Deck 20: Audit of the Payroll and Personnel Cycle

Question 1

The total of the individual employee earnings in the payroll master file should equal the total

A)balance of gross payroll in general ledger accounts.
B)of the checks drawn to employees for payroll.
C)gross payroll plus the total contributed by the employer for payroll taxes.
D)gross pay for the current week's payroll.

Answer 1

A

Question 2

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

A)employees have not yet cashed their payroll checks.
B)fraudulent transfer of funds by the company.
C)lack of controls over payroll distribution.
D)the company is overpaying its employees.

Answer 2

A

Question 3

Which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees?

A)general accounting department
B)human resources department
C)treasurer
D)controller

Answer 3

B

Question 4

State the purpose and the information contained on the W-2 Form and on the payroll tax returns.

Question 5

Most companies,with the exception of small ones,have effective controls over the payroll cycle.

Question 6

Which department should be authorized to add and delete employees from the payroll or change pay rates and deductions?

A)the supervising department
B)the accounting department
C)the human resources department
D)the treasurer's department

Question 7

Discuss each of the following primary documents and records used in the personnel and employment function in the payroll and personnel cycle: human resource records,deduction authorization form,and the rate authorization form.

Question 8

Auditors typically test details of account balances in the audit of payroll.

Question 9

While most cycles include at least two classes of transactions,the payroll and personnel cycle includes only one class of transactions.

Question 10

Which of the following statements about the payroll and personnel cycle is correct?

A)
B)
C)
D)

Question 11

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

A)payroll transaction file.
B)payroll master file.
C)payroll bank account reconciliation.
D)payroll tax returns.

Question 12

Discuss three important differences between the payroll and personnel cycle and other cycles in a typical audit.

Question 13

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

A)human resource records.
B)employee screening forms.
C)summary payroll reports.
D)employee folders.

Question 14

What events initiate and terminate the payroll and personnel cycle?

Question 15

Discuss each of the following documents and records used in the timekeeping and payroll preparation function in the payroll and personnel cycle: time record,job time ticket,payroll transaction file,payroll journal and payroll master file.

Question 16

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

A)payroll journal
B)payroll transaction file
C)time report
D)payroll summary

Question 17

Hiring personnel initiates the payroll and personnel cycle.

Question 18

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

A)interviewing job candidates
B)hiring a new employee
C)existing employees submitting requests for payment for work performed
D)issuance of paychecks

Question 19

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

A)payment of payroll
B)timekeeping and payroll preparation
C)reconciliation of payroll account
D)human resources and employment

Question 20

Which of the following statements is false?

A)The payroll cycle consists of one class of transactions.
B)Balance sheet accounts related to payroll are generally more significant than related transactions.
C)Internal controls over payroll are effective for most companies.
D)Small companies usually have effective controls over payroll.

Question 21

The deduction authorization form authorizes the rate of pay and the deductions for taxes,dues,etc.

Question 22

The job time ticket indicates the starting and stopping times of work during the pay period.

Question 23

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

A)the computer.
B)job time tickets.
C)personnel records.
D)the canceled check file.

Question 24

When the auditor compares the cancelled check or direct deposit with the payroll journal for amount,they are concerned with the transaction-related audit objective of

A)occurrence.
B)accuracy.
C)classification.
D)timing.

Question 25

Which of the following best describes the systems of internal control for payroll for large companies?

A)loosely structured but well controlled
B)loosely structured and loosely controlled
C)highly structured and well controlled
D)highly structured but loosely controlled

Question 26

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

A)redeposited.
B)kept in the payroll department.
C)left with the employee's supervisor.
D)held for the employee in the personnel department.

Question 27

Many audits have a ________ risk of misstatement for the payroll cycle.

A)high
B)low
C)moderate
D)zero

Question 28

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

A)incorrect summaries of employee time records.
B)overpayments and unauthorized payments.
C)under withholding of amounts required to be withheld.
D)posting of gross payroll amounts to incorrect salary expense accounts.

Question 29

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

A)employees work the number of hours for which they are paid.
B)payments are made at the contractual rate.
C)product cost information is accurate.
D)segregation of duties is present between the payroll function and the payment function for cash disbursements.

Question 30

Imprest accounts usually carry a significant balance.

Question 31

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

A)Trace transactions recorded in the payroll journal to the human resources department to determine employment status.
B)Examine cancelled checks for proper endorsement.
C)Recalculate net pay.
D)Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.

Question 32

Paying employees for their services ends the payroll and personnel cycle.

Question 33

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

A)must
B)cannot
C)can rarely
D)can often

Question 34

An imprest payroll account limits the client's exposure to payroll fraud.

Question 35

Firing personnel terminates the payroll and personnel cycle.

Question 36

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

A)employee's supervisor
B)human resources department
C)chief financial officer
D)budgeting supervisor

Question 37

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

A)The person authorized to sign paychecks should not be otherwise involved in the preparation of the payroll.
B)A check-signing machine should not be used to replace a manual signature.
C)Distribution of pay checks should be performed by someone who is not involved in the other payroll functions.
D)Unclaimed paychecks should be immediately returned for redeposit.

Question 38

In audits of companies in which payroll is a significant portion of inventory,the improper account classification of payroll can

A)
B)
C)
D)

Question 39

When testing for fraudulent hours or fraudulent expense reports

A)it is easy for the auditor to discover fraudulent hours because of the abundance of available evidence.
B)it is difficult to prevent fraud in these two areas with adequate internal controls.
C)management falsification of expense reports can be an indicator of disregard for internal controls and the potential for fraud in other areas.
D)examining payroll records for approval is an important substantive tests of transactions to uncover fraudulent hours.

Question 40

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

A)tests of controls and substantive tests of transactions.
B)analytical procedures and tests of controls.
C)analytical procedures and substantive tests of transactions.
D)tests of controls and tests of details of balances.

Question 41

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.

A)fraud awareness
B)doing tests of balances
C)doing tests of transactions
D)understanding the client's internal controls

Question 42

Which of the following types of audit tests is usually emphasized due to a lack of independent third-party evidence related to payroll transactions?

A)analytical procedures
B)tests of details of balances
C)tests of controls
D)Each of the above is emphasized.

Question 43

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

A)not considered
B)low
C)moderate
D)high

Question 44

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

A)approval of employee time records
B)maintain records of employment,firings,and raises
C)temporary retention of unclaimed employee paychecks
D)preparation of governmental reports as to employees' earnings and withholding taxes

Question 45

Which of the following is a key control for the transaction-related audit objective of accuracy?

A)The time records are approved by a supervisor.
B)The payroll checks are prenumbered and accounted for.
C)The payroll master file contents are internally verified.
D)The batch totals are compared with computer summary reports.

Question 46

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

A)Examine personnel records for accuracy and completeness.
B)Examine employees' names listed on payroll tax returns for agreement with payroll accounting records.
C)Make a surprise observation of the company's regular distribution of paychecks.
D)Visit the working areas and confirm with employees their badge or identification numbers.

Question 47

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

A)classification.
B)accuracy.
C)existence.
D)occurrence.

Question 48

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

A)computerized preparation of tax returns.
B)a well-defined set of policies that indicate when each form must be filed.
C)independent verification of computer output by a competent individual.
D)the use of an outside payroll service.

Question 49

Audit tests of payroll are usually not extensive because

A)
B)
C)
D)

Question 50

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

A)The preparation of the payroll must be under the control of the personnel department.
B)The confidentiality of employee payroll data should be carefully protected to prevent fraud.
C)The duties of hiring,payroll computation,and payment to employees should be segregated.
D)The payment of cash to employees should be replaced with payment by checks.

Question 51

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

A)
B)
C)
D)

Question 52

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

A)fictitious employees.
B)authorization of wage rates.
C)proper classification of payroll transactions.
D)completeness of recorded transactions.

Question 53

Which of the following errors gives the auditor concern in auditing payroll transactions?

A)an error that indicates possible fraud
B)computational errors in formulas when a computerized system is used
C)classification errors in charging labor to inventory and job cost accounts
D)Each of the above gives the auditor significant concern.

Question 54

Auditors may extend their tests of payroll in which of the following circumstances?

A)
B)
C)
D)

Question 55

________ is not a transaction-related audit objective for the classes of transactions underlying the payroll cycle.

A)Classification
B)Existence
C)Timing
D)Completeness

Question 56

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?

A)Account for a sequence of payroll checks.
B)Examine the procedures manual and observe the recording of transactions.
C)Examine the payroll records for indication of pay rate approval.
D)Reconcile the payroll bank account.

Question 57

Which of the following is a substantive test of transactions?

A)Review personnel policies.
B)Account for a sequence of payroll checks.
C)Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.
D)Examine printouts of transactions rejected by the computer as having invalid employee IDs.

Question 58

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

A)identifying employees who do not have proper work credentials.
B)establishing a tightly controlled,fraud-free work environment.
C)testing for nonexistent employees.
D)identifying employees who have not submitted proper W-2 forms.

Question 59

Which of the following is an accurate statement regarding nonexistent employees?

A)In order to prevent this type of fraud,the foreman should distribute the paychecks and approve the time cards.
B)Records for all terminated employees should be destroyed to prevent this type of fraud.
C)The person committing this type of fraud is generally the CEO or CFO of the company.
D)This type of fraud often results from the continuance of an employee on the payroll after the employee has been terminated.

Question 60

Auditors should determine whether the client has fulfilled its legal obligation in submitting payments of all payroll withholdings as part of their payroll tests.

Question 61

Discuss the two circumstances under which auditors would extend their procedures considerably in the audit of payroll.

Question 62

What is one audit procedure that may be used to test for proper handling of terminated employees?

Question 63

Payroll checks should be distributed by someone independent of the payroll and timekeeping functions.

Question 64

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

A)distribute paychecks.
B)recompute hours worked from time cards.
C)foot the payroll journal and trace postings to the general ledger and the payroll master file.
D)compare the date of the recorded check in the payroll journal with the date on the canceled checks and time cards.

Question 65

"Physical control over assets" is not a type of control that is applicable to the payroll cycle.

Question 66

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

A)examination of human resource records
B)examination of the payroll master file
C)examination of the payroll transaction file
D)examination of the payroll tax records

Question 67

The nature,extent,and timing of substantive tests of payroll transactions vary depending,in part,on assessed control risk.

Question 68

Generally,is the inherent risk level for the audit of the payroll and personnel set at low,moderate,or high?
Explain.

Question 69

Which of the following statements is correct?

A)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.
B)When jobs are billed on a cost-plus basis,revenue and total expenses are both affected by charging labor to incorrect jobs.
C)Payroll is a significant portion of inventory for retail and service industry companies.
D)The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process.

Question 70

When auditing the payroll and personnel cycle,tests of controls are routinely performed.

Question 71

What key separation of duties should the auditor expect to find within the payroll and personnel cycle?

Question 72

There are several key internal controls over the payment of payroll function that should be present.For example,the payroll should be distributed by someone who is not involved in the other payroll functions.Discuss other key internal controls over the payment of payroll function as it relates to the physical control over assets and records.

Question 73

In testing for the transaction-related audit objective of occurrence,an auditor is verifying that the recorded payroll payments are for work actually performed by existing employees.List three key internal controls that a company should have in place in this area.

Question 74

Auditors seldom expect to find misstatements when testing payroll transactions.

Question 75

Discuss the procedures involved in,and the purpose of a surprise payroll payoff.

Question 76

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

A)Fraudulent hours occur when an employee reports more time than was actually worked.
B)It is difficult for an auditor to discover fraudulent hours.
C)It is ordinarily easier for the client to prevent fraudulent hours by adequate internal controls than for the auditor to detect it.
D)To detect fraudulent hours,the auditor should examine the cancelled checks written to the employees.

Question 77

When auditing the payroll and personnel cycle,the auditor should keep in mind that

A)since payroll transactions are typically uniform,all companies have the same internal controls over payroll.
B)the substantive tests of transactions for the payroll cycle are the same for all audit clients.
C)controls the auditor intends to rely on to reduce assessed control risk must be tested with tests of controls.
D)the tests of controls and the substantive tests of transactions for payroll cannot be combined.

Question 78

A detailed reconciliation of the information on the payroll tax forms and the payroll records must be prepared as part of the test of controls over the payroll cycle.

Question 79

When labor is a material part of inventory valuation,auditors should emphasize testing internal controls over proper classification of payroll transactions.

Question 80

Because of confidentiality requirements and potential losses of payroll funds,outside service center systems are rarely used by companies for payroll-related functions.