Deck 13: Auditing Human Resources Cycle Process: Personnel and Payroll in Service Industries

Question 1

Substantive analytical procedures of payroll accounts provide little audit evidence.

Answer 1

False

Question 2

Tracing wages paid to the union contract listing wages per job is an example of the rights and obligations assertion.

Answer 2

False

Question 3

If a client outsources payroll to a service firm, the auditor must obtain a SAS 70 Type I report.

Answer 3

False

Question 4

Time worked not accepted by the payroll application program because the employee is not in the payroll master file is an example of which assertion(s)?

A) Completeness and existence.
B) Existence.
C) Authorization and existence.
D) None of the above.

Question 5

A W-2 form is used to report earnings to the appropriate governmental bodies.

Question 6

A W-4 form is used to report earnings to the appropriate governmental bodies.

Question 7

When payroll is outsourced and the auditor relies on a SAS 70 Type II audit report, dual testing is not relevant.

Question 8

Payroll should be notified first when an employee leaves the company.

Question 9

Auditors report their chargeable hours using timesheets.

Question 10

Tracing wages paid to the appropriate time and attendance data is an example of the existence assertion.

Question 11

There are three separate components to the human resources payroll cycle.

Question 12

Dual purpose tests for payroll cash disbursements involve both the transfer of money from the general bank account to the payroll account and the cash disbursements from the payroll bank account to the employees.

Question 13

The difference between a SAS 70 Type I and Type II report centers on risk.

Question 14

Most auditors perform an audit of outsourced service firms themselves.

Question 15

Most firms process their own payroll.

Question 16

Human Resources (personnel) should maintain the payroll master file.

Question 17

Direct deposit of net pay into a checking account often is through an ACH.

Question 18

Reviewing employment contracts for payments due is an example of the cut-off assertion.

Question 19

Not all businesses have a human resources cycle.

Question 20

Tracing the amounts used to calculate payroll to the source documents tests which assertion?

A) Existence.
B)
B) Authorization.
C) Valuation.
D) Both a and

Question 21

The user company should:

A) inspect paychecks for completeness.
B)
B) inspect timecard and other input data for accuracy.
C) establish processing controls to detect errors.
D) Both a and

Question 22

Employers must submit payroll tax forms:

A) every pay period.
B) every month.
C) every quarter.
D) every month or pay period, whichever is more frequent.

Question 23

Which of the following activities is usually performed by a service provider?

A) Updating the payroll master file.
B)
B) Submitting summary information back to the organization for use in the accounting process.
C) Distributing paychecks.
D) Both a and

Question 24

EFT involves:

A) Direct deposit.
B) A computer.
C) Electronic transfer of funds.
D) All of the above.

Question 25

One of management's objectives in paying employees includes:

A) paying employees at least once a month.
B) withholding the proper amounts from employee paychecks.
C) providing legal evidence to the government of the employee's right to work.
D) All of the above.

Question 26

A public client uses a service provider who has received a favorable SAS 70 Type II report. The auditor can:

A) limit his/her testing of internal controls.
B) decide to rely entirely on the SAS 70 report.
C) refer to the work of the SAS 70 auditor in the audit report.
D) None of the above.

Question 27

AS#5 requires auditors whose public clients use service providers considered significant:

A) obtain a SAS 70 Type I report.
B) obtain a SAS 70 report.
C) obtain a SAS 70 Type II report.
D) Any of the above considering the circumstances. None of the offered answers is technically correct. A SAS 70 report is not mandatory. AU 324 (AS 5 Appendix B20) suggests a SAS 70 report be obtained if the user auditor can not obtain necessary evidence to reduce control risk through review of client activities (AU 324.13 and AS5 Appendix B20 (b)). The text (page 714) describes AS 5 Appendix B20 (a) and (c), but is silent on B20 (b). Additionally, the "Auditing In Action" (blue box) on page 715 suggests an auditor need not use a service provider report.

Question 28

An output control needed regardless of who processes payroll is:

A) agree record counts, hash totals, and control totals after processing to the input.
B) agree record counts, hash totals, and control totals to the input.
C) agree record counts and control totals to the input and output.
D) None of the above.

Question 29

Outsourcing:

A) affects the ICFR of the organization doing the outsourcing.
B)
B) if significant, the auditor must consider the controls that surround the service provider.
C) payroll is not considered significant.
D) Both a and

Question 30

AS#5 states that:

A) service providers are part of the client's IT system.
B) service providers must be audited as part of the ICFR.
C) service providers must be considered when evaluating client risk.
D) None of the above.

Question 31

The payroll master file serves which purpose?

A) It is a repository of all employees currently employed and recently discharged.
B) It lists key employee data such as pay rate and deduction information.
C) It lists the year-to-date earnings information for each employee.
D) All of the above.

Question 32

The service provider needs to:

A) enforce input controls to detect discrepancies between client and service provider.
B) oversee user company personnel on its computers.
C) review the employees granted access to its system by the user company.
D) All of the above.

Question 33

Input and submission controls required of the user company include:

A) use of passwords and IDs for authorizing access to input and transmission functions.
B) updating the employee master file.
C) updating hash totals of information submitted.
D) All of the above.

Question 34

An imprest payroll account:

A) is similar to other imprest accounts.
B) balance should reach zero.
C) serves to make reconciliation easier.
D) All of the above.

Question 35

The human resource department:

A) hires and fires employees.
B) oversees the employees' work.
C) is charged with authorizing changes to the payroll master file.
D) None of the above.

Question 36

AU 324 identifies which of the below as being a criterion for meeting the significance test for service providers?

A) It processes classes of transactions that are significant to the financial statements.
B) It affects the financial reporting process leading to the preparation of financial statements.
C) It affects accounting records, supporting information, and specific accounts related to the transactions.
D) All of the above.

Question 37

A time sheet serves which purpose?

A) It records deductions.
B) It records time worked.
C)
C) It collects billing information.
D) Both b and

Question 38

The human resources payroll cycle interfaces with the cost accounting system by:

A) classifying costs as either product or period.
B)
B) use of job time tickets to reduce payroll expense and increase WIP.
C) use of time sheets to bill clients.
D) Both a and

Question 39

The difference between a SAS 70 Type I and Type II report is:

A) Type II reports extend Type I reports by testing the operating effectiveness of controls.
B) Type II reports extend Type I reports by testing the design effectiveness of internal control.
C) Type II reports occur prior to year-end.
D) Answers C and A.

Question 40

A W-2 form can be used as a control for:

A) detecting payment never received.
B) detecting unused vacation time.
C) preventing payment to fictitious employees.
D) All of the above.

Question 41

Stock compensation plans involve:

A) valuation.
B) compensation expense.
C) vesting plan.
D) All of the above.

Question 42

Substantive analytical procedures for payroll include:

A) comparing compensation expense account balances with prior year and budget.
B) comparing compensation expense as a percent of total expense.
C) comparing compensation expense as a percent of total sales.
D) All of the above.

Question 43

Dual purpose tests for payroll involve:

A) the transfer of money from the general bank account to the payroll bank account.
B) the transfer of money from the payroll bank account to the individual employees.
C) tracing the amounts from the payroll register to individual employee records.
D) All of the above. This is the same question as number 52 below

Question 44

The audit of stock compensation also involves the audit of:

A) sales commissions.
B) payroll tax expense.
C) deferred tax expense.
D) All of the above.

Question 45

Tests of balances include:

A) reconciling total payroll expense to payroll tax returns.
B) reconciling total payroll expense to tax forms.
C)
C) reconciling total payroll task expense to task forms.
D) Both a and

Question 46

Changes to direct deposit information should:

A) be vested with the Treasury Department.
B) be vested with Human Resources.
C)
C) be detected by proper access controls.
D) Both a and

Question 47

The cut-off assertion is audited by:

A) reviewing the general ledger for adjusting entries after year-end close.
B) reviewing cash disbursements for payments made subsequent to year-end.
C) reviewing cash disbursements for payments made prior to year-end.
D) All of the above.

Question 48

The presentation and disclosure assertion is audited by:

A) tracing the paychecks to the bank statement.
B) tracing the cash disbursements in the general ledger to the imprest account.
C) tracing the control totals for the payroll register to the general ledger.
D) All of the above.

Question 49

SAB #108 promulgates that:

A) the accuracy of the liability accounts is important.
B)
B) the accuracy of the expense accounts is important.
C) Both a and
D) None of the above.

Question 50

An auditor expresses an unqualified opinion on the financial statements of a publically held client. Subsequent to the audit, the client files for bankruptcy protection. The auditor issuing the unqualified opinion may:

A) cite its reliance on the work of the auditor issuing the SAS 70 report.
B) disown the opinion as it relies on the work of another auditor.
C) cite its work on the client's internal controls as the basis for issuing the opinion.
D) None of the above.

Question 51

Dual purpose tests for payroll processing are:

A) encouraged by AS #4.
B) required by SAS #70.
C) not relevant if the auditor is relying on a SAS 70 Type II report.
D) All of the above.

Question 52

An auditor expresses an unqualified opinion on the financial statements of a publically held client. Subsequent to the audit, the client files for bankruptcy protection. If the bankruptcy was caused by poor internal controls at a service provider, the auditor may use as a valid defense which of the following?

A) It relied on the work of another auditor.
B) It extended its testing of the client's internal control environment.
C) It extended its testing of client internal controls by performing tests of controls at the service provider.
D) Any of the above depending on the circumstances.

Question 53

Payroll fraud can consist of:

A) paying employees more than agreed to.
B) paying employees less than agrees to.
C) paying employees vacation time.
D) All of the above.

Question 54

The existence assertion is audited by:

A) tracing transactions from the payroll master file to the payroll register.
B) tracing transactions from the payroll register to the source documents.
C) tracing transactions from the bank statement to the general ledger.
D) Answers A & B only.

Question 55

Stock compensation plans are frequently valued:

A) using the Black-Scholes model.
B) by the auditor.
C)
C) by specialists within the audit firm.
D) Both a and

Question 56

Substantive analytical procedures include:

A) calculating commission expense as a percent of sales.
B) calculating payroll tax expense as a percent of compensation expense.
C) comparing direct labor expense as a percent of sales.
D) All of the above.

Question 57

The completeness assertion is audited by:

A) comparing payroll master file update control totals to the payroll register totals.
B)
B) comparing the check numbers per the bank statement for missing checks.
C) comparing the deposits in transit to the bank statement.
D) Both a and

Question 58

Which of the following must the auditor consider when deciding whether to perform additional testing of a service provider in the presence of a SAS 70 report?

A) The time period covered in the SAS report.
B) The relationship of controls tested at the service provider to those at the client organization.
C) The quality of the audit report and firm conducting the SAS 70 report.
D) Both a and b only.

Question 59

Disclosures associated with payroll include:

A) underfunded pension liability.
B) share based payments.
C) other comprehensive income.
D) All of the above.

Question 60

An example in the book cites the case of a young woman who received an incorrect W-2 showing more wages than she received. How did this occur?

A) Her supervisor awarded her a bonus.
B) Her supervisor failed to notify human resources that she left the company.
C) Her supervisor forgot to sign her out.
D) None of the above.

Question 61

Professional Payroll Plus: On a single day in May 2007 six businesses filed complaints against Professional Payroll Plus (PPP). The Florida-based payroll provider
filed for bankruptcy. The IRS and the FBI initiated investigations. When PPP processed payroll for its clients it withheld money for federal taxes. But at some point PPP stopped sending the withheld funds to the IRS and instead kept the money for itself. Clients of PPP discovered the problem when they received notices from the IRS regarding unpaid taxes. Many of PPP's clients had to lay off employees or make other cuts to keep their businesses afloat while paying the IRS.
Using an outside payroll service exposes a company to risk that must be considered
by the auditor.
Required:
(a) List specific topics the auditor must address during the financial statement and
ICFR audits when the audit client uses an outside service provider.
(b) List characteristics used to define the role a service organization plays in the user company's
information system? For each characteristic, identify how it impacts whether
the service provider is part of the company's information processing system.
(c) What factors influence an auditor's decision on whether a Type II audit report provides
sufficient evidence about the effectiveness of controls at service organizations?

Question 62

Who writes the SAS 70 report? TYPO

A) The user auditor.
B) The service auditor.
C) The service provider.
D) Any of the above depending on the circumstances.
MATCHING

Question 63

In general, who is responsible for the SAS 70 report?

A) The user auditor.
B) The service auditor.
C) The service provider.
D) All of the above.

Question 64

Assume the role of a senior auditor on Genetech Corp, a large public corporation that performs evaluations of lab results submitted by physicians and hospitals. You have been assigned the task of planning and performing tests over the client's human resources cycle.
(a)What are the primary processes about which your work should be concerned?
(b) Discuss the types of activities and transactions significant to the human resources cycle.
(c) Which accounts might be significantly affected by this cycle?

Question 65

Why would a service organization choose to hire an accountant to perform a SAS 70 engagement and issue a report? Would the clients of the service organization
(in other words, the user organizations) want the service organization to provide a
SAS 70 report? Why or why not? What might the service organization consider when
it contracts for a SAS 70 engagement to make the resulting report the most useful
for user organizations and their auditors?

Question 66

How do management reports produced by a public accounting firm's engagement management system for the current year engagement assist them in bidding
on the job in subsequent years? In justifying to the client human resources cost overruns
in the current year?

Question 67

You are assigned to audit a public client. This client uses a service provider for processing its payroll transactions which are considered material and significant. Your job is to provide a work program listing the steps you would perform as part of the audit. You may assume that the client receives a SAS 70 Type II report that matches the period under audit.
Other details:
Your client primarily provides services to a specific industry. It has 5 senior managers who are eligible for bonus and stock compensation. All other employees are salaried, except one who is paid only commission. The service provider supplies the terminal used to enter the transactions and receive the output. Employees are paid using EFT. There is a Human resource Department and an accounting clerk who together oversee the payroll function. The accounting clerk reports to the controller.

Question 68

Organizations that might use a SAS 70 report are:

A) application service providers.
B)
B) mortgage bankers that service mortgages for others.
C) Both a and
D) None of the above.

Question 69

List appropriate steps and documents that an auditor could use in a walkthrough of the following human resources processes:
• Hiring, authorizing input of a new employee to the payroll master file
• Change of pay rate, input of a change of pay rate to the payroll master file
• Obtaining employee authorization for voluntary withholdings from payroll payout
such as medical and life insurance
• Separation of employees from the company, changes to the payroll master file following
Separation

Question 70

An example in the book cites the case of a young woman who received an incorrect W-2 showing more wages than she received. This is an example of:

A) fictitious employee fraud.
B) overpayment fraud.
C) overtime payment fraud.
D) All of the above.