What Is a Payroll Audit?
A payroll audit is a systematic review of a business’s payroll processes, records, and procedures to ensure accuracy, compliance, and efficiency. This process typically involves verifying employee compensation, tax withholdings, superannuation contributions, and adherence to applicable employment laws such as the Fair Work Act 2009, Modern Awards, and National Employment Standards (NES) in Australia.
Payroll audits can be internal (conducted by your HR/payroll team or accountant) or external (conducted by third-party auditors or government agencies such as the ATO or Fair Work Ombudsman). They help uncover inconsistencies, prevent fraud, and ensure your business remains compliant with payroll obligations.
ATO – Keeping accurate payroll records
Why Payroll Audits Matter
Regular payroll audits are essential for:
- Legal compliance: Avoiding fines, penalties, or legal action for breaches of Fair Work laws
- Financial accuracy: Preventing overpayments, underpayments, or tax errors
- Employee trust: Ensuring staff are paid correctly and fairly
- Process improvement: Identifying inefficiencies or risks in your payroll system
Given that payroll is often a company’s largest expense, even small errors can accumulate into costly issues over time.
What Does a Payroll Audit Include?
A thorough payroll audit generally covers the following areas:
1. Employee Information
- Are employee details (e.g. names, TFNs, addresses, bank accounts) up to date?
- Are employment types correctly classified (e.g. full-time, part-time, casual, contractor)?
- Are TFNs valid and submitted to the ATO?
2. Wages and Pay Rates
- Are hourly rates and salaries in line with Modern Awards or employment agreements?
- Are penalty rates, allowances, and loadings correctly applied?
- Are overtime rates accurate?
3. Timesheets and Rosters
- Do recorded hours match scheduled shifts?
- Are timesheets approved by the correct personnel?
- Are breaks and leave entitlements applied correctly?
4. Leave and Entitlements
- Are annual leave, personal leave, long service leave, and parental leave balances accurate?
- Is leave accrual calculated correctly?
5. Superannuation Contributions
- Is the current SG rate (11.5% for FY24–25) applied to all eligible earnings?
- Are contributions paid on time via a compliant clearing house?
6. Deductions and Withholdings
- Are PAYG taxes withheld correctly and submitted to the ATO?
- Are garnishments or salary sacrifices handled lawfully?
7. Payslips and Recordkeeping
- Are payslips issued in compliance with Fair Work requirements?
- Are payroll records stored securely for the required 7 years?
Common Issues Uncovered in Payroll Audits
- Misclassification of casual vs part-time employees
- Underpayment due to incorrect award interpretation
- Incorrect leave accrual for shift workers
- Super not paid on bonuses or allowances
- Backdated adjustments not applied
- Late superannuation payments (leading to SG Charge penalties)
How Often Should You Conduct a Payroll Audit?
- Quarterly: Ideal for growing businesses or those with complex rosters and frequent pay cycles.
- Annually: A minimum best practice for all employers.
- Before EOFY: Helps ensure clean records for reporting and tax time.
- After System Changes: If you’ve switched payroll systems, updated awards, or changed HR policies.
Tools to Support Payroll Auditing
Modern payroll software like Microkeeper makes audits much easier by centralising all payroll data, automating compliance checks, and storing historical records securely.
Microkeeper offers:
- Audit trails for pay changes
- Historical leave and pay records
- Automated award interpretation
- Single Touch Payroll (STP) reporting to the ATO
- Built-in superannuation calculations
- Exportable audit logs for external reviews
See how Microkeeper simplifies payroll
How to Conduct a Payroll Audit: Step-by-Step
- Gather payroll data from your software or records
- Verify employee classifications and award conditions
- Check pay rates against current award rates or contracts
- Compare timesheets with payslips and rosters
- Review leave accruals and balances
- Validate super and PAYG payments
- Ensure STP submissions match payroll outputs
- Document findings and correct discrepancies
- Implement fixes and improve payroll processes
FAQs About Payroll Audits
Is a payroll audit required by law?
No, but maintaining accurate records and paying employees correctly is required. Audits are a smart way to ensure this.
What if I find underpayments during an audit?
You should rectify them immediately and backpay affected staff. Keeping a clear record of adjustments is critical.
Can the ATO or Fair Work audit my business?
Yes. Government audits can be random or triggered by complaints. Internal audits help you stay prepared.
What’s the penalty for payroll errors?
Penalties vary. For serious Fair Work breaches, businesses may face fines over $100,000, plus reputational damage.
Final Thoughts
A payroll audit is more than a check, it’s a proactive approach to protecting your business, building employee trust, and ensuring legal compliance. By conducting audits regularly and using robust payroll software, you can reduce risk, catch errors early, and stay ahead of regulatory changes.
Microkeeper’s all-in-one payroll, time-tracking, and HR platform provides everything you need for smoother, smarter payroll audits, without the stress.
Disclaimer: This article is for informational purposes only. Always seek advice from a registered accountant, payroll advisor, or the Fair Work Ombudsman for specific guidance.
