Audit. How can such a simple five letter word cause payroll practitioners to cringe? The mere thought of going through an audit can be very stressful. The reality is, if you are responsible for payroll, chances are you will be audited. However, if you are compliant, keep up-to-date with changing legislation and maintain complete and accurate records, your audit should be a piece of cake!
Following these simple steps may help mitigate the risk of noncompliance penalties and fines.
Typically, there are three types of audits that payroll professionals may encounter: an internal compliance audit, an external audit, and a government audit. A government audit is performed by an agency responsible for overseeing a particular area of legislation. Government regulatory bodies including the Canada Revenue Agency (CRA), Workers’ Compensation (WC) Boards, the Ministry of Finance, and the Ministry of Labour conduct audits on a regular basis.
Audits can be administered on-site or at a third party’s establishment.They are carried out to ensure that organizations satisfy their obligations related to the employment of workers, payment of salaries and wages, the collection and remittance of statutory withholdings and the accuracy of annual returns. To ensure a smooth audit, you are recommended to prepare information ahead of time, cooperate with the auditor, and be available for any questions they may have.
Being proactive and keeping complete and accurate records is the best approach to ensuring a smooth audit. Follow these best practices:
- Ensure that employee records are set up properly (e.g. tax brackets, pension set up)
- Conduct a self-audit to ensure a reasonability test is complete (e.g.Are all the taxable benefits and allowances on the payroll register reported on the T4 in the appropriate boxes?)
- Confirm that all taxable benefits are set up correctly
- Verify that all taxes are withheld and remitted on time and that you balance back to your required financial reports (e.g. general ledger) and
- Conduct monthly or quarterly Pensionable and Insurable Earnings Review (PIER) testing.
Taking these steps will help you determine if you need to make additional changes to your organization’s processes to mitigate any further risks from non-compliance.
Depending upon who is conducting the audit, any of the following records may be requested for review:
- Payroll records, registers and supporting documents (e.g. time & attendance)
- Financial statements
- General Ledgers
- Payment records including cancelled cheques
- Accounts payable records including payments to contractors
- Records of any independent operator rulings issued by CRA or a WC Board
- T4, T4A slips and summaries and other information returns filed with the CRA
- RL slips and summaries filed with RQ
- Clearance Certificates for the year(s) under review in a WC audit
- Organization meeting minutes and other governance/managerial records and/or
- Files and working papers used to calculate payroll remittances.
The auditor will contact you in writing to indicate the place of the audit and which records they require. Therefore, it is essential to keep a detailed paper trail or traceable transactions of your payroll from start to finish.
Employment Standards gives inspectors wide ranging powers related to investigations, including the ability to:
- Enter and investigate without a warrant;
- Examine records;
- Require production of relevant documents;
- Take records or any other relevant documents; and
- Question any person, including employees.
The most common records that inspectors investigate include:
- Time records
- Vacation records
- The different employee positions in the workplace and
- Payroll records.
Regardless of which type of audit is being conducted, there will be a requirement to produce organization documents for review. It is the responsibility of the organization to maintain and store accurate records. For example, the CRA requires that organizations must make the records available and permit the auditor to make or receive copies, as requested. Electronic records are allowed, as long as they are supported and maintained in an accessible and readable format. All backup copies must be stored, preferably at a Canadian site other than the operations location.
If you deduct Canada/Quebec Pension Plan (CPP/QPP) contributions, Employment Insurance (EI) and income tax from remuneration or other paid amounts, your records must include the following:
- Hours worked by employees
- Amounts withheld for CPP and QPP contributions, EI premiums and taxes
- TD1/TP1015.3-V forms
- CRA Letters of Authority to reduce tax deductions for certain employees for a specific year
- All issued information slips
- All filed returns and
- Registered Pension Plan (RPP) information. (For RPP members, this is required even if there are no statutory deductions.)
Records of an employee’s gross earnings, CPP contributions, EI premiums and income tax (payroll register) must be kept for six tax years plus the current year. Records must also be kept of the remittances paid to the CRA, as well as T4 and RL-1 filing.
This is an excerpt from Dialogue Magazine, a publication for CPA members. Best practices for topics like audit preparation are available to members on their website at www.payroll.ca.