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

3.5    Sample Audit Procedures

There are a number of ways to conduct an audit of an employer's accounting books and records. The following is a description of one method that can be used.

  1. Begin with the acknowledged payroll.
  1. Using earnings records, compute total and taxable wages. Compare those amounts to the "as reported", resolve any variances, and make appropriate comments.

  2. Calculate total and taxable wages using W-2's and W-3.
  1. Calculate total wages by adding all gross wages on the W-2's.

  2. Calculate taxable wages for each person. If the gross wages for an employee is less than $9000, include all of the gross wages for that individual in the calculation of taxable wages. If the gross wages are greater than $9000, use $9000 in the calculation.
  1. Compare total and taxable wage amounts to the earnings records, resolve any variances, and make appropriate comments. You will need to determine which quarters are involved if there are variances.

  2. Compare amounts to federal Forms 941, 942, or 943 as applicable, resolve any variances, and make appropriate comments.

  3. Compare total and taxable wages to the amounts on federal Form 940. The amounts may not match due to the difference in state and federal taxable wage base. Resolve any variances, and make appropriate comments.

  4. Choose a number of employees and compare the payments indicated on the earnings records to the actual checks written.

  5. If the random sampling for verifying the payroll posting system is used and errors are found, it is necessary to expand the sampling in order to determine the magnitude of the discrepancy. However, if no errors are found it is reasonable to assume that the employer did not make any errors in the remainder of the audit period.

  6. Note in the audit work papers all report errors or discrepancies that were resolved.
  1. Begin to look for wages not included in the acknowledged payroll.
  1. Begin with the employer's chart of accounts and look for accounts that might contain wages paid such as "Contract Labor, Outside Services, Miscellaneous Expenses, etc." Review the transactions posted to those accounts.

  2. Examine the general ledger accounts and disbursement journals. Many employers use a "double entry" system, debiting the amount to one account and crediting it to another, so that the total debits equal the total credits. Other employers use a "single entry" system, which is usually a record of cash. The Auditor may encounter employers with little or no record of income and expenses.

  3. Compare totals from the earnings records to the general ledger and disbursement journal for the quarter and year-end. Be aware of the employer's fiscal year end. A fiscal year end other than 12/31 can distort the figures.

  4. Review any summary records the employer might have, such as Balance Sheet, Income Statement, Profit and Loss Statement or Big Chief Tablet.

  5. Examine the employer's income tax return.

  6. Examine the employer's 1099 file. Be sure that the general ledger or disbursement accounts to which the 1099's are charged have been examined for payments to additional people. Those who were paid less than $600 may not have received a Form 1099, but payments to them may be reflected in the accounts to which the 1099's are charged. Question the employer about any suspicious payments. You may wish to examine the supporting documents.

    If the employer correctly issued a Form 1099 to an independent contractor for at least $100,000, attempt to determine if the independent contractor had employees. If the Independent contractor had employees, but lacks an active TWC tax account, the Auditor will refer the Form 1099 to the appropriate tax area for a status investigation.
  1. Continue the audit
  1. Review 100 percent of other payments made by the employer in the search for unreported or hidden wages. Question any suspicious payments noted and review the employer's supporting documentation. Annotate findings.

  2. If not accomplished during the pre-audit interview, secure all current Status data from either the employer, SS-4, pre-audit questionnaire, or franchise tax report. Remember that a Status Report must be completed if the employer is a corporation, or if a change in ownership has occurred.

  3. Review all Petty Cash Payments.

  4. Review Corporate or Board Minutes, if available.
  1. Document findings in work papers.

  2. Prepare and sign audit report.  Signature is optional.  AE number is used by the Audit program.

  3. Send NEC assignments to appropriate tax areas.
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Texas Workforce Commission  |  Unemployment Tax

Last Revision: May 11, 2011