What Is a Time Audit?

A time audit is a systematic review of employee time records, timesheets, and payroll data to verify accuracy, catch errors, and ensure compliance with labor laws. It’s essentially checking that the hours employees were paid for match the hours they actually worked.

Think of it as a quality control process for your payroll. You’re looking for discrepancies between what the time clock recorded, what employees submitted, and what payroll processed.

Quick Answer
A time audit reviews employee time records to find errors, prevent payroll mistakes, and ensure compliance with wage and hour laws. It compares recorded hours against actual work performed and checks for issues like missing punches, incorrect overtime, or policy violations.

Why Do Time Audits Matter?

Payroll errors are expensive and common. Over 70% of employers experienced at least one payroll error in the last two years, according to Lumber Finance.

The Fair Labor Standards Act requires accurate recordkeeping of hours worked. Time audits ensure you’re meeting these requirements and help avoid penalties like back wages, liquidated damages, and civil penalties.

Time audits also catch time theft like buddy punching, time rounding abuse, and unauthorized overtime.

When Should You Run a Time Audit?

Regular Audit Schedule

Every pay period: Quick reconciliation to catch obvious errors before finalizing payroll

Quarterly: Mid-depth review of patterns, compliance, and trends

Annually: Comprehensive audit covering the full year’s data, employee classifications, and policy compliance

Triggered Audits

Run a time audit immediately when:

You notice unusual overtime patterns
Employees frequently report paycheck errors
You’re preparing for a DOL inspection
There’s suspected time theft or fraud
You’ve implemented a new time tracking system
You’re changing payroll providers
There’s been a merger or acquisition

What Does a Time Audit Check For?

A time audit verifies:

Employee classification: Are employees correctly classified as exempt or non-exempt under FLSA? Misclassification is one of the most expensive compliance violations.

Time entry accuracy: Missing punches, duplicate entries, suspicious patterns, and whether time clock data matches submitted timesheets.

Overtime calculations: Verify overtime is correctly calculated (1.5x after 40 hours/week) and properly approved. Common errors include not including bonuses in overtime rates or calculating overtime incorrectly across multiple pay codes.

Break compliance: Required breaks are being taken, meal breaks are unpaid, and employees aren’t working through breaks. Requirements vary by state.

Rounding practices: Time rounding is neutral and doesn’t systematically favor the employer. Under FLSA, rounding must average out over time.

Policy compliance: Employees follow your timekeeping policy, managers approve timesheets, and corrections are documented.

How Do You Perform a Time Audit?

1. Gather records: Collect time clock data, timesheets, payroll reports, schedules, and approval logs for the audit period.

2. Define scope: Decide on the time period (pay period, quarter, or year), which employees to audit, and focus areas. For your first audit, start with a sample to refine your process.

3. Compare data sources: Cross-reference time clock data with timesheets, timesheets with payroll records, and schedules with actual hours. Look for entries with no punch data, unpaid hours worked, or pattern discrepancies.

4. Check calculations: Verify daily and weekly hour totals, overtime rates, and PTO deductions. Use spot checks to find patterns.

5. Review approvals: Check that managers approved timesheets before payroll and that edits are documented. Red flag: employees editing their own time without review.

6. Check compliance: Verify against FLSA requirements, state laws, and company policies. Common violations include not paying for all hours worked or improper overtime exemptions.

7. Document findings: Create a report showing records reviewed, errors found, patterns, violations, and recommendations.

8. Take corrective action: Fix errors immediately, issue corrections on next payroll, notify affected employees, retrain staff, and update policies to prevent recurrence.

What Tools Help With Time Audits?

Built-In Audit Features

Modern time tracking software includes audit tools:

Exception reports: Flag missing punches, unusual patterns, unauthorized overtime
Comparison reports: Show scheduled vs actual hours
Edit logs: Track who changed what and when
Approval workflows: Ensure manager review before payroll
Compliance alerts: Warn of potential violations in real-time

Manual Tools

For businesses without automated systems:

Spreadsheets: Create comparison tables between punch data and payroll
Checklists: Use ADP’s payroll audit checklist or create your own
Sampling calculators: Determine how many records to review for statistical validity

When to Hire an Auditor

Consider external auditors for:

Your first comprehensive audit
Suspected major compliance issues
DOL investigation or lawsuit
Pre-acquisition due diligence
Annual independent review for large companies

How Do You Prevent Future Audit Findings?

Automate Time Tracking

Use digital time clocks that prevent buddy punching
Enable GPS verification for mobile workers
Set up automatic overtime alerts
Require manager approval before payroll processing

Implement Controls

Separation of duties: Different people enter time, approve time, and process payroll
Exception-based review: Managers review only flagged issues, not every timesheet
Regular spot checks: Random weekly audits of a sample of employees

Train Your Team

Employees need to understand how to clock in/out correctly
Managers must know overtime rules and approval requirements
Payroll staff should recognize red flags

Update Policies

Make sure your timekeeping policy clearly covers:

How to record time
Meal and rest break requirements
Overtime approval process
How to report and correct errors
Consequences for time theft

What’s the Bottom Line?

Time audits are preventive maintenance for your payroll. They find errors before they become expensive problems and ensure you’re complying with wage and hour laws.

In 2026, with updated reporting requirements and ongoing DOL enforcement, regular time audits aren’t optional—they’re essential risk management.

Key takeaways:

Audit at least annually, with quick checks every pay period
Focus on high-risk areas: overtime, breaks, employee classification
Use automated tools to flag exceptions and reduce manual work
Fix errors immediately and document everything
Implement controls to prevent recurring issues

Ready to simplify time audits? Explore ShiftFlow’s time tracking and reporting tools that automate compliance checks and flag issues before payroll runs. Contact us to learn how we can help streamline your audit process.

Sources

Lumber Finance – Payroll Audit Checklist and Best Practices
Paycom – The Real Cost of Payroll Errors in 2026
ADP – How to Audit Payroll
U.S. Department of Labor – FLSA Recordkeeping Requirements

Frequently Asked Questions

What is a time audit?

A time audit is a systematic review of employee time records, timesheets, and payroll data to verify accuracy, catch errors, and ensure compliance with labor laws. It compares recorded hours against actual work performed and checks for issues like missing punches, incorrect overtime calculations, or policy violations.

How often should I run a time audit?

Most experts recommend reconciling payroll every pay period and performing a comprehensive time audit at least annually. High-risk industries or companies with compliance issues should audit quarterly. Run spot audits whenever you notice patterns like frequent overtime or missing punches.

What does a time audit check for?

A time audit checks employee classification accuracy, time entry errors (missing punches, duplicates), overtime calculations, break compliance, rounding practices, unauthorized time edits, timesheet approvals, and wage and hour law compliance. It verifies recorded hours match actual work performed.

Who should perform a time audit?

Internal audits can be performed by HR, payroll, or accounting staff. For best results, someone independent of the payroll process should review to catch errors objectively. Consider external auditors for your first comprehensive audit or if compliance issues are suspected.

How long does a time audit take?

It depends on company size and audit scope. A quick pay period reconciliation might take 1-2 hours. A comprehensive annual audit for a 50-person company could take 8-16 hours. Automated time tracking systems reduce audit time by 50% or more through exception reporting.

What if I find errors during the audit?

Fix errors immediately. Calculate the impact (overpaid or underpaid amounts), issue corrections on the next payroll, notify affected employees, and document everything. For compliance violations, implement corrective actions, retrain staff, and update policies to prevent recurrence.

Can time audits prevent DOL investigations?

While audits can’t prevent investigations, they significantly reduce your risk. Regular audits demonstrate good-faith compliance efforts and catch violations before the DOL does. If investigated, your audit records show due diligence, which can reduce penalties.

What’s the difference between a time audit and a payroll audit?

A time audit specifically focuses on hours worked, time tracking accuracy, and wage and hour compliance. A payroll audit is broader—it includes time review but also examines tax withholdings, benefits deductions, contractor payments, and overall payroll processing accuracy.