How to conduct a payroll audit
Regular payroll audits are essential to ensure employees are paid correctly, tax obligations are met, and your business stays compliant with Australian workplace laws. This complete checklist walks you through the process step by step.
Written by
Georgia Morgan
General information only – not tax or legal advice
This guide provides general information about conducting payroll audits. Tax rates, superannuation requirements, and employment laws change regularly. It does not constitute legal, HR, or professional advice and should not be relied on as a substitute for advice specific to your business, workforce, or circumstances.
What is a payroll audit?
A payroll audit is a detailed check-up of your company's payroll processes, records, and procedures. The main goal is to ensure all payroll-related activities are accurate, efficiently done, and compliant with Australian tax laws and employment regulations.
During an audit, you can identify discrepancies that help prevent financial issues like overpayments, underpayments, or even fraud such as "ghost employees" who don't actually work for the company.
According to the Australian Taxation Office (ATO), employers must keep accurate payroll records and submit Pay As You Go (PAYG) withholding and Single Touch Payroll (STP) reports correctly.
Sample payroll audit report structure
Here's what a typical payroll audit report includes. Document your findings systematically.
Payroll audit report
Period: [Start Date] to [End Date]
1. EXECUTIVE SUMMARY
Employees audited: [X]
Issues identified: [X]
Total discrepancy value: $[X]
2. KEY FINDINGS
3. RECOMMENDED ACTIONS
- Action item 1 with deadline
- Action item 2 with deadline
- Action item 3 with deadline
A payroll audit report typically includes:
- Summary - Scope and key metrics
- Findings - Issues discovered
- Discrepancies - Values and causes
- Actions - Fixes and deadlines
- Sign-off - Approvals recorded
Internal vs external audits
Choose the right type of audit based on your business needs and resources.
Internal audit
Conducted by employees within your organisation to evaluate payroll processes and identify improvements.
Advantages
- Cost-effective
- Familiar with systems
- Can be done frequently
- Immediate corrections
Considerations
- May lack objectivity
- Limited expertise
- Potential for oversight
Best for: Regular quarterly audits and ongoing compliance monitoring
External audit
Performed by independent third parties such as accounting firms or certified auditors.
Advantages
- Objective assessment
- Professional expertise
- Credibility for stakeholders
- Identifies hidden issues
Considerations
- More expensive
- Less frequent
- Requires scheduling
Best for: Annual compliance verification, investor due diligence, or after significant issues
Essential components of a payroll audit
Make sure to cover all these areas during your audit.
Employee records
Personal details, classifications, pay rates, and contract terms
Attendance and leave
Timesheets, leave balances, and absence records
Tax compliance
PAYG withholding, STP submissions, and tax forms
Superannuation
Contribution rates, fund details, and payment timing
Benefits and deductions
Salary sacrifice, health insurance, and other deductions
Record keeping
Document retention for 7 years as required by law
Payroll audit checklist
Use this checklist to ensure you cover all essential aspects of your payroll audit.
Employee details verified
RequiredNames, addresses, TFNs, and bank accounts are current
Classifications confirmed
RequiredFull-time, part-time, casual status matches contracts
Pay rates checked
RequiredRates match contracts and meet award minimums
Timesheets reconciled
RequiredHours worked match payroll records
Overtime verified
RequiredOvertime calculated at correct penalty rates
Leave balances audited
RequiredAnnual, sick, and long service leave balances accurate
PAYG withholding checked
RequiredTax deductions match current ATO tax tables
Super contributions verified
RequiredMinimum 11.5% paid to correct funds on time
Bank reconciliation complete
RequiredPayroll records match bank statements
Audit report documented
Findings and actions recorded for future reference
Three ways to manage payroll audits
Each method has trade-offs. Here's how they compare.
Manual process
Paper records, manual calculations, and spreadsheet tracking. Time-consuming and error-prone.
Efficiency: Low
Structured spreadsheets with formulas and checklists. Better organisation but still manual data entry.
Efficiency: Medium
Automated calculations, integrated timesheets, and real-time compliance. Faster audits with fewer errors.
Efficiency: High
7 steps to conducting a payroll audit
Follow these steps to conduct a thorough payroll audit for your business.
Review employee records
Start by verifying all employee information is accurate and up-to-date, including personal details, employment status, and pay rates.
Key actions:
- Check that names, addresses, and contact details are current
- Verify employee classification (full-time, part-time, casual)
- Confirm pay rates match employment contracts
- Check tax file numbers and superannuation fund details
Examine timesheets and wages
Compare reported hours worked against submitted timesheets and verify wages paid match the hours recorded.
Key actions:
- Cross-reference timesheet data with payroll records
- Check for any unapproved overtime or missed shifts
- Verify break times are correctly recorded and unpaid where applicable
- Investigate and correct any discrepancies immediately
Track variable payments
Review bonuses, commissions, overtime, and penalty rates to ensure they are calculated correctly according to company policy and award requirements.
Key actions:
- Verify overtime is calculated at the correct penalty rate
- Check commission calculations against sales records
- Confirm bonus payments match eligibility criteria
- Ensure allowances are paid correctly (uniform, travel, etc.)
Inspect payroll corrections
Review any corrections or adjustments made to payroll records and ensure they are properly documented and justified.
Key actions:
- Check all manual adjustments have proper approval
- Verify back-pay calculations are correct
- Ensure leave balance corrections are documented
- Flag any unjustified corrections for investigation
Audit tax and superannuation
Verify that income tax withholdings and superannuation contributions are calculated correctly and submitted on time.
Key actions:
- Check PAYG withholding against current tax tables
- Verify super contributions meet the 11.5% minimum (2024-25)
- Confirm super is paid to the correct funds by the deadline
- Review STP (Single Touch Payroll) submissions for accuracy
Reconcile with bank statements
Compare payroll records with bank statements to ensure all payments match and there are no unexplained discrepancies.
Key actions:
- Match each payroll payment to bank transactions
- Investigate any payments that do not have matching records
- Check for duplicate payments or missing transactions
- Verify net pay calculations are correct
Document findings and actions
Create a comprehensive report summarising findings, discrepancies, and recommended actions for improvement.
Key actions:
- Document all issues discovered during the audit
- Create an action plan with deadlines for corrections
- Recommend process improvements to prevent future errors
- Share the report with relevant stakeholders
Streamline payroll audits
RosterElf provides comprehensive audit trails and reports for all timesheet and payroll data. Built for Australian small businesses.
Payroll audit tips
Follow these principles for effective payroll audits.
Audit quarterly
Conduct payroll audits at least every quarter to catch issues before they compound.
Use a checklist
Follow a consistent checklist to ensure no aspect of payroll is overlooked during audits.
Separate duties
Have different people process payroll and conduct audits to reduce fraud risk.
Document everything
Keep detailed records of all findings, corrections, and process improvements.
Support your compliance efforts
Keep up with changes to tax rates, super requirements, and award conditions.
Use technology
Use payroll software to automate calculations and reduce human error.
Risks of neglecting payroll audits
Skipping regular audits can lead to serious consequences for your business.
Financial losses
Undetected overpayments drain company resources. Underpayments result in back-pay claims and penalties. Small errors compound into thousands of dollars over time.
Compliance penalties
Missed tax obligations lead to ATO penalties and interest. Late superannuation payments incur the Super Guarantee Charge. Fair Work violations result in fines.
Fraud risk
Ghost employees on the payroll go undetected. Time theft and false overtime claims continue unchecked. Duplicate payments may not be identified.
Reputation damage
Wage theft allegations damage employer brand. Employee trust erodes when pay issues occur repeatedly. Negative publicity affects recruitment and retention.
Simplify payroll audits with RosterElf
Integrated time tracking and payroll features make audits faster and more accurate.
Accurate time tracking
GPS, photo proof, and digital timesheets eliminate timesheet fraud and provide reliable audit data.
Award interpretation
Automatic calculation of penalty rates, overtime, and allowances based on applicable awards.
Payroll integration
Export payroll-ready data directly to Xero, MYOB, or other systems with one click.
Complete audit trail
Every change is logged with timestamps and user details for complete accountability.
No credit card required
Feature comparison
See how each audit method compares across key features.
Employee records
Timesheet tracking
Award interpretation
Tax calculations
Super compliance
Bank reconciliation
Audit trail
STP reporting
| Feature | Manual | Templates | Payroll software |
|---|---|---|---|
| Employee records | Paper files | Spreadsheet | Centralised database |
| Timesheet tracking | Paper timesheets | Excel formulas | Automated time clock |
| Award interpretation | Manual lookup | Rate tables | Built-in compliance |
| Tax calculations | Manual calculation | Tax calculator | Automated PAYG |
| Super compliance | Manual tracking | Due date reminders | Automated payments |
| Bank reconciliation | Statement matching | Reconciliation sheet | Auto-matching |
| Audit trail | Filing cabinet | Version history | Full digital trail |
| STP reporting | Manual submission | Export data | Direct ATO submission |
Common payroll audit mistakes
These mistakes lead to compliance issues, financial losses, and employee disputes.
Not auditing regularly
Consequence: Small errors compound over time, leading to significant underpayments or overpayments
Solution: Schedule regular audits (quarterly minimum) to catch issues early with payroll integration
Ignoring award rate changes
Consequence: Employees paid below minimum rates, leading to back-pay claims and Fair Work penalties
Solution: Stay updated with annual award rate changes using our award rates hub
Not verifying leave balances
Consequence: Incorrect leave payouts on termination, disputes with employees
Solution: Cross-check leave balances with recorded absences using leave management software
Skipping timesheet verification
Consequence: Time theft, ghost employees, or legitimate hours going unpaid
Solution: Use automated time tracking with photo proof and GPS verification via time and attendance
Poor record keeping
Consequence: Unable to defend against underpayment claims, ATO audit failures
Solution: Maintain digital records for 7+ years with digital HR records
Payroll and compliance resources
Access our free templates and guides to support your payroll processes.
Related guides
Explore more resources to support your payroll audit process
Frequently asked questions about conducting payroll audits
- A payroll audit is a detailed check-up of a company's payroll processes, records, and procedures. Its main goal is to ensure all payroll-related activities are accurate, efficiently done, and compliant with Australian tax laws and employment regulations.
- You should conduct payroll audits at least quarterly to catch issues before they compound. Annual audits are the absolute minimum, but more frequent reviews help identify errors early when they are easier and cheaper to correct.
- Yes, small business owners can conduct their own internal payroll audits. This is often more cost-effective than hiring external auditors. However, for complex operations, regulatory compliance requirements, or when seeking investment, an external audit by a certified accountant may be advisable.
- Australian employers must retain payroll records for 7 years. This includes employee details, pay records, leave records, superannuation contributions, and tax documents. Proper record keeping is essential for ATO audits and Fair Work compliance.
- Neglecting payroll audits can lead to undetected errors causing overpayments or underpayments, non-compliance with tax laws resulting in ATO penalties, missed superannuation deadlines, Fair Work violations, employee disputes, and potential fraud going undetected.
Regulatory sources
This guide is aligned with official Australian workplace and tax regulations on payroll compliance.
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