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.
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.
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:
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.
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.
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.
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.
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:
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.
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.
Payroll audits review access controls and system security. This helps companies identify any possible threats and protect the sensitive payroll information from breaches.
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:
Audit assertions are specific claims that auditors verify during a payroll audit. These include:
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
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:
Recording payroll expenses involves documenting all employee-related costs in the organization’s financial records. The following are the steps to record payroll 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:
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:
To upgrade your payroll management system, book a demo today with Darwinbox!
A detailed payroll audit checklist helps ease the payroll audit process. The following is the payroll audit checklist companies can follow:
Companies should ensure that all the employee details like salaries, designations, benefits, etc., are updated and accurate.
Organizations must cross check deductions for tax withholding, SSS, PhilHealth, and Pag-IBIG contributions for legal compliance.
Departments should ensure that the salaries and reimbursements are paid correctly and on time.
Teams should review the attendance records of employees and check the overtime calculations to confirm the accuracy.
Organizations should verify that the incentives and bonuses are calculated and approved according to the company policy.
Organizations need to match their payroll disbursements with the bank statements to ensure that all the transactions are accurately accounted for.
Companies should compile and review their reports for tax filings and other regulatory submissions to avoid any delays or troubles.
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.
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.
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.
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.
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.