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:
§ 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:
§ 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:
§ 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 off-site 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:
§ 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.