operating effectively. To ensure that the
payroll process is efficient and effective.
1. Review the payroll process flowchart with responsible management and update it with
changes in procedures or responsibility.
2. Obtain a completed control self assessment (CSA) questionnaire from the payroll
manager. Review negative or not applicable responses and assess whether compensating
control procedures exist.
3. Identify key controls documented either on the payroll process flowchart or the CSA
questionnaire. Through discussion and observation work, validate that procedures are in
place and operating effectively. Testing should include the following steps:
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Determine whether someone (other than the payroll preparer) performs the review
and approval of payroll registers before disbursement. Check for documentation.
Review controls over access to unissued payroll checks, signature plates, processing
areas, and payroll records to ensure access is properly restricted. Review
methodology and documentation for periodic accounting of prenumbered checks.
Review recent exception reports for payroll adjustments to verify that they are being
trended, monitored, and investigated. Discuss possible corrective actions with
managers.
4. Judgmentally select a sample of supplemental payroll checks (scope: >10 checks).
Review supporting documentation to ensure payroll adjustments/supplemental checks are
appropriate and properly authorized.
5. Determine whether your organization has performed any fair labor audits and find the
results. Follow up on significant findings to ensure that the payroll department addresses
them.
6. Through discussion with the controller or other appropriate personnel like the director
of nursing, determine whether the entity uses or shares staff with other health systems.
Find out whether the payroll system properly captures and pays overtime hours.
7. Obtain a list of all payments to independent contractors. Select a sample of the largest
contractors by payments, and then perform the following:
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Determine whether signed contracts exist and whether the vendor/contractor complies
with the terms of the agreement.
Review for factors that the IRS has identified. Look at employee relationships vs.
independent contractor relationships.
8. Review payroll records for excessive overtime by doing the following:
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Determine overtime percentage for the period being audited
Compare the current percentage to the facility’s historical percentage
Compare the overtime percentage to other health system entities of comparable size,
if available
9. Ensure that employees can only enter time recordings by swiping their badge. (Entry
number should not be made by entering employee number or numeric code.) If any offsite areas use a manual time-keeping system, assess the adequacy of related controls.
10. Review methodology used for capturing paid time off (PTO) for salaried individuals,
paying particular attention to administration and department directors. Follow this advice:
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Select a sample of these employees’ time records for the audited pay periods
including at least two major holidays, to ensure that PTO appears to be properly
recorded
Document results
Source: Jim McKee, manager of internal audit for Baptist Memorial Health Care
Corporation in Memphis, TN.