Why Auditing the Payroll Cycle is Important
You don’t hear a lot about large-scale financial statement frauds involving payroll accounts, as accrued payroll liabilities aren’t typically material to a company’s financial position. But fraud involving the payroll cycle is quite common. Here are 6 examples of payroll fraud:
• Paying fictitious employees
• Paying terminated employees
• Overpaying actual employees
• Incorrectly classifying labor costs
• Underpaying third parties
• Inaccurate disclosures for executive and/or shared-based compensation
To reduce the likelihood of fraud, companies should ensure that:
• Payment is made to actual employees at authorized rates for actual time worked
• Gross pay, payroll deductions, and net pay have been correctly calculated
• Payroll deductions have been authorized
• Payroll costs are correctly classified
• Withholdings are submitted to third parties in a timely manner
• Full disclosure is made for any executive and/or share-based compensation
0:00 Introduction
0:29 Paying fictitious employees
1:11 Paying terminated employees
1:49 Overpaying actual employees
2:25 Incorrect classification of labor costs
2:58 Underpaying third parties
3:39 Inaccurate disclosures
4:15 What companies need to ensure
6:26 The 6 steps for auditing the payroll cycle
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