Putting your payroll to the test: Your guide to payroll audit preparation

June 24, 2026

Drew Maginn

Note: Check out additional articles from HCM Dialogue to learn more about how you can proactively prepare for an audit by applying payroll reconciliation best practices on an ongoing basis.

Many human capital management professionals are accustomed to being adaptable when something unexpected comes up. However, even with strong processes and good record keeping practices in place, finding out that you’ve been identified for a payroll record audit can add a long list of items to your to-do list. But rest assured, a lot of this work can happen in advance, and you can avoid common payroll audit findings and make the best out of a potentially stressful situation.

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Why do payroll audits happen?

A payroll audit verifies that your records are in good order and that you are compliant with various legislative and legal requirements. Auditors, whether federal (Canada Revenue Agency or Revenu Québec) or provincial bodies, will examine your records to confirm up-to-date pay rates, proper employee classification and accurate tax submissions.

Audits may be triggered for a variety of reasons including the below.

Employee complaints or a tip from a third party (e.g., a former employee)
Late or missed remittances (e.g., Canada Pension Plan, Employment Insurance)
Unusual deductions
Mismatched records
Random audits

Regardless of the reason, audit preparation requires all your documents and records to be in good order when the time comes for them to be reviewed.

” Audit preparation can be simplified by using a checklist to make sure your team is on the same page before any work begins. ”

Preparing with purpose: Your payroll audit preparation checklist for human resources and finance teams

Audit preparation can be simplified by using a checklist to make sure your team is on the same page before any work begins. While the level of detail needed for your checklist will depend on the size and complexity of your organization, there are repeatable steps that will apply regardless of the circumstances.

Assign a team lead and key point of contact: While preparing for an audit might involve many different employees, it’s important to establish a team lead right from the start. This individual will oversee the plan to keep you all on track, ensure you have prepared as much as possible in advance and be the key contact for the auditors when the actual review begins.
Develop a plan: Like any project, a payroll audit needs a clear plan to guide your team through the process from start to finish. If you’ve been audited in the past, review an older work plan to reacquaint yourself with the process. You can also look for helpful reference resources, like Canada Revenue Agency’s audit preparation webinar, which provides more details about what you can expect.
Get your records in order: All payroll documentation, including T4s, timesheets, earning statements, contracts and receipts, should be saved consistently for easy access. This includes making sure your file management system is documented and security settings are maintained to demonstrate controls to limit employee access to certain sensitive information.
Review employee classifications: Double check to make sure you have correctly identified and classified work arrangements (e.g., employees, individual contractors), as their deductions and remittances will vary.
Reconcile your numbers: Review your remittances to ensure that they match the amounts on employee pay records.
Conduct an internal audit: Examine your systems through an internal audit that focuses on testing your payroll processes to catch any issues that need to be corrected.

Put yourself to the test: Conducting an internal control review before a payroll audit

At a certain point in your preparation process, the best way to determine if you’re ready is to test your own systems the same way an auditor will. But what should you test? While you may have additional priority areas to examine based on your specific type of business, such as needing to comply with payroll legislation across multiple provinces and countries, there are some common errors that often come up during audits.

Misclassified employees: Check for misclassified employees, such as an employee being treated as a contractor, as this mistake can result in unpaid CPP, EI and other tax deductions, plus potential interest and fines for missing regular deadlines for remittances.
Incorrect deductions and withholdings: Beyond employee classifications, incorrect deductions and withholdings may occur by using outdated information or not staying up to date with payroll changes. These small errors, compounded over time, can require significant reconciliation and communication to employees who have been impacted.
Accounting for changes in employee status: Depending on the size of your organization, you may be constantly updating and revising payroll to account for salary changes as well as the arrival and departure of employees. These changes should be captured and proper documentation should be readily available (e.g., compensation letters, employment agreements) to demonstrate the accuracy of each employee’s record.

Reporting on all taxable benefits: Across different employees, taxable benefits must be identified and reported based on fair market value. This can include vehicle allowances, parking and bonuses, which should be tracked for each employee, especially perks that come with promotions or certain job titles.

With a payroll audit fast approaching, it’s only natural to worry that small errors may reveal themselves and balloon into bigger issues. However, you don’t have to wait for an auditor to point out your flaws if you take the time to place your own systems and processes under a microscope. By taking control of your situation, testing your own payroll systems and proactively correcting these errors, you may find that an impending audit that once felt like a potential catastrophe actually turns into nothing more than a minor inconvenience.

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