Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 20 Audit of the Payroll and Personnel Cycle
20.1 Learning Objective 20-1
1) Which of the following statements about the payroll and personnel cycle is correct?
A)
There are three classes of
transactions within
the payroll cycle —
salaried employees,
hourly employees, and
commissioned
employees.
Transactions are
more significant
than related
balance sheet
accounts.
Internal controls
over payroll are
effective for almost
all companies, even
small ones.
No
No
Yes
B)
There are three classes of
transactions within
the payroll cycle —
salaried employees,
hourly employees, and
commissioned
employees.
Transactions are
more significant
than related
balance sheet
accounts.
Internal controls
over payroll are
effective for almost
all companies, even
small ones.
Yes
No
Yes
C)
There are three classes of
transactions within
the payroll cycle —
salaried employees,
hourly employees, and
commissioned
employees.
Transactions are
more significant
than related
balance sheet
accounts.
Internal controls
over payroll are
effective for almost
all companies, even
small ones.
No
Yes
Yes
D)
There are three classes of
transactions within
the payroll cycle —
salaried employees,
hourly employees, and
commissioned
employees.
Transactions are
more significant
than related
balance sheet
accounts.
Internal controls
over payroll are
effective for almost
all companies, even
small ones.
No
Yes
No
2) Discuss three important differences between the payroll and personnel cycle and other cycles
in a typical audit.
3) Most companies, with the exception of small ones, have effective controls over the payroll
cycle.
4) While most cycles include at least two classes of transactions, the payroll and personnel cycle
includes only one class of transactions.
5) Auditors typically test details of account balances in the audit of payroll.
20.2 Learning Objective 20-2
1) 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
2) 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
3) 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
4) 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.
5) 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.
6) 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.
7) 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
8) 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.
9) 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
10) What events initiate and terminate the payroll and personnel cycle?
11) 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.
12) 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.
13) State the purpose and the information contained on the W-2 Form and on the payroll tax
returns.
14) Match seven of the terms for documents and records (a-k) used in the payroll and personnel
cycle with the descriptions provided below (1-7):
a. human resource records
b. deduction authorization form
c. rate authorization form
d. time record
e. job time ticket
f. summary payroll report
g. payroll check
h. W-2 form
i. payroll tax returns
j. payroll journal
k. payroll master file
________ 1. a file used for recording payroll transactions for each employee and maintaining
total employee wages paid for the year to date
________ 2. a document indicating the time the hourly employee started and stopped working
________ 3. a form indicating which jobs an employee worked on during a given time period
________ 4. forms submitted to local, state, and federal units of government for the payment of
withheld taxes and the employer’s tax
________ 5. a form authorizing payroll deductions, including the number of exemptions for
withholding of income taxes, retirement savings plans, and union dues
________ 6. a form used to authorize the amount of pay
________ 7. records including date of employment, personnel investigations, rates of pay, etc.
15) Hiring personnel initiates the payroll and personnel cycle.
16) Firing personnel terminates the payroll and personnel cycle.
17) Paying employees for their services ends the payroll and personnel cycle.
18) The deduction authorization form authorizes the rate of pay and the deductions for taxes,
dues, etc.
19) The job time ticket indicates the starting and stopping times of work during the pay period.
20) An imprest payroll account limits the client’s exposure to payroll fraud.
21) Imprest accounts usually carry a significant balance.
20.3 Learning Objective 20-3
1) 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.
2) 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.
3) 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.
4) 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.
5) 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
6) 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.
7) In audits of companies in which payroll is a significant portion of inventory, the improper
account classification of payroll can
A)
Increase inventory asset valuations.
Decrease inventory asset valuations.
Yes
Yes
B)
Increase inventory asset valuations.
Decrease inventory asset valuations.
No
No
C)
Increase inventory asset valuations.
Decrease inventory asset valuations.
Yes
No
D)
Increase inventory asset valuations.
Decrease inventory asset valuations.
No
Yes
8) 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.
9) 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.
10) 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
11) 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.
12) 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.
13) 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
14) Many audits have a ________ risk of misstatement for the payroll cycle.
A) high
B) low
C) moderate
D) zero
15) 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.
16) 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.
17) 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.
18) Audit tests of payroll are usually not extensive because
A)
Employees will
likely complain
if underpaid.
Payroll
transactions are typically
uniform and
uncomplicated.
Payroll transactions are
subject to audit by federal
and state governments.
Yes
Yes
Yes
B)
Employees will
likely complain
if underpaid.
Payroll
transactions are typically
uniform and
uncomplicated.
Payroll transactions are
subject to audit by federal
and state governments.
No
Yes
No
C)
Employees will
likely complain
if underpaid.
Payroll
transactions are typically
uniform and
uncomplicated.
Payroll transactions are
subject to audit by federal
and state governments.
No
No
Yes
D)
Employees will
likely complain
if underpaid.
Payroll
transactions are typically
uniform and
uncomplicated.
Payroll transactions are
subject to audit by federal
and state governments.
Yes
No
No
19) 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.
20) 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.
21) 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
22) 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.
23) 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.
24) What potential problems may arise when an auditor considers the relationship between
payroll and inventory valuation?
A)
Improper
account
classification
Improper
allocation to jobs
or processes
The overpayment or
underpayment of factory
employees
Yes
Yes
Yes
B)
Improper
account
classification
Improper
allocation to jobs
or processes
The overpayment or
underpayment of factory
employees
No
Yes
No
C)
Improper
account
classification
Improper
allocation to jobs
or processes
The overpayment or
underpayment of factory
employees
No
No
Yes
D)
Improper
account
classification
Improper
allocation to jobs
or processes
The overpayment or
underpayment of factory
employees
Yes
Yes
No
25) 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.