Payroll Audit Checklist – Must have for every business

A successful payroll audit helps organisations verify that employee compensation is accurate, compliant, and properly documented. To begin the audit, organisations should gather all relevant compensation details and financial records. By the end of the review, they can identify gaps and improve payroll processes to prevent future errors.

While quarterly audits are ideal, many organisations prefer conducting payroll audits annually—typically at the end of the financial year. The frequency ultimately depends on the organisation’s internal practices.
Below is a comprehensive checklist of the items that should be reviewed during a payroll audit.

1. Review Employee Records

• Employee names

• Payroll records

• Bank statements vs. payroll data

• Hours worked

• Overtime hours

Verify Employee Details

• Are all listed employees currently active?

• Are terminated employees or those on leave correctly updated?

• Are there any employees the management does not recognise?

• Are any employee details missing?

2. Verify Payroll Records

• Are all pay rates accurately recorded?

• Does the number of payroll runs match the comparison period?

• Are pay periods correct?

• Was payroll processed on time?

• Are employees paid on every scheduled payday?

• Were pay rate changes implemented promptly?

• Are employees correctly classified?

• Have all pay rate adjustments been properly entered?

3. Verify Time Records

• Are employees paid for all hours worked?

• Is overtime correctly calculated and paid?

• Are all time entries updated, approved, and accurate?

4. Verify Variable Compensation Components

• Are all variable payments clearly labelled?

• Are calculations for bonuses, commissions, shift allowances, and tips accurate?

• Is there written documentation for variable components?

• Are PTO and sick leave categories accurate?

• Is the methodology for PTO/sick leave documented?

• Are leave balances accrued correctly?

• Are PTO payouts calculated accurately?

• Are any special or irregular payments processed correctly?

5. Verify Tax Components

• Are employee income taxes properly withheld?

• Are Medicare or equivalent statutory taxes deducted?

• Are the correct state and local taxes applied?

• Has the employer paid all required unemployment or state taxes?

6. Verify Employee Deduction Records

• Are deductions for health, dental, and vision insurance calculated correctly?

• Are wage garnishments correctly processed?

• Are employee retirement contributions accurate?

• Are employer contributions to retirement plans correct?

• Are deductions for uniforms, property, or other items documented?

• Were all “other” deductions correctly applied?

7. Reconcile Payroll Records

• Does the payroll register match payroll expenses in the ledger?

• Are tax payments to local, state, and federal authorities recorded accurately?

• Are all payroll deductions properly tracked?

8. Reconcile Payroll Records With Bank Statements

• Does the payroll bank account balance match the payroll register?

• Did any employee receive duplicate payments?

• Do bank transactions align with payroll data?

• Are there any uncashed cheques?

• Are bank fees correct?

• Is documentation available for all payroll-related expenses?

• Are all expenses legitimate and accurate?

• Are there any unidentified transactions?