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.

Many audits have a _risk of misstatement for the payroll cycle.

Choices:

-

high

-

low

-

moderate

-

zero

Correct answer: low

When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the system of internal controls concerning

Choices:

-

fictitious employees.

-

authorization of wage rates.

-

proper classification of payroll transactions.

-

completeness of recorded transactions.

Correct answer: proper classification of payroll transactions.

In audits of companies in which payroll is a significant portion of inventory, the improper account classification of payroll can
(1) Increase inventory asset valuations; (2) Decrease inventory asset valuations.

Choices:

-

Yes, Yes

-

No, No

-

Yes, No

-

No, Yes

Correct answer: Yes, Yes

It would be appropriate for the payroll department to be responsible for which of the following functions?

Choices:

-

approval of employee time records

-

maintain records of employment, firings, and raises

-

temporary retention of unclaimed employee paychecks

-

preparation of governmental reports as to employees' earnings and withholding taxes

Correct answer: preparation of governmental reports as to employees' earnings and withholding taxes

Once the auditor determines that the company's policy for accruing wages is consistent with prior years, the appropriate audit procedure to test for accuracy and cutoff is

Choices:

-

recalculating the client's accrual.

-

performing extensive tests of controls.

-

performing extensive tests of details.

-

none of the above.

Correct answer: recalculating the client's accrual.

As a part of the auditor's responsibility for _, the auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing.

Choices:

-

fraud awareness

-

doing tests of balances

-

doing tests of transactions

-

understanding the client's system of internal controls

Correct answer: understanding the client's system of internal contro

No individual with access to time cards, payroll records, or checks should also be permitted access to

Choices:

-

the computer.

-

job time tickets.

-

personnel records.

-

the canceled check files.

Correct answer: personnel records.

The _____ has the responsibility for approving the number of hours worked for each employee.

Choices:

-

employee's supervisor

-

human resources department

-

chief financial officer

-

budgeting supervisor

Correct answer: employee's supervisor

If an auditor wishes to test the completeness transaction-related audit objective in the payroll and personnel cycle, which of the following would be a reasonable test of control?

Choices:

-

Account for a sequence of payroll checks.

-

Examine the procedures manual and observe the recording of transactions.

-

Examine the payroll records for indication of pay rate approval.

-

Reconcile the payroll bank account.

Correct answer: Account for a sequence of payroll checks.

Which of the following is not a correct statement regarding fraudulent hours?

Choices:

-

Fraudulent hours occur when an employee reports more time than was actually worked.

-

It is difficult for an auditor to discover fraudulent hours.

-

It is ordinarily easier for the client to prevent fraudulent hours by adequate system of internal controls than for the auditor to detect it.

-

To detect fraudulent hours, the auditor should examine the cancelled checks written to the employees.

Correct answer: To detect fraudulent hours, the auditor should examine the cancelled checks written to the employees.

When control risk is assessed as low for assertions related to payroll, substantive procedures of payroll balances most likely would be limited to applying analytical procedures and

Choices:

-

Observing the distribution of paychecks.

-

Footing and crossfooting the payroll register.

-

Inspecting payroll tax returns.

-

Recalculating payroll accruals

Correct answer: Recalculating payroll accruals

Which of the following audit procedures would be the most effective in testing for nonexistent employees?

Choices:

-

Trace transactions recorded in the payroll journal to the human resources department to determine employment status.

-

Examine cancelled checks for proper endorsement.

-

Recalculate net pay.

-

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

Correct answer: Trace transactions recorded in the payroll journal to the human resources department to determine employment status.

The auditor _____ rely on the system of internal controls of the payroll service organization if the service organization's auditor issues a report on the service organization's system of internal control.

Choices:

-

must

-

cannot

-

can rarely

-

can often

Correct answer: can often

Auditors may extend their tests of payroll in which of the following circumstances?
(1) Payroll materially affects the valuation of inventory.
(2) The auditor is concerned there may be nonexistent employees on the payroll.

Choices:

-

YES, YES

-

NO, NO

-

YES, NO

-

NO, YES

Correct answer: YES, YES

Records that include data about employees such as employment date, performance ratings, and pay rates are the

Choices:

-

human resource records

-

employee screening forms.

-

summary payroll reports.

-

employee folders.

Correct answer: human resource records

An imprest payroll account that has a significant balance may indicate the presence of

Choices:

-

employees not cashing their payroll checks.

-

fraudulent transfer of funds by the company.

-

lack of controls over payroll distribution.

-

the company overpaying its employees.

Correct answer: employees not cashing their payroll checks.

In auditing payroll, the auditor wants to determine that the individuals included in her/his sample were employees of the company for the period under review. What is the auditor's best source of evidence?

Choices:

-

examination of human resource records

-

examination of the payroll database

-

examination of the payroll transaction file

-

examination of the payroll tax records

Correct answer: examination of human resource records

There is inherent risk of payroll fraud because most transactions involve

Choices:

-

expense accounts.

-

accrued liabilities.

-

estimates.

-

cash.

Correct answer: cash.

Which of the following is the best way for an auditor to determine that every name on a company's payroll for the Amado Factory is that of a bona fide employee presently on the job?

Choices:

-

Examine personnel records for accuracy and completeness.

-

Examine employees' names listed on payroll tax returns for agreement with payroll accounting records.

-

Make a surprise observation of the company's regular distribution of paychecks.

-

Visit the working areas and confirm with employees their badge or identification numbers.

Correct answer: Make a surprise observation of the company's regular distribution of paychecks.

A surprise payroll payoff in which employees must pick-up and sign for their paychecks is one means of

Choices:

-

identifying employees who do not have proper work credentials.

-

establishing a tightly controlled, fraud-free work environment.

-

testing for nonexistent employees.

-

identifying employees who have not submitted proper BIR forms.

Correct answer: testing for nonexistent employees.

An auditor is vouching a sample of hourly employees from the payroll database to approved time clock or time sheet data in order to provide evidence that

Choices:

-

employees work the number of hours for which they are paid.

-

payments are made at the contractual rate.

-

product cost information is accurate.

-

segregation of duties is present between the payroll function and the payment function for cash disbursements.

Correct answer: employees work the number of hours for which they are paid.

Which of the following is not one of the business functions for the payroll and personnel cycle?

Choices:

-

payment of payroll

-

timekeeping and payroll preparation

-

reconciliation of payroll account

-

human resources and employment

Correct answer: reconciliation of payroll account

The computer file used for recording payroll transactions for each employee and maintaining total wages paid for the year to date is the

Choices:

-

payroll transaction file.

-

payroll database.

-

payroll bank account reconciliation.

-

payroll tax returns.

Correct answer: payroll database.

To minimize the opportunity for fraud, unclaimed salary checks should be

Choices:

-

redeposited.

-

kept in the payroll department.

-

left with the employee's supervisor.

-

held for the employee in the personnel department.

Correct answer: redeposited.

When examining payroll transactions, an auditor is primarily concerned with the possibility of

Choices:

-

incorrect summaries of employee time records.

-

overpayments and unauthorized payments.

-

under withholding of amounts required to be withheld.

-

posting of gross payroll amounts to incorrect salary expense accounts.

Correct answer: overpayments and unauthorized payments.

Which of the following includes all payroll transactions processed by the accounting system for a given period of time?

Choices:

-

payroll journal

-

payroll transaction file

-

time report

-

payroll summary

Correct answer: payroll transaction file

Audit tests of payroll are usually not extensive because
(1) Employees will likely complain if underpaid.
(2) Payroll transactions are typically uniform and uncomplicated.
(3) Payroll transactions are subject to audit by government agencies.

Choices:

-

Yes, Yes, Yes

-

No, Yes, No

-

No, No, Yes

-

Yes, No, No

Correct answer: Yes, Yes, Yes

Which of the following statements is false?

Choices:

-

The payroll cycle consists of one class of transactions.

-

Balance sheet accounts related to payroll are generally more significant than related transactions.

-

Internal controls over payroll are effective for most companies.

-

Small companies usually have effective controls over payroll.

Correct answer: Balance sheet accounts related to payroll are generally more significant than related transactions.

The payroll and personnel cycle ends with which of the following events?

Choices:

-

interviewing job candidates

-

hiring a new employee

-

existing employees submitting requests for payment for work performed

-

issuance of paychecks

Correct answer: issuance of paychecks

A weak internal control system allows a department supervisor to "clock in" for a fictitious employee and then approve the employee's time card at the end of the pay period. This fraud would be detected if other controls were in place, such as having an independent party

Choices:

-

distribute paychecks.

-

recompute hours worked from time cards.

-

foot the payroll journal and trace postings to the general ledger and the payroll database.

-

compare the date of the recorded check in the payroll journal with the date on the canceled checks and time cards.

Correct answer: distribute paychecks.

Which of the following best describes effective system of internal control over payroll?

Choices:

-

The preparation of the payroll must be under the control of the personnel department.

-

The confidentiality of employee payroll data should be carefully protected to prevent fraud.

-

The duties of hiring, payroll computation, and payment to employees should be segregated.

-

The payment of cash to employees should be replaced with payment by checks.

Correct answer: The duties of hiring, payroll computation, and payment to employees should be segregated.

Which of the following would have the least amount of importance regarding controls over the processing of payroll?

Choices:

-

The person authorized to sign paychecks should not be otherwise involved in the preparation of the payroll.

-

A check-signing machine should not be used to replace a manual signature.

-

Distribution of paychecks should be performed by someone who is not involved in the other payroll functions.

-

Unclaimed paychecks should be immediately returned for redeposit.

Correct answer: A check-signing machine should not be used to replace a manual signature.

Which of the following statements is correct?

Choices:

-

The overhead charged to inventory at the balance sheet date can be understated if the salaries of administrative personnel are inadvertently or intentionally charged to indirect manufacturing overhead.

-

When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by charging labor to incorrect jobs.

-

Payroll is a significant portion of inventory for retail and service industry companies.

-

The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process.

Correct answer: The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process.