Tax & Benefits Payment Verification

CPA Verification Procedures

Important Notes:

A PEO may choose to use the independent CPA that already provides the PEO with other accounting and audit services or the PEO may use any other independent CPA that is a member in good standing of the American Institute of Certified Public Accountants.
A PEO and its selected independent CPA may choose from any of three optional methods of payment verification or may choose to use any combination of these three methods. The ESAC Board has authorized this flexibility in an effort to minimize the time and cost required to verify on a quarterly basis the timely and appropriate payment of the designated employer responsibilities.
The three optional methods of verification include:
- Examination Level Attestation: If the Independent CPA performed the Participant's last audit or is engaged to do the next annual audit, the CPA may perform an examination level attestation of management's representations in accordance with standards established by the AICPA; and/or
- Agreed Upon Procedures: In lieu of performing an examination level attestation, the CPA may perform the agreed upon procedures outlined below and report findings in a procedures letter format as prescribed by the AICPA; and/or
- Payee Confirmations of Payment: The CPA may substitute, in lieu of all or any portion of the above verification methods, monthly or quarterly written confirmations of appropriate and timely payment of any of the above listed employer liabilities so long as such confirmations are provided to the CPA or Participant by the recipient of such liability payment or by an authorized agent of the recipient.
Agreed Upon Procedures Instructions to CPA:
I. Where the nature of the PEO's records make conformance to the following procedures impractical or unreliable, ESAC authorizes the independent CPA to exercise professional judgment in modifying and performing the procedures as dictated by available records and in the manner most consistent with the objective to be accomplished, noting any differences between the procedures described below and the procedures actually used.
II. In tracing tax and benefit liability amounts or payments for a selected period (month or quarter) for each PEO company, all payments should be traced if there are no more than 5 payments in the period. If there are more than 5 payments in the period, trace 25% of the payments, selected at random, but no less than 5 payments or more than 20 payments for each type of liability or payment for each company.

Quarterly Verification of Payroll Tax Payments:
a. Inquire of management if all state and federal payroll taxes and withholding taxes have been properly and timely reported and paid for the previous calendar quarter. Note any instances of known noncompliance.

b. Inquire of management regarding any communications from the IRS or state agencies affecting payroll taxes tested in this quarter or prior quarters. If any communications were received, review the IRS or state agency correspondence and, if material, attach a copy of such correspondence to your quarterly report.

c. For FICA and federal unemployment and withholding taxes, the following procedures will be used:

i. Obtain a copy of the most recent Form(s) 941.

ii. Randomly select a month in the quarter and trace the gross wages (or a random sample thereof, as specified in Instruction II, above) from Form 941 (or multiple 941s, in the case of a control group) to the general ledger entry for wages or payroll journal or similar record and note any material differences. (If more efficient, this procedure may be performed for the entire quarter rather than for a single month.)

iii. Trace the federal withholding amounts (or a random sample thereof, as specified in Instruction II, above) for the selected month (or quarter) to the general ledger or payroll journal or similar records and note any material differences.

iv. Trace both portions of FICA taxes (or a random sample thereof, as specified in Instruction II, above) for the selected month (or quarter) to the general ledger or payroll journal or similar records and note any material differences.

v. Trace payments (or a random sample thereof, as specified in Instruction II, above) from the schedule of payments reported on the 941 to the cash disbursements journal, or its equivalent, or to cancelled checks or ACH or wire debits on the bank statement, and note any material differences in amount or date of payment.

vi. For the above steps i) through v) conducted for the previous fiscal quarter, compare the date of payment as shown on the schedule of payment to the date the payment cleared on the bank statement and note any payment that cleared the bank more than 15 business days after the date of the reported payment.

d. For state unemployment taxes, the following procedures will be used:

i. Select the state in which the PEO or PEO Group has the largest state tax liability. Also, select any other states where a state PEO licensing law or regulation requires such quarterly tax payment verification (currently Arkansas, Montana, New Hampshire, New Jersey, New York, Oklahoma, South Carolina, Tennessee and Utah). If the PEO or PEO Group has a quarterly state tax liability of at least $10,000 in more than four additional states, select at random four additional states from this group for review. If the PEO or PEO Group has a quarterly state tax liability of $10,000 or more in no more than four additional states, include all remaining states in the group of states selected for review. Unless required for state licensing or registration, these procedures are not required for states with less than $10,000 in quarterly state tax liability, since such states are considered immaterial for these purposes.

ii. If the selected state tax reports have tax liability broken out by month, randomly select a month in the quarter and, for each selected state report, trace the wages (or a random sample thereof, as specified in Instruction II, above) as reported on the state tax report to the general ledger or payroll journal or similar records and note any material differences. If the selected state tax reports do not have tax liability broken out by month, perform these procedures on the entire quarterly tax liability.

iii. Trace payments (or a random sample thereof, as specified in Instruction II, above) reported on each tax report to the cash disbursements journal, or its equivalent, or to cancelled checks or ACH or wire debits on the bank statement, and note any material differences in amount or date of payment.

iv. For the above steps i) through iii) conducted for the previous fiscal quarter, compare the reported date of payment to the date the payment cleared on the bank statement and note any payment that cleared the bank more than 15 business days after the date of the reported payment.

e. For state withholding taxes, repeat the procedures used or state employment taxes outlined in d., above.
Quarterly Verification of Payments to Employee Retirement Plans:
a. Select at random a plan or plans representing at least 25% of the total contributions for all plans combined.

b. Select at random a month within the quarter and trace such total worksite employee contributions (or a random sample thereof, as specified in Instruction II, above) for the plan(s) selected from the payroll records to the general ledger recording of these withholdings as a liability and note any material differences.

c. Trace the payment of the total amount of liability recorded on the general ledger for both worksite employee and employer contributions to such plans to the cash disbursements journal, or its equivalent, or to cancelled checks or ACH or wire debits on the bank statement, and note any material differences in the amount of payment.

d. Determine if all such payments were funded no later than the 15th business day of the month following the month in which the amounts were withheld from worksite employee wages and note any material differences.

e. For the above steps a. through d, conducted for the previous fiscal quarter, compare the date of all such payments to the plan or policy as shown in the cash disbursement journal to the date the payment cleared on the bank statement and note any payment that cleared the bank more than 15 business days after the date of the recorded payment.
Quarterly Verification of Payment of Fully Insured Group Life & Health Insurance Premiums:
a. Select at random a policy or policies representing at least 25% of the total premium liability for the quarter for all fully insured group life and health insurance policies sponsored or co-sponsored by the PEO.

b. Select at random a month within the quarter and trace the premiums owed for the selected policy or policies as shown on carrier premium invoices or as specified in policy documents to the general ledger recording of those premiums as a liability and note any material differences.

c. Trace the payment of recorded premium liabilities to the cash disbursements journal, or its equivalent, or to cancelled checks or ACH or wire debits on the bank statement, and note any material differences in the amount of payment.

d. For the above steps a. through c. conducted for the previous fiscal quarter, compare the date of all such payments to the date the payments cleared on the bank statement and note any payment that cleared the bank more than 15 business days after the date of the recorded payment.
Quarterly Verification of Payment of Self-Insured or Partially Self-Insured Group Health Insurance Plan Funding Requirements:
a. Randomly select a month within the quarter and, using notices of contribution requirements or other information provided by the third party claims administrator, trace reported liabilities (or a random sample thereof, as specified in Instruction II, above) for all such plans to the general ledger recording of these liabilities and note any material differences.

b. Trace the total of withholding from employees (or a random sample thereof, as specified in Instruction II, above) to the recorded liability account in the general ledger, and follow through to the cash disbursements journal, or its equivalent, or to cancelled checks or ACH or wire debits on the bank statement, and note any material differences in the amount of payment.

c. For the above steps a. through b. conducted for the previous fiscal quarter, compare the date of all such payments to the date the payment cleared on the bank statement and note any payment that cleared the bank more than 15 business days after the date of the recorded payment.

d. Request from the Plan administrator a written confirmation of the current amounts due to the Plan Administrator, and verify that the payables have been properly recorded in the PEO�s general ledger. Note any payments that were not made within the terms of the Plan Administrator.
Quarterly Verification of Payment of Fully Insured Workers� Compensation Insurance Premiums:
a. Select at random a policy or policies representing at least 25% of the total premium liability for the quarter for all fully insured workers� compensation insurance policies sponsored or co-sponsored by the PEO.

b. Select at random a month within the quarter and trace the premiums owed for the selected policy or policies as shown on carrier premium invoices or as specified in policy documents to the general ledger recording of those premiums as a liability and note any material differences.

c. Trace the recorded premium liabilities to the cash disbursements journal, or its equivalent, or to cancelled checks or ACH or wire debits on the bank statement, and note any material differences in the amount of payment.

d. For the above steps a. through c. conducted for the previous fiscal quarter, compare the date of all such recorded payments to the date the payments cleared on the bank statement and note any payment that cleared the bank more than 15 business days after the date of the recorded payment.
Quarterly Verification of Payment of Self-Insured or Partially Self-Insured Workers� Compensation Insurance Plan Funding Requirements:
a. Randomly select a month within the quarter and, using notices of contribution requirements or other information provided by the third party claims administrator, trace reported payments (or a random sample thereof, as specified in Instruction II, above) to all such plans to the general ledger recording of these liabilities and note any material differences.

b. Trace each withholding (or a random sample thereof, as specified in Instruction II, above) to the recorded liability account in the general ledger, and follow through to the cash disbursements journal, or its equivalent, or to cancelled checks or ACH or wire debits on the bank statement, and note any material differences in the amount of payment.

c. For the above steps a. through b. conducted for the previous fiscal quarter, compare the date of all such payments to the date the payment cleared on the bank statement and note any payment that cleared the bank more than 15 business days after the date of the recorded payment.

d. Request from the Plan administrator a written confirmation of the current receivables due to the Plan Administrator, and verify that the payables have been properly recorded in the PEO's general ledger. Note any payments that were not made within the terms of the Plan Administrator.