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26) Auditors may extend their tests of payroll in which of the following circumstances?
A)
Payroll materially affects the
valuation of inventory.
The auditor is concerned
there may be nonexistent
employees on the payroll.
Yes
Yes
B)
Payroll materially affects the
valuation of inventory.
The auditor is concerned
there may be nonexistent
employees on the payroll.
No
No
C)
Payroll materially affects the
valuation of inventory.
The auditor is concerned
there may be nonexistent
employees on the payroll.
Yes
No
D)
Payroll materially affects the
valuation of inventory.
The auditor is concerned
there may be nonexistent
employees on the payroll.
No
Yes
27) ________ is not a transaction-related audit objective for the classes of transactions
underlying the payroll cycle.
A) Classification
B) Existence
C) Timing
D) Completeness
28) 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.
29) 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.
30) 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
31) 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
32) 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.
33) 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.
34) 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.
35) 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.
36) 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.
37) 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.
38) 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.
39) 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
40) Generally, is the inherent risk level for the audit of the payroll and personnel set at low,
moderate, or high? Explain.
41) Discuss the procedures involved in, and the purpose of a surprise payroll payoff.
42) 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.
43) Discuss the two circumstances under which auditors would extend their procedures
considerably in the audit of payroll.
44) What is one audit procedure that may be used to test for proper handling of terminated
employees?
45) 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.
46) What key separation of duties should the auditor expect to find within the payroll and
personnel cycle?
47) Auditors should determine whether the client has fulfilled its legal obligation in submitting
payments of all payroll withholdings as part of their payroll tests.
48) Payroll checks should be distributed by someone independent of the payroll and timekeeping
functions.
49) Auditors seldom expect to find misstatements when testing payroll transactions.
50) The nature, extent, and timing of substantive tests of payroll transactions vary depending, in
part, on assessed control risk.
51) "Physical control over assets" is not a type of control that is applicable to the payroll cycle.
52) When auditing the payroll and personnel cycle, tests of controls are routinely performed.
53) When labor is a material part of inventory valuation, auditors should emphasize testing
internal controls over proper classification of payroll transactions.
54) 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.
55) For proper internal control, the person(s) responsible for signing the payroll checks should
not have access to timekeeping or be otherwise involved in the preparation of payroll.
56) It is usually very easy for an auditor to determine if an employee has overstated their hours
worked.
57) For most clients, the balance sheet accounts related to payroll are normally insignificant,
except for labor charged to inventory.
58) Separation of duties in the payroll and personnel cycle will prevent overpayments, but not
payments to nonexistent employees.
59) For good internal control, the payroll function should be independent of the human resources
department.
60) Since the amount of expense report reimbursements is insignificant, auditors can ignore
expense reports for officers and directors.
61) Tests of controls and tests of details of balances are the auditor's most important means of
verifying account balances in the payroll and personnel cycle.
62) The primary purpose of a surprise payroll payoff is to detect employees who have reported
more time than was actually worked (fraudulent hours).
63) Because of confidentiality requirements and potential losses of payroll funds, outside service
center systems are rarely used by companies for payroll-related functions.
64) Internal control over payroll is normally highly structured and well controlled.
65) Most monetary misstatements of payroll are corrected by internal verification controls or by
the PCAOB.
66) Despite the large dollar amounts involved in the payroll and personnel cycle, auditors
typically spend less time auditing this cycle than others.
67) It is generally more difficult for the auditor to detect payment of fraudulent hours than
payment of fictitious employees.
68) Examining payroll records for an indication of authorization is part of the timing transaction-
related audit objective.
69) The audit procedure "recompute hours worked from time cards" is normally performed when
testing the completeness objective for payroll.
20.4 Learning Objective 20-4
1) Which of the following types of audit procedures is ordinarily emphasized the least when
auditing payroll?
A) tests of controls
B) tests of transactions
C) substantive analytical procedures
D) tests of details of balances
2) There is inherent risk of payroll fraud because most transactions involve
A) expense accounts.
B) accrued liabilities.
C) estimates.
D) cash.
3) The primary concern in testing payroll-related liabilities is to make sure that
A) accruals are properly valued.
B) transactions are recorded in the proper period.
C) there are no understated or omitted accruals.
D) the accruals are not overstated.
4) Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be
accomplished by comparing the recorded accrual to the amount
A) in the expense account.
B) used in the prior period.
C) authorized in the minutes of the board.
D) paid in the subsequent period.
5) The usual audit test for a public company's officer compensation is to obtain the authorized
salary of each officer from the minutes of the board of directors and compare it with
A)
the SEC's 10-K report.
the company's federal income
tax return.
Yes
Yes
B)
the SEC's 10-K report.
the company's federal income
tax return.
No
No
C)
the SEC's 10-K report.
the company's federal income
tax return.
Yes
No
D)
the SEC's 10-K report.
the company's federal income
tax return.
No
Yes
6) Which of the following is a major balance-related audit objective in testing payroll liabilities?
A) Payroll tax expense is properly recorded.
B) Transactions in the payroll and personnel cycle are recorded in the proper period.
C) Accrual of salaries is the same as the amounts paid on the payroll tax returns.
D) Time records are recorded by supervisors.
7) What are the two major balance-related audit objectives in testing payroll liabilities?
A) accuracy and detail tie-in
B) completeness and valuation
C) completeness and rights and obligations
D) accuracy and cutoff
8) 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
A) recalculating the client's accrual.
B) performing extensive tests of controls.
C) performing extensive tests of details.
D) none of the above.
9) The most important consideration in evaluating the fairness of the amounts accrued for
vacation pay, sick pay, and other benefits is the
A) consistent accrual of these liabilities relative to those of preceding periods.
B) actual expense incurred for the prior period.
C) amount expended to date in the current period.
D) profitability of the client which will enable these liabilities to be met.
10) When performing the tests of details of balances for expense accounts, ________ is (are)
generally not necessary.
A) extensive additional testing
B) analytical procedures
C) tests of controls
D) substantive tests of transactions
11) An auditor traces a sample of electronic time cards before and after the bi-weekly payroll
report and then traces to the payroll master file to determine that payroll transactions are reported
in the correct period. The auditor is gathering evidence for which audit objective?
A) completeness
B) existence
C) cut-off
D) accuracy
12) Although significant client business risks affecting payroll are unlikely for most companies,
an area that would have the most business risk would be
A) payment of hourly employees.
B) payment of salaried employees.
C) payments to employees for stock options and bonus plans.
D) payments to employees who have direct deposit of their payroll checks.
13) Mathews and Company has $112,000 in an accrued payroll account. The company's weekly
payroll is $186,700 and the accrual represents 3 days out of 5 working days. If the auditor has
determined that controls are effective over payroll, what additional work should the auditor
perform for this account?
14) How do auditors commonly verify sales commission expense?
15) Required disclosures for payroll and personnel cycle transactions and balances are extensive.
16) The two major balance-related audit objectives in testing payroll liabilities are accuracy and
cutoff.
17) On most audits, the calculation for payroll tax expense is costly and is not necessary unless
analytical procedures indicate a problem that cannot be resolved through other procedures.
18) An analytical procedure to determine a possible misstatement of commission expense is to
compare commission expense to salaries payable.
