How To Perform An Internal Payroll Audit

5/21/2026

How can a payroll manager be sure that the department meets or exceeds all wage and hour compliance issues? The answer is simple although the execution of the process is complex.

Basically, the payroll manager has to conduct an audit for wage and hour compliance internally before any government agency does. He or she must conduct the same kind of thorough audit of all the payroll procedures as an external auditor would do. This audit is not a quick project that can be done in a day, but an overall department wide project that may take several weeks or months or even a year to complete, depending on how much time the manager can devote exclusively to this task.

ince the audit should be done on one aspect of the Payroll Department at a time, there is a starting and stopping point for each task. This makes it easier to complete each phase of the audit, be able to handle other projects, and then return to the next phase. Speed is not the concern for this audit but accuracy.

The audit can be conducted with the full knowledge of the payroll staff. This is not a secret audit to find fraud or to catch someone doing something wrong. The purpose is to find areas that are out of compliance and correct them before ever facing an external audit. The payroll staff can be useful in this endeavor.

This type of audit is not to be confused with an external audit conducted by an accounting firm or internal audits. Those audits are looking for compliance with general accounting practices and company procedures.

There are two points that are critical for the Payroll Manager to complete before beginning any internal audit:

• The person conducting the audit should know all the laws, rules and regulations concerning the topic being audited. These should be put in writing and include both federal and state regulations. This should not be done from memory but from primary sources such as the DOL website. Secondary sources (such as payroll manuals) can also be used if the source is comprehensive including source cites. This can be done prior to each audit for each topic or the entire audit book can be compiled prior to starting the audit.
  
  The company policy for each topic should also be included. Many times the federal or state requirements are exceeded by company policy. And, employees can sue if company policy is not followed even if the federal and state requirements are, so they should be included in the audit as well.
• A comprehensive list of all payroll tasks to be audited should be completed, in writing, prior to beginning the audit. This gives a playlist of the tasks to be accomplished and helps with assembling the law book discussed in the previous bullet. It also assists in compiling the time frame and work schedule for the audit.