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Examine evidence that payroll hours and wage rates are verified by an independent person

Consider using a selection of the following controls for nearly all payroll systems, irrespective of how timekeeping information is accumulated or how employees are paid. The controls noted below may be used.

  • Change Authorizations
  • Change Tracking Log
  • Error-Checking Reports
  • Expense Trend Lines
  • Issue Payment Reports to Supervisors
  • Restrict Access to Records
  • Separation of Duties
  • Payroll Calculation Controls
  • Automated Timekeeping Systems
  • Calculation Verification
  • Hours Worked Verification
  • Match Payroll Register to Supporting Documents
  • Match Time Cards to Employee List
  • Overtime Worked Verification
  • Pay Change Approval
  • Check Payment Controls
  • Update Signature Authorizations
  • Hand Checks to Employees
  • Lock up Undistributed Paychecks
  • Match Addresses
  • Payroll Checking Account
  • How do you verify payroll?
  • How do you audit a payroll external audit?
  • How would an auditor about the wages paid to workers?
  • How do you vouch payroll?


Have either
internal auditors or external auditors conduct a periodic audit of the payroll function to verify whether payroll payments are being calculated correctly, employees being paid are still working for the company, time records are
being accumulated properly, and so forth.

Change Authorizations

Only allow a change to an employee’s marital status or deductions if the employee has submitted a written and signed request for the company to do so. Otherwise, there is no proof that the employee wanted a change to be made. The same control applies for any pay rate changes requested by a manager.

Change Tracking Log

If you are processing payroll in-house with a computerized payroll module, activate the
change tracking log and make sure that access to it is only available through a password-protected interface. This log will track all changes made to the payroll system, which is very useful for tracking down erroneous or fraudulent entries.

Error-Checking Reports

Some types of payroll errors can be spotted by running reports that only show items that fall outside of the normal distribution of payroll results. These may not all indicate certain errors, but the probability of
underlying errors is higher for the reported items. The payroll manager or a third party not involved in payroll activities should run and review these reports.

Expense Trend Lines

Look for fluctuations in payroll-related expenses in the financial statements, and then investigate the reasons for the fluctuations.

Issue Payment Reports to Supervisors

Send a list of payments to employees to each department supervisor, with a request to review it for correct payment amounts and unfamiliar names. They may identify payments being made to employees who no longer work for the company.

Restrict Access to Records

Lock up employee files and payroll records at all times when they are not in use, to prevent unauthorized access. Use password protection if these records are stored on line.
This precaution is not just to keep someone from accessing the records of another employee, but also to prevent unauthorized changes to records (such as a pay rate).

Separation of Duties

Have one person prepare the payroll, another authorize it, and another create payments, thereby reducing the risk of fraud unless multiple people
collude in doing so. In smaller companies where there are not enough personnel for a proper separation of duties, at least insist on having someone review and authorize the payroll before payments are sent to employees.

Payroll Calculation Controls

The following list of possible controls address such issues as missing
timesheets, incorrect time worked, and incorrect pay calculations. They are as follows:

Automated Timekeeping Systems

Depending on the circumstances, consider installing a computerized time clock. These clocks have a number of built-in controls, such as only allowing employees to clock in or out for their designated shifts, not allowing
overtime without a supervisory override, and (for biometric clocks) eliminating the risk of buddy punching. Also, you should send any exception reports generated by these clocks to supervisors for review.

Calculation Verification

If you are manually calculating payroll, then have a second person verify all
calculations, including hours worked, pay rates used, tax deductions, and withholdings. A second person is more likely to conduct a careful examination than the person who originated the calculations.

Hours Worked Verification

Always have a supervisor approve hours worked by employees, to prevent employees from charging more time than they actually worked.

Match Payroll Register to Supporting Documents

The payroll register shows
gross wages, deductions, and net pay, and so is a good summary document from which to trace back to the supporting documents for verification purposes.

Match Time Cards to Employee List

There is a considerable risk that an employee will not turn in a timesheet in a timely manner, and so will not
be paid. To avoid this problem, print a list of active employees at the beginning of payroll processing, and check off the names on the list when you receive their timesheets.

Overtime Worked Verification

Even if you do not require supervisors to approve the hours worked by employees, at least have supervisors approve overtime hours worked. There is a pay premium associated with these hours, so the cost to the company is higher, as is the temptation for employees to claim them.

Pay Change Approval

Consider requiring not just one approval signature for an employee pay change, but two signatures – one by the employee’s supervisor, and another by the next-higher level of supervisor. Doing so reduces the risk of collusion in altering pay rates.

Check Payment Controls

When you pay employees with checks, several controls are needed to mitigate the risks of fraud and various errors. Key controls are noted below.

Update Signature Authorizations

When check signers leave the company, remove them from the authorized check signer list and forward this information to the bank. Otherwise, they could still sign company checks.

Hand Checks to Employees

Where possible, hand checks directly to employees. Doing so prevents a type of fraud where a payroll clerk creates a check for a
ghost employee, and pockets the check. If this is too inefficient a control, consider distributing checks manually on an occasional basis.

Lock up Undistributed Paychecks

If you are issuing paychecks directly to employees and someone is not present, then lock up their check in a secure location. Such a check might otherwise be stolen and cashed.

Match Addresses

If the company mails
checks to its employees, match the addresses on the checks to employee addresses. If more than one check is going to the same address, it may be because a payroll clerk is routing illicit payments for fake employees to his or her address.

Payroll Checking Account

You should pay employees from a separate checking account, and fund this account only in the amount of the checks paid out. Doing so
prevents someone from fraudulently increasing the amount on an existing paycheck or creating an entirely new one, since the funds in the account will not be sufficient to pay for the altered check.

You may find that several controls buttress each other, so that there are overlapping effects resulting from multiple controls. In these cases, you may be able to safely eliminate a few controls, knowing that other controls will still mitigate the risk of loss.

How do you verify payroll?

How to conduct an effective payroll audit.
Determine the timeframe for your payroll audit. ... .
Review employee data. ... .
Review hours worked and paid. ... .
Check variable payment and different types of compensation. ... .
Examine and document atypical payroll transactions. ... .
Check tax withholdings and deposits. ... .
Payroll reconciliation..

How do you audit a payroll external audit?

How you can perform a payroll audit for your business.
Scan your employee list, pay rates, and hours worked. ... .
Confirm pay rates and hours worked. ... .
Verify variable payments. ... .
Scrutinize off-cycle payroll. ... .
Do a payroll reconciliation. ... .
Reconcile internal payroll records with tax forms. ... .
Search for outstanding tax liabilities..

How would an auditor about the wages paid to workers?

Vouching of Salaries – Audit Procedure and Guidelines to Auditors. The auditor should vouch salary register and then compare it with the entries in the cash book. He should see that the total of salaries book for a particular month agrees with cheque drawn for salaries.

How do you vouch payroll?

Vouching of Payment of Wages.
Verify entry in Cash Book with respect to wages paid amount and date of payment..
Verify entry in Wages Account with regard to date and amount of payment..
Verify entries in Wage Sheet..
Verify entries in Pay Roll..

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