Fundamental Payroll Audits and Record Retention Flashcards

A company stores payroll records in a cloud-based system and then deletes them after the required retention period. What additional step should be documented during an audit?

Answer: A certified destruction record or deletion log confirming records were properly disposed of after the retention period

Maintaining a destruction log documents that records were retained for the required period and then disposed of appropriately.

Which audit procedure would BEST detect errors in the calculation of employee net pay?

Answer: Recalculating gross-to-net pay independently using payroll inputs and tax tables

Independent recalculation of gross-to-net pay is the most direct way to detect computational errors in payroll processing.

What is the primary purpose of segregation of duties in the payroll function?

Answer: To reduce errors and prevent fraud by dividing payroll tasks among multiple individuals

Segregation of duties prevents any single individual from controlling all aspects of a payroll transaction, reducing fraud and error risk.

An employer discovers that state income tax was withheld at the wrong rate for employees working in multiple states. Which corrective step is most critical?

Answer: Issue corrected W-2c forms and file amended state returns, then repay or collect the difference

Errors in state withholding require corrected W-2c forms, amended state filings, and adjusting under- or over-withheld amounts.

Under which circumstance is an employer required to withhold federal income tax at a flat 22% supplemental rate?

Answer: When paying bonuses or other supplemental wages up to $1 million, if paid separately from regular wages

Supplemental wages such as bonuses paid separately may be withheld at the flat 22% optional rate instead of using the aggregate method.

A payroll auditor reviews Forms 941 filed for the year and compares totals to W-2 amounts reported on Form W-3. What is this procedure testing?

Answer: Whether quarterly tax filings reconcile with annual wage reporting

Reconciling Forms 941 to Form W-3 ensures that the wages and taxes reported quarterly match what was reported annually on W-2s.

Which of the following is a red flag that an internal payroll audit should investigate further?

Answer: Multiple employees with direct deposits to the same bank account

Multiple employees sharing one bank account is a strong indicator of ghost employee fraud or wage diversion.