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Does government audit affect employee allocation of enterprises? Using the quasi natural experiment and differences-in-differences(DID) model, this paper empirically tests the impact of government audit on employees efficiency and labor cost stickiness of state-owned enterprises (SOEs) in China. The results show that after the implementation of government audit, excess employees and labor cost stickiness of the audited enterprise is significantly reduced, which confirms the supervision and governance function of government audit on employee efficiency of SOEs. However, labor costs of the audited enterprise are not significantly reduced. These indicate from the side that the compensation system of SOEs conforms to market mechanisms, and there is no problem of employee over payment in China. This study enriches the relevant literature on the impact of government audit on employee policy of SOEs, and also provides empirical support for the full coverage of government audit.