Deck 12: Auditing the Human Resource Management Process

Question 1

The payroll-processing function is responsible for paying employees for services and benefits.

Answer 1

False

Question 2

The human resource function is responsible for managing the personnel needs of the organization.

Answer 2

True

Question 3

There are few inherent risk factors that directly affect the human resource management process and its related accounts for non-officers.

Answer 3

True

Question 4

If the results of the control tests do not support the planned level of control risk, the detection risk will have to be set higher.

Question 5

Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?

A)There are significant unexplained variances between standard and actual labor cost.
B)Payroll checks are disbursed by the same employee each payday.
C)Employee time sheets are approved by individual departmental supervisors.
D)A separate payroll bank account is maintained on an imprest basis.

Question 6

An auditor vouched data for a sample of employees in a payroll register to approved clock card/time sheet data to provide assurance that:

A)payments to employees are computed at authorized rates.
B)employees worked the number of hours for which they are paid.
C)segregation of duties exists between the preparation and distribution of the payroll.
D)internal controls relating to unclaimed payroll checks are operating effectively.

Question 7

Which of the following internal control objectives is likely to be a larger concern in the audit of the payroll cycle?

A)Payroll transactions are properly disclosed.
B)Recorded payroll transactions are valid.
C)Payroll transactions are recorded in the appropriate time period.
D)All payroll transactions have been recorded.

Question 8

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

A)Human resource.
B)Treasurer.
C)Controller.
D)Payroll.

Question 9

Tests of details of transactions are often conducted in conjunction with tests of controls.

Question 10

The proper use of prenumbered termination notice forms by the Payroll Department should provide assurance that all:

A)uncashed payroll checks were issued to employees who have not been terminated.
B)personnel files are kept up to date.
C)employees who have not been terminated receive their payroll checks.
D)terminated employees are removed from the payroll.

Question 11

Employees must complete a W-4 form to authorize insurance deductions from his or her pay.

Question 12

Possible misstatements related to the occurrence assertion for payroll transactions include all of the following except:

A)payments to fictitious employees.
B)payments to terminated employees.
C)payments to valid employees who have not worked.
D)payments to valid employees at a rate in excess of the authorized amount.

Question 13

All of the following are incorporated into valuation models for share-based compensation except:

A)the exercise price of the option.
B)the term of the option.
C)expected dividends.
D)current tax rates.

Question 14

A surprise observation by an auditor of an entity's regular distribution of paychecks is primarily designed to satisfy the auditor that:

A)all unclaimed payroll checks are properly returned to the cashier.
B)the paymaster is not involved in the distribution of payroll checks.
C)all employees have in their possession proper employee identification.
D)names on the company payroll are those of bona fide employees presently on the job.

Question 15

Which of the following is the best reason why an auditor should consider observing an entity's distribution of regular payroll checks?

A)To ensure that names on the company payroll are those of bona fide employees presently on the job.
B)Total payroll costs are a significant part of total operating costs.
C)The auditor did not observe the distribution of the entire regular payroll during the audit in the prior year.
D)Employee turnover is excessive.

Question 16

Proper segregation of duties is critical for the human resource management process.

Question 17

Which of the following could test the assertion of cutoff for payroll-related liabilities?

A)Compare items in accrued payroll taxes to the supporting payroll tax return.
B)Search for unrecorded liabilities.
C)Examine payroll tax returns to determine that the expense was recorded in the proper period.
D)Review payroll liabilities for proper classification as short- or long-term.

Question 18

Payroll-related expenses normally are not a material cost to the organization.

Question 19

Which of the following could test the assertion of classification for payroll-related liabilities?

A)Compare items in accrued payroll taxes to the supporting payroll tax return.
B)Search for unrecorded liabilities.
C)Examine payroll tax returns to determine that the expense was recorded in the proper period.
D)Review payroll liabilities for proper reporting as short- or long-term.

Question 20

Inherent risk associated with officer compensation is frequently set high because officers have motive and opportunity to take advantage of their high-ranking offices in the form of excessive compensation.

Question 21

Effective internal control over the payroll function would include which of the following?

A)Total time recorded on time sheets should be reconciled to job reports by employees responsible for those specific jobs.
B)Payroll Department employees should be supervised by the management of the Human Resource Department.
C)Payroll Department employees should be responsible for maintaining employee personnel records.
D)Total time spent on jobs should be compared with total time indicated on time sheets.

Question 22

Transactions processed through the payroll process include all of the following except:

A)payments to employees for services rendered.
B)payments to independent contractors for services rendered.
C)accrual of social security taxes.
D)payment of unemployment taxes.

Question 23

A substantive test of transactions to test the completeness assertion includes:

A)tracing a sample of time sheets to the payroll register.
B)testing a sample of payroll checks for the presence of an authorized time sheet.
C)testing postings to the payroll register for a sample of payroll checks.
D)recomputing the accuracy of a sample of payroll checks.

Question 24

Which of the following could test the existence assertion for payroll-related liabilities?

A)Compare items in accrued payroll taxes to the supporting payroll tax return.
B)Search for unrecorded liabilities.
C)Examine payroll tax returns to determine that the expense was recorded in the proper period.
D)Review payroll liabilities for proper classification as short- or long-term.

Question 25

The purpose of segregating the duties of distributing payroll checks and hiring personnel is to separate the:

A)duties within the accounting function.
B)custody of assets from the accounting for those assets.
C)authorization of transactions from the custody of related assets.
D)operational responsibility from record keeping responsibility.

Question 26

In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week. Which of the following controls, if properly utilized, would have been most effective in preventing the error or ensuring its prompt detection?

A)A control total for hours worked, prepared from time sheets collected by the Timekeeping Department.
B)Requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the EDP department for the processing of the payroll.
C)Use of a check digit for employee numbers.
D)Use of a header label for the payroll input sheet.

Question 27

Which of the following is an effective internal control used to prove that production department employees are properly validating payroll time sheets?

A)Time sheets should be carefully inspected by those persons who distribute pay envelopes to the employees.
B)One person should be responsible for maintaining records of employee time for which salary payment is not to be made.
C)Daily reports showing time charged to jobs should be approved by the foreman and compared to the total hours worked on the employee time sheets.
D)Internal auditors should make observations of distribution of paychecks on a surprise basis.

Question 28

Which of the following is a control activity that most likely could help prevent employee payroll fraud?

A)The Human Resource department promptly sends employee termination notices to the payroll supervisor.
B)Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors.
C)Salary rates resulting from new hires are approved by the payroll supervisor.
D)Total hours used for determination of gross pay are calculated by the payroll supervisor.

Question 29

Which of the following procedures would normally be performed by the auditor when conducting tests of payroll transactions?

A)Interview employees selected in a statistical sample of payroll transactions.
B)Trace a sample of payroll checks to the master employee list.
C)Confirm amounts withheld from employees' salaries with proper governmental authorities.
D)Examine signatures on paid salary checks.

Question 30

An auditor most likely would extend substantive tests of payroll when:

A)payroll is extensively audited by the state government.
B)payroll expense is substantially higher than in the prior year due to company growth.
C)overpayments are discovered in performing tests of details.
D)employees complain to management about too much overtime.

Question 31

Vouching selected items from the payroll register to employee time sheets that have been approved by supervisory personnel provides evidence that:

A)internal controls relating to payroll disbursements were operating effectively.
B)payroll checks were signed by an appropriate officer independent of the payroll preparation process.
C)only bona fide employees worked and their pay was properly computed.
D)employees worked the number of hours for which their pay was computed.

Question 32

Key segregations of duties in the human resource management process include all of the following except:

A)the supervision function should be separate from the payroll-processing function.
B)the disbursement function should be separate from the supervision function.
C)the human resource function should be separate from setting salaries.
D)the payroll-processing function should be separate from the general ledger function.

Question 33

An effective system of internal control over the payroll function would include:

A)verification of agreement of job time sheets with employee recorded hours by a payroll department employee.
B)reconciliation of totals on job time sheets with job reports by employees responsible for those specific jobs.
C)custody of rate authorization records by the supervisor of the payroll department.
D)preparation of payroll transaction journal entries by an employee who reports to the supervisor of the human resource department.

Question 34

A large retail enterprise has established a policy that requires that the paymaster deliver all unclaimed payroll checks to the Internal Auditing Department at the end of each payroll distribution day. This policy was most likely adopted in order to:

A)assure that employees who were absent on a payroll distribution day are not paid for that day.
B)prevent the paymaster from cashing checks that are unclaimed for several weeks.
C)prevent a bona fide employee's check from being claimed by another employee.
D)detect any fictitious employee who may have been placed on the payroll.

Question 35

An auditor would consider internal control over an entity's payroll procedures to be ineffective if the payroll department supervisor is responsible for:

A)hiring subordinate payroll department employees.
B)having custody over unclaimed paychecks.
C)updating employee earnings records.
D)applying pay rates to time tickets.

Question 36

Comparing selected items from the payroll register to employee time records that have been approved by supervisory personnel tests which of the following assertions for payroll expense?

A)Occurrence.
B)Completeness.
C)Authorization.
D)Cutoff.

Question 37

A CPA reviews an entity's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:

A)distributing payroll checks to employees.
B)reviewing and approving time reports for subordinate employees.
C)hiring subordinate employees.
D)initiating requests for salary adjustments for subordinate employees.

Question 38

Which of the following is required of an auditor who is testing the fair value of options in share-based compensation?

A)Using a specialist.
B)Testing the inputs used in the valuation model.
C)Becoming an expert in option-pricing.
D)Using the work of the internal audit function.

Question 39

Which of the following is the best way for an auditor to determine that every name on a company's payroll 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 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 40

Which of the following activities most likely would detect whether payroll data are accurately processed?

A)Monitor authorized distribution of data control sheets.
B)Use computer-assisted audit techniques and test data to verify the accurate performance of payroll processing.
C)Examine source documents for approval by supervisors.
D)Segregate duties between approval of hardware and software specifications.

Question 41

For each of the following tests, identify the assertion to which the test applies.
1)Trace a sample of payroll checks to the master employee list.
2)Recalculate a sample of payroll checks.
3)Review supporting documentation to determine that the entity is legally obligated to pay the liability.
4)Estimate sales commissions by applying commission formulas to recorded sales totals.
5)Compare amounts accrued to supporting documentation, such as payroll tax returns.
6)Compare payroll costs as a percentage of sales to industry data.

Question 42

In performing tests concerning the granting of stock options, an auditor should:

A)confirm the transaction with the Secretary of State in the state of incorporation.
B)verify the existence of option holders in the entity's payroll records or stock ledgers.
C)determine that sufficient treasury stock is available to cover any new stock issued.
D)trace the authorization for the transaction to a vote of the board of directors.

Question 43

In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and:

A)observe the segregation of duties concerning human resource responsibilities and payroll disbursement.
B)inspect evidence that all prenumbered payroll checks are accounted for.
C)recompute the payroll deductions for employee fringe benefits.
D)verify the preparation of the monthly payroll account bank reconciliation.

Question 44

The Hamster Stop has $93,650 in the Accrued Payroll account. Hamster's weekly payroll is $156,000 and the accrual represents payroll for 3 days. If controls are strong, determine whether additional audit work should be performed on this account.

Question 45

Explain how the human resource management process can affect the financial statements.

Question 46

Comparing amounts selected from the payroll account analysis for payroll accruals to supporting documentation would provide evidence primarily for which assertion?

A)Completeness.
B)Existence.
C)Classification.
D)Presentation and disclosure.

Question 47

Tracing a sample of time sheets before and after period end to the weekly payroll report and tracing the weekly payroll report to the general ledger to verify that payroll transactions are recorded in the proper period would provide evidence primarily for which assertion?

A)Classification.
B)Occurrence.
C)Cutoff.
D)Valuation.

Question 48

During the current year being audited, Hitech, Inc. changed from a conventional payroll punch clock to a computerized payroll time system. Factory employees now record time in and out with magnetic cards and the IT system automatically updates all payroll records. Because of this change:

A)the auditor must audit through the computer.
B)internal control has improved.
C)without paper clock cards, part of the audit trail has been altered.
D)the potential for payroll related fraud has been diminished.

Question 49

Which of the following internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead?

A)Periodic independent counts of work-in-process for comparison to recorded amounts.
B)Comparison of daily journal entries with approved production orders.
C)Use of time sheets to record actual labor worked on production orders.
D)Reconciliation of work-in-process inventory with periodic cost budgets.

Question 50

In the substantive audit procedures for payroll where the control risk is set at low, an auditor most likely would:

A)verify that checks representing unclaimed wages are mailed.
B)trace individual employee deductions to entity journal entries.
C)observe entity employees during a payroll distribution.
D)compare payroll costs with entity standards or budgets.

Question 51

In testing the payroll of a large company, the auditor wants to establish that the individuals included in a sample actually were employees of the company during the period under review. What will be the best source to determine this?

A)Telephone contacts with the employees.
B)Tracing from the payroll register to the employee's earnings records.
C)Confirmation with the union or other independent organization.
D)Examination of Human Resource Department records.

Question 52

Which of the following internal control activities could best prevent direct labor from being charged to manufacturing overhead?

A)Reconciliation of work in process inventory with cost records.
B)Comparison of daily journal entries with the factory labor summary.
C)Comparison of period costs budgets and time sheets.
D)Reconciliation of the unfinished job summary and production cost records.

Question 53

Generally, is the inherent risk level for the human resource management process set at low, moderate or high? For what area of the process might the appropriate level differ from the previous answer? Why?

Question 54

An auditor most likely would assess control risk at high if the payroll department supervisor is responsible for:

A)examining authorization forms for new employees.
B)comparing payroll registers with original batch transmittal data.
C)authorizing payroll rate changes for all employees.
D)hiring all subordinate payroll department employees.

Question 55

Give an example of a test of controls that could be used by an auditor to test for the following assertions: Occurrence, Accuracy, and Cutoff.

Question 56

Listed below are descriptions of various types of documents used in the payroll process. Identify the document being described for each of the following:
1)The document used to record hours worked by an employee.
2)The document that summarizes all payroll payments issued to employees.
3)The document that contains information on an employee's work history.
4)The form used to authorize deductions from an employee's pay.
5)The computer file that contains all the entity's records related to payroll.

Question 57

When an auditor sets control risk low, sufficient evidence can be obtained for most payroll accounts through an understanding of internal controls, substantive analytical procedures, and tests of details of transactions. However, there are several accounts in the payroll cycle that may require more attention. Name the accounts and explain why the additional testing is necessary.

Question 58

Identify whether the following tests are substantive analytical procedures, tests of details of transactions, or tests of details of account balances.
1)Trace a sample of payroll checks to the master employee list to verify occurrence.
2)Recalculate the mathematical accuracy of a sample of payroll checks.
3)Test a sample of bank reconciliations for the payroll bank account.
4)Estimate sales commissions by applying commission formulas to recorded sales totals.
5)Compare amounts accrued to supporting documentation, such as payroll tax returns.
6)Compare payroll costs as a percentage of sales to industry data.