How to Conduct a Payroll Audit in the Philippines?

Payroll audits are one of the most important and crucial activities of every company. Companies conduct payroll audits to ensure there is no foul play in the system, or any other impending issue. Payroll audits are a complicated task, especially in countries like the Philippines, where the labor laws are complex, and compliance requirements are very strict. 

A payroll audit is a detailed review and verification of the payroll process of the company. Conducting payroll audits ensures smooth operation of payroll systems of an organization. It also protects organizations from legal and compliance issues. 

In this blog, we will discuss about payroll audits, payroll compliance, how to conduct a payroll audit in the Philippines, how payroll audit softwares help organizations, payroll audit checklist, compliance laws, how to prepare for payroll audits, and how payroll softwares help.

What is a payroll audit?

Payroll audit is an evaluation of a company’s payroll processes in which their records are checked and verified. It involves checking the accuracy of employee compensation, tax deductions, benefits and compliance with the labour laws. Payroll audits ensure that the organization’s payroll system is operating efficiently and it aligns with the legal standards.

In the Philippines, the Bureau of Internal Revenue (BIR) conducts audits to ensure the payroll systems are accurate and the companies are adhering to the Philippine labour laws.

Why are payroll audits important?

Payroll audits are one of the sensitive aspects of a company’s business operations. These audits directly impact the company’s employees satisfaction and financial stability. It also exposes the companies to legal and financial troubles in case the payroll is mishandled. The following are the reasons why payroll audits are important in the Philippines:

Compliance with the Philippine Labour Laws

The Philippines Labour Laws like the Labour Code of the Philippines and agencies like the Bureau of Internal Revenue have regulations for strict compliance in the payroll management of organizations. If the companies get caught for non-compliance of the employment laws, they can face heavy penalties, which may affect them financially, and can tarnish their brand image as well.

Prevention of Errors and Payroll Fraud

Payroll audits identify discrepancies that ensure accurate payments and provide a safety net against any possible frauds. For example, a routine audit may reveal ghost employees in the system that are receiving salaries. This will help companies save costs and cut unnecessary financial and legal liabilities. 

Financial Integrity

Payroll audits help organizations maintain their financial integrity by making sure that their payroll expenses are allocated correctly and there is transparency. Accurate payroll data is important for financial budgets and reports.

Improved Operational Efficiency

By discovering the payroll inefficiencies, audits ensure that the process is optimised. For example, automating manual payroll calculations after an internal payroll audit can help an organization save hours of work.

What are the benefits of conducting a payroll audit?

As discussed above payroll audits are extremely important for an organization for a smooth working process. Along with being important, payroll audits have a plethora of benefits. The following are the benefits of conducting a successful payroll audit:

Enhanced Accuracy

Payroll audits ensure that the employees receive accurate salaries, and benefits, which builds trust within the workforce. For example, an employee may have been receiving the wrong amount for their overtime. By correcting a recurring error in their overtime calculation, it will lead to the employee receiving the correct amount, which will lead to employee satisfaction.

Companies can use tools like Darwinbox to maintain accuracy in their payroll audits and improve their work processes.

Process Improvement

Conducting audits identifies issues with the payroll management of a company. For example, outdated payroll processes and softwares might cause delays in generating payslips. This leads to management chaos, employee dissatisfaction, etc. By conducting a payroll audit, companies can upgrade to a better software which will lead to a more efficient work process. 

Organizations can upgrade to softwares like Darwinbox for efficient payroll and records management to improve their payroll processes.

Data Security

Payroll audits review access controls and system security. This helps companies identify any possible threats and protect the sensitive payroll information from breaches.

How to prepare for an external payroll audit?

Preparing for an external audit is important to ensure that there are no last minute blunders or issues. The following are the steps to prepare for a payroll audit:

1. Organize Payroll Records: It is important to ensure that all financial statements related to payroll like employee contracts, tax fillings, remittance proofs, etc. are properly available. Companies can also keep digital copies to simplify record management.
2. Understand Legal Requirements: Companies should be thorough with the Philippines labor laws and tax laws to avoid any compliance issues. For example, companies should ensure compliance with Tax Reform for Acceleration and Inclusion (TRAIN) law.
3. Review Internal Policies: Payroll department should ensure that their internal policies align with the legal regulations. For example, companies can check if their leave encashments are calculated according to the legal policies and the labour laws.
4.  Utilize Payroll Software: Companies can use softwares to centralize data and simplify their audit process. Tools like Darwinbox can automate data collection and analysis.
5. Engage Key Stakeholders: Companies can involve HR, finance, and legal departments in the payroll audit process. This will ensure that all the aspects of the audit are covered efficiently.

Audit assertions for payroll in the Philippines

Audit assertions are specific claims that auditors verify during a payroll audit. These include:

• Existence: All employees listed in the payroll system are valid and active. For example, verify that resigned employees are no longer on the payroll.
• Completeness: All employee payments are included in the payroll records, ensuring no omissions.
• Accuracy: Salary computations, deductions, and benefits are correct. This includes ensuring tax deductions match BIR rates.
• Authorization: Payroll transactions are approved by appropriate personnel, such as HR managers and finance heads.
• Classification: Payroll expenses are categorized correctly in financial records. For instance, segregate employee bonuses from regular salaries.

Understanding Payroll Audit Procedures

Conducting regular payroll audits is a critical process for ensuring compliance, accuracy, and financial transparency. The following are the steps to conduct a payroll audit:

Review Employee Data

Organizations can begin by ensuring that employee records in the payroll system are consistent with the data maintained by HR. Mismatched or outdated records can lead to errors in payroll processing.

For companies without integrated systems, such as an Applicant Tracking System (ATS) linked to HR and payroll software, it is essential to verify employee information against offer letters and contracts. For example, active employees must be correctly classified (e.g., exempt versus nonexempt, full-time versus part-time). It is equally important to check that employees on leaves of absence are receiving the appropriate pay as per company policy.

Platforms like Darwinbox streamline this process by connecting HR and payroll systems, reducing the chances of discrepancies and automating record updates across systems.

Review Hours Worked and Paid

Organizations should verify timesheets and attendance records to ensure the hours worked by employees align with the amounts paid, particularly for hourly employees.

A consistent pattern of identical time cards across employees might indicate potential tampering, such as "buddy punching" or time theft. To avoid these risks, advanced payroll systems like Darwinbox integrate seamlessly with attendance tracking tools, providing real-time data to ensure accuracy in payments.

Examine Variable Payments and Compensation

Organizations must thoroughly check variable components of employee pay, such as overtime pay, bonuses, commissions, and piece-rate earnings. For companies employing tipped workers, it is important to validate that reported tips are accurate.

For example, when dealing with vacation pay, shift differentials, or special incentives, proper documentation and policy are very important to avoid any overpayments or underpayments.

With solutions like Darwinbox, companies can easily track and calculate variable pay elements, ensuring precision and compliance with applicable laws.

Scrutinize and Document Atypical Payroll Transactions

Special transactions like signing bonuses, relocation allowances, back pay, or payroll corrections require additional scrutiny. These areas often carry a higher risk of fraud or error.

Validate Tax Withholdings and Deposits

Companies need to ensure that tax withholdings and deposits are accurate and compliant with the latest regulations. Changes in employee work locations or updates to tax laws or payroll tax can significantly affect withholdings.

For example, employees working remotely may have different tax requirements than those based in the office. Tools like Darwinbox automatically calculate and adjust tax withholdings based on location and regulatory updates, helping companies stay compliant with Bureau of Internal Revenue (BIR) requirements in the Philippines.

Reconcile Payroll with Financial Records

Reconciling payroll with bank activity ensures alignment between payroll records and bank statements. Companies must verify that all payments, including direct deposits, match their documentation.

Organizations should also confirm the authenticity of direct deposit change requests. Darwinbox simplifies bank account reconciliations by integrating payroll and financial systems, providing real-time visibility into all transactions.

Review Payroll Compliance Rules

Payroll compliance rules are especially critical in regions with stringent labor laws, such as the Philippines. Companies must ensure that payroll processes adhere to local regulations, including tax rates, benefits contributions (SSS, PhilHealth, Pag-IBIG), and minimum wage requirements.

For multinational organizations, the complexity increases as rules vary across locations. Platforms like Darwinbox provide real-time compliance updates tailored to the regions where the company operates, minimizing the risk of penalties or fines.

Consolidate the Report Findings

Organizations should compile a detailed payroll audit report outlining findings, discrepancies, and areas for improvement. This report should be shared with key stakeholders, such as HR and finance leaders.

Maintaining documentation of audits is essential for future reference, particularly in cases of legal disputes or regulatory reviews. Tools like Darwinbox allow for automated reporting, ensuring accuracy and reducing manual effort.

Identify Opportunities for Improvement

A payroll audit can reveal inefficiencies in processes or outdated practices. Companies should evaluate areas for improvement, such as adopting automation to minimize errors or integrating systems for better data flow.

For example, if manual timesheet entries are prone to inaccuracies, upgrading to an automated time tracking solution could significantly enhance payroll accuracy. Darwinbox’s all-in-one platform offers a range of automation tools to streamline payroll management and improve overall efficiency.

Develop an Action Plan

Once areas for improvement have been identified, organizations should develop a clear action plan. This plan should outline priorities, timelines, and budget requirements while identifying key stakeholders responsible for implementation.

Starting with the most pressing issues, companies can systematically enhance their payroll processes to achieve long-term compliance and efficiency. Platforms like Darwinbox can support these improvements through scalable, customizable solutions that grow with organizational needs.

By following these steps companies can ensure their payroll audits are thorough, accurate, and aligned with regulatory standards. This approach not only minimizes risks but also builds trust with employees and stakeholders alike.

Common Mistakes while conducting a payroll audit

As we discussed earlier, conducting a payroll audit is a complex task. Companies often encounter mistakes that cost them penalties and harm their brand image. The following are the mistakes that companies may make during their payroll audit:

Inadequate Record-Keeping

Incomplete or missing documents can delay audits and create issues in the workflow. For example, due to missing documents, companies may fail to file taxes on time, and this may lead to non-compliance issues.

Failure to Update Compliance Changes

Sometimes, companies may miss or ignore the recent updates in labour laws, like changes in minimum. This can lead to errors and more compliance issues. 

Relying on Manual Processes

Manual processes lead to increased risk of errors and inefficiencies. Manual computations are more prone to mistakes and errors, especially in case of large workforces. 

Businesses can automate their payroll processes by using tools like Darwinbox.

Neglecting Employee Input

Overlooking concerns raised by the company’s employees can cause trust issues within the workforce. For example, ignoring employee reports about incorrect tax deductions can increase compliance risks.

The Role of Payroll Software in Simplifying the Process

In today’s work processes, payroll softwares have become an essential part for efficient payroll audits. The following are the ways payroll service providers simplify the payroll audit process:

• Automated Calculations: Ensures accurate computation of salaries, taxes, and benefits. For example, calculating withholding tax automatically based on BIR rates reduces errors
• Real-Time Compliance Updates: Reflects changes in labor and tax laws, ensuring adherence to regulations
• Centralized Data Management: Eliminates the need for manual records, reducing errors. Centralized systems allow quick access to payroll data during audits
• Customizable Reporting: Generates audit-specific reports quickly. For instance, Darwinbox can create detailed reports on overtime payments
• Enhanced Security: Protects sensitive payroll data with encryption and access controls
• Integration with Other Systems: Connects seamlessly with HR and accounting systems, streamlining data flow.

Recording Payroll Expenses Effectively

Recording payroll expenses involves documenting all employee-related costs in the organization’s financial records. The following are the steps to record payroll expenses:

1. Categorizing Expenses: Companies should separate wages, benefits, taxes, and deductions. For instance, organizations need to list health insurance contributions under benefits.
2. Using General Ledger Accounts: Organizations must allocate payroll costs to specific accounts. For example, companies should assign employee bonuses to a bonuses account.
3. Reconciliation: Companies should match payroll records with bank statements to ensure all transactions are accounted for to avoid any discrepancies.
4. Documentation: It is important for organizations to retain proof of payments, tax filings, and benefit remittances. These documents are essential for audits.

Effective Methods for Auditing Employee Expenses

For organizations, auditing employee expenses ensures that reimbursement costs and other expenses are accurate and comply with the company policies. Following are the key steps to audit employee expenses:

1. Collect Expense Reports: Companies should start by gathering all the employee submitted reports. For example, travel expense claims can be compiled for verification.
2. Verify Receipts: Organizations should ensure that all the claims are supported by valid and authentic receipts. 
3. Check Policy Compliance: Companies should confirm that the submitted expenses align with the company guidelines. 
4. Approve Legitimate Claims: Organizations should validate and approve genuine reimbursements while flagging questionable claims for internal review.

A Leading Tools for Efficient Payroll Audits

As payroll audit is a complicated task, tools like Darwinbox help companies simplify their payroll management by integrating advanced technology with a user-friendly interface. Its payroll module is at par to handle unique payroll practices in the Philippines.

The following are the key features of Darwinbox:

• Automated Compliance Checks:
  Darwinbox regularly updates its system to align with changes in Philippine labor and tax laws. For example, it automatically adjusts for new BIR tax brackets or SSS contributions, ensuring compliance with government regulations.
• Seamless Integration:
  It integrates payroll data with HR and financial systems, ensuring that all records are synchronized and accessible. For instance, when an employee’s salary or tax details are updated in the HR system, the payroll data reflects these changes instantly. This avoids any chance of payroll errors.
• Employee Self-Service Portal:
  Employees can access their payslips, tax deductions, and benefits records in real-time, reducing errors and the need for manual interventions. This feature also enables employees to flag discrepancies, improving the audit process.
• Customizable Reports and Dashboards:
  Darwinbox provides audit-friendly reporting features that allow companies to generate detailed insights on various payroll metrics, such as overtime payments, tax remittances, and benefit contributions.
• Enhanced Data Security:
  Sensitive payroll data is encrypted, and access is restricted to authorized personnel, ensuring compliance with data privacy regulations like the Data Privacy Act of 2012 in the Philippines.
• Error Detection and Notifications:
  The software identifies anomalies in payroll calculations, such as duplicate salary payments or incorrect deductions, and sends notifications for timely corrections.

To upgrade your payroll management system, book a demo today with Darwinbox!

Comprehensive Payroll Audit Checklist for Ensuring Accuracy and Compliance

A detailed payroll audit checklist helps ease the payroll audit process. The following is the payroll audit checklist companies can follow:

Verify Employee Records

Companies should ensure that all the employee details like salaries, designations, benefits, etc., are updated and accurate.

Review Tax Deductions

Organizations must cross check deductions for tax withholding, SSS, PhilHealth, and Pag-IBIG contributions for legal compliance.

Check Payment Records

Departments should ensure that the salaries and reimbursements are paid correctly and on time.

Validate Timesheets and Overtime

Teams should review the attendance records of employees and check the overtime calculations to confirm the accuracy.

Analyze Bonus and Benefits

Organizations should verify that the incentives and bonuses are calculated and approved according to the company policy.

Reconcile Bank Statements

Organizations need to match their payroll disbursements with the bank statements to ensure that all the transactions are accurately accounted for.

Document Compliance Reports

Companies should compile and review their reports for tax filings and other regulatory submissions to avoid any delays or troubles.

Conclusion

With the right approach and technology, effective payroll audits become more than a compliance necessity. Regular payroll audits are important for organizations for ensuring accuracy, compliance, and operational efficiency. In the Philippines, where labor laws and tax regulations are complex, regular payroll audits safeguard businesses from financial and legal risks while boosting employee confidence.

Modern payroll solutions like Darwinbox simplify the auditing process by automating calculations, maintaining compliance, and providing actionable insights through comprehensive reporting.

FAQs

What is a payroll audit?

A payroll audit is a review of the payroll records and processes of an organization to ensure that there is compliance with the laws and the procedure is accurate.

How often should companies conduct a payroll audit?

Companies should ideally conduct payroll audits at least annually. However, quarterly or bi-annual audits are recommended for organizations with complex payroll systems or frequent regulatory changes.

What is the role of tax withholdings in a payroll audit?

Tax withholdings are crucial for payroll audits. Auditors verify that the correct amount of taxes is deducted and remitted to the tax authorities as per the applicable laws and regulations.

How are payroll registers used in a payroll audit?

Payroll registers are detailed records of all employee payments, including salaries, deductions, taxes, and benefits. During a payroll audit, auditors use these registers to verify the accuracy of payments and deductions, cross-check tax remittances, and ensure compliance with company policies and government regulations.