Audit System Manual graphic

[ Audit System Manual- TOC ] [ Ch 1 - Introduction ] [ Ch 2 - Preparing for an Audit ] [ Ch 3 - Conducting the Audit ] [ Ch 4 - Completing the Audit Forms and Schedules ] [ Ch 5 - Audit System Screens ] [ Ch 6 - Miscellaneous ] [ Ch 7 - USDOL - Tax Performance System ] [ Ch 8 - Computer Fundamentals & Hardware ] [ Appendix ]
[ 3.1 - General Information ] [ 3.2 - Understanding the Payroll Flow ] [ 3.3 - Books and Records ] [ 3.4 - Employee vs Independent Contractor Decision ] [ 3.5 - Sample Audit Procedures] [3.6 - Minimum Audit Requirements of the TWC Tax Department & the Tax Performance System (TPS)] [3.7 - Post Audit Conference] [3.8 - Audit Report and Work Papers]

Chapter 3: Conducting the Audit

comments to: Tax Department

3.2    Understanding the Payroll Flow

[ 3.2.1 - Flow of Data in a Typical Payroll System] [3.2.2 - Flow of Data in a Computerized Payroll System ] [3.2.3 - Memory Sticks, CD/DVD and TWC computers ]

Understanding the kinds of payroll records maintained by the employer, and the flow of information from one stage in the payroll system to the next stage is very important for an Auditor.

3.2.1    Flow of Data in a Typical Payroll System

The field Auditor should have a general understanding of how documents flow in an employer's payroll system. The flow of payroll documents follows a general pattern.

  1. Applicant completes an application for employment.

  2. Applicant is interviewed.

  3. Applicant is hired.

  4. Employee completes the required employment paperwork - W-4, I-9, insurance papers, etc.

  5. Employee information is sent to the Payroll Department and Personnel Department.

  6. Employee starts to work.

All of the above steps could occur on the same day.

  1. Employee punches time card each day, completes a time sheet or somehow records the amount of time worked.

  2. Employee records are initiated and/or updated.

  3. Rate and deduction authorizations are verified and a copy is sent to personnel.

  4. Employee's total wages, deductions, and net pay are calculated and posted to the Individual Earnings Record for the payroll period.

  5. Payroll check is prepared and given to the employee or electronically deposited in the employee's bank account.

  6. Total payroll for the period (day, week, or month) is posted to the payroll journal.

  7. Amounts in journals are totaled.

  8. Computations of employer contributions for FICA and FUTA purposes (accrual accounting) are prepared.

  9. End of month total payroll, and applicable accruals are posted to the general ledger. Tax deposits made if necessary (941, 940).

  10. Preparation of quarterly tax reports (C-3/C-4 for TWC, 941).

  11. Entries are made in the general ledger.

  12. Tax reports and checks for amounts due are sent to the appropriate government agency.

At year end:

  1. Year-end payroll data is verified and footed.

  2. Year-end payroll reports are prepared (940, 941, 4th quarter TWC report, and W-2). Checks are written and sent to the appropriate governmental agency.

NOTE: 100% of the records could be electronic.

3.2.2    Flow of Data in a Computerized Payroll System

Many employers use a computer to maintain payroll records. Auditors should know how to audit around the computer.

  1. After the pre-audit interview, start with the accounting department, bookkeeper, or accountant having the responsibility of furnishing input documents for the computer. Request and study the general ledger chart of accounts.

  2. Secure an explanation as to the format and content of reports containing payroll and cash disbursement information.
  1. Payroll data for salaried employees (name, address, social security number, deduction, salary payable, and year to date totals) is normally retained for processing based on the employer's pay periods. Only adjusting entries for overtime pay, unpaid leave, etc. would cause a change to usual payroll information for salaried employees.

  2. The basic data for hourly employees normally includes the current hourly rate of pay. Time cards could then be used by the employer to input hours worked by the employee during the pay period, or may be used to prepare a payroll ledger.

  3. After making any necessary adjustments to the payroll system for salaried employees or other personnel, the payroll process is activated and a preliminary payroll run is printed. The preliminary run is usually checked by the owner, bookkeeper, or someone in the accounting department to determine if the employees listed on the run are relevant to the pay period involved and to substantiate the subtotals and totals.

    If the information on the preliminary run is incomplete or in error, corrections are made and a second proof is run. When approved, the final payroll run is printed and payroll checks issued, usually as one of a sequence of events.
  1. The Auditor should verify the information on the printouts with canceled checks or time cards on a sample basis. If discrepancies are found in the sample, the number of entries checked should be expanded.

  2. The actual computer programs are complex and it is not necessary for the Auditor to have knowledge of all of the programs. Flow charts and record layouts are usually available from accounting or computer personnel who should be able to furnish the Auditor with the appropriate printouts.

  3. The Auditor should compare the input documents with the computer printouts. The employer must be queried about questionable items and these items must be resolved to the satisfaction of the Auditor.

  4. The Auditor should remember that the computer system will only process payroll checks that are entered into the system as payroll. It is still necessary to review other documents to search for unreported wages for casual or part-time labor, or wages paid to other workers that the employer does not consider to be in employment.

3.2.3    Memory Sticks, CD/DVD and TWC computers

If an employer, selected for an audit states they are completely paperless and offers all required documents via a memory stick, CD, DVD, or other device the auditor can accept this information, without violating Agency policy.

Agency owned computers are equipped with anti-virus software that will auto scan the data for any problems. Should the anti-virus software display an error message the employer provided device will be immediately removed and returned to the employer along with a request for another copy without problems.

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Texas Workforce Commission  |  Unemployment Tax

Last Revision: May 05, 2011