AT.15 Audit of the Payroll Cycle

An auditor most likely would perform substantive procedures of details on payroll transactions and balances when

Choices:

• Cutoff tests indicate a substantial amount of accrued payroll expense.

• The assessed level of control risk relative to payroll transactions is low.

• Analytical procedures indicate unusual fluctuations in recurring payroll entries.

• Accrued payroll expense consists primarily of unpaid commissions.

Correct answer: Analytical procedures indicate unusual fluctuations in recurring payroll entries.

Verifying that an adequate chart of accounts is used is a key system of internal control for the transaction-related objective of

Choices:

• classification.

• accuracy.

• existence.

• occurrence

Correct answer: classification.

Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount

Choices:

• in the expense account.

• used in the prior period.

• authorized in the minutes of the board.

• paid in the subsequent period

Correct answer: authorized in the minutes of the board.

What are the two major balance-related audit objectives in testing payroll liabilities?

Choices:

• accuracy and detail tie-in

• completeness and valuation

• completeness and rights and obligations

• accuracy and cutoff

Correct answer: accuracy and cutoff

Which of the following best describes inherent risk for balance-related audit objectives as they relate to payroll?

Choices:

• not considered

• low

• moderate

• high

Correct answer: low

Although significant client business risks affecting payroll are unlikely for most companies, an area that would have the most business risk would be

Choices:

• payment of hourly employees.

• payment of salaried employees.

• payments to employees for stock options and bonus plans.

• payments to employees who have direct deposit of their payroll checks

Correct answer: payments to employees for stock options and bonus plans.

A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test?

Choices:

• Range test

• Detail test

• Category test

• Reasonableness test

Correct answer: Reasonableness test

When testing for fraudulent hours or fraudulent expense reports

Choices:

• it is easy for the auditor to discover fraudulent hours because of the abundance of available evidence.

• it is difficult to prevent fraud in these two areas with adequate system of internal controls.

• management falsification of expense reports can be an indicator of disregard for system of internal controls and the potential for fraud in other areas.

• examining payroll records for approval is an important substantive test of transactions to uncover fraudulent hours.

Correct answer: management falsification of expense reports can be an indicator of disregard for system of internal controls and the potential for fraud in other areas.

Which of the following is a substantive test of transactions?

Choices:

• Review personnel policies.

• Account for a sequence of payroll checks.

• Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.

• Examine printouts of transactions rejected by the computer as having invalid employee IDs.

Correct answer: Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement

Which of the following types of audit procedures is ordinarily emphasized the least when auditing payroll?

Choices:

• tests of controls

• tests of transactions

• substantive analytical procedures

• tests of details of balances

Correct answer: tests of details of balances

The primary concern in testing payroll-related liabilities is to make sure that

Choices:

• accruals are properly valued.

• transactions are recorded in the proper period.

• there are no understated or omitted accruals.

• the accruals are not overstated.

Correct answer: there are no understated or omitted accruals.

What potential problems may arise when an auditor considers the relationship between payroll and inventory valuation?

(1) Improper account classification

(2) Improper allocation to jobs or processes

(3) The overpayment or underpayment of factory employees

Choices:

• 1, 2, and 3

• 2 only

• 3 only

• 1 and 2 only

Correct answer: 1 and 2 only

The most important means of verifying account balances in the payroll and personnel cycle are

Choices:

• tests of controls and substantive tests of transactions.

• analytical procedures and tests of controls.

• analytical procedures and substantive tests of transactions.

• tests of controls and tests of details of balances.

Correct answer: tests of controls and substantive tests of transactions.

The careful and timely preparation of all payroll tax returns is necessary to avoid penalties and criminal charges. The most important control in the timely preparation of these returns is

Choices:

• computerized preparation of tax returns.

• a well-defined set of policies that indicate when each form must be filed.

• independent verification of computer output by a competent individual.

• the use of an outside payroll service.

Correct answer: a well-defined set of policies that indicate when each form must be filed.

Which of the following is a major balance-related audit objective in testing payroll liabilities?

Choices:

• Payroll tax expense is properly recorded.

• Transactions in the payroll and personnel cycle are recorded in the proper period.

• Accrual of salaries is the same as the amounts paid on the payroll tax returns.

• Time records are recorded by supervisors

Correct answer: Transactions in the payroll and personnel cycle are recorded in the proper period.