Auditing, 12e (Arens)
Chapter 15 Audit of the Human Resources and Payroll Cycle
15.1 Explain the importance of the human resources and payroll cycle
1) The human resources and payroll cycle is the transaction cycle that begins with
A) processing the payment to the employees.
B) the creation of the employee profile in the payroll master file.
C) the employee performing work for the company.
D) hiring of personnel.
2) Payroll and personnel costs at ABC Manufacturing are a major expense. This means that
improper allocation or misclassification of labour costs could result in
A) a material misstatement of net income.
B) a net effect that is negligible when costing inventory.
C) quality control problems with respect to the production of finished products.
D) incorrect payment of payroll to employees.
3) Which of the following describes the class of transactions associated with payroll?
A) Posting costs of purchasing inventory
B) Payment of employee services
C) Payment of withholding taxes and benefits
D) Write-off of damaged inventory dropped by employees
4) In most audits, the amounts of the balance sheet accounts related to payroll are
A) large and require substantial effort to audit.
B) small compared with the transactions.
C) large on the liability side but small on the asset side.
D) significantly larger than the related accounts on the income statement.
5) In auditing the imprest payroll account, which of the following procedures will take the least
amount of auditor time?
A) tests of controls
B) risk analysis and obtaining an understanding of controls
C) analytical procedures
D) tests of details of balances
6) If there is an error in wage rates, such errors can typically escalate into material amounts.
What characteristic of the human resources and payroll cycle causes this?
A) many repeated transactions
B) the presence of independent verification
C) the use of outsourcing organizations for payroll
D) an error in the starting cheque number in a cheque run
7) The human resources department would likely provide which of the following internal
controls for the human resources and payroll cycle?
A) recalculation of net pay for every pay
B) independent verification of wage rate
C) account for the continuity of employee numbers
D) account for the continuity of payroll check numbers
8) Which of the following is an example of semi-permanent information that would be included
in personnel records?
A) gross pay for the monthly pay issued in September
B) met pay for the weekly pay issued in the first week of October
C) category of job the person is employed in
D) income tax deducted for the current pay
9) The most important control in the payroll cycle is clear, properly documentation of the
employee’s job responsibilities and wages by the appropriate level of authority. This control is
associated with which audit objective?
A) completeness
B) classification
C) valuation
D) occurrence
10) Which of the following best describes proper internal control over payroll? The
A) preparation of the payroll must be under the control of the personnel department.
B) confidentiality of employee payroll data should be carefully protected to prevent fraud.
C) duties of hiring, payroll computation, and payment to employees should be segregated.
D) payment by cheque to employees should be replaced with payment by automatic deposits.
11) Master file data is the semi-permanent data in an employee’s file. Changes to master file
changes
A) should be adequately supported.
B) should be checked by the originator.
C) would be entered only once per month.
D) would be implemented on an annual basis.
12) The file for recording each payroll transaction for each employee and maintaining total
employee wages paid for the year to date is the
A) payroll master file.
B) payroll transaction file.
C) payroll journal.
D) job time ticket.
13) A form issued for each employee summarizing the earnings record for the calendar year is
the
A) rate authorization form.
B) summary payroll report.
C) payroll master file.
D) T-4 form.
14) A wage rate form that also documents a change in job responsibility for one of the
warehouse employees should be approved by the
A) human resources and the corporate controller.
B) warehouse supervisor and human resources.
C) warehouse supervisor.
D) human resources.
15) Ricky recently got an internal transfer from payroll analyst to assistant regional manager of
production. An employee at the production facility came to see Ricky since he was not paid on
the last payroll cheque for the overtime he had done. Ricky apologized for this mistake and
logged into the payroll system to modify the next paycheque for the employee to ensure that he
would be paid for the additional hours.
A) The company did not properly allocate access rights.
B) The company did not properly complete the access rights approval form.
C) The company did not properly check employee background when they hired Ricky.
D) Ricky did not do anything wrong since the employee had worked the hours.
16) Access rights management is important because it is the organizations method of
A) establishing data tables usage.
B) identifying master file data.
C) identifying transaction file data.
D) enforcing segregation of duties.
17) Which of the following controls helps to prevent error with set up of access rights, and also
helps to prevent unauthorized changes to the access rights?
A) independent comparison to check that they have been set up properly
B) access rights forms that are signed by the user’s manager
C) tracking all accesses in an access log by user identification code
D) using audit software to provide a list of who has accessed sensitive data
18) Which of the following controls will help to detect unauthorized changes to payroll master
files, and help to detect whether terminated employees are still being paid?
A) use of authorized change forms
B) periodic review of master files
C) use of master files to print T4’s
D) use of master files to print payroll cheques
19) Which of the following controls best prevents employees from checking in for more than one
employee? The use of
A) numerically controlled punch-in cards.
B) placing the punch clock in full view of the receptionist.
C) time cards stored in a wall rack.
D) a personalized swipe card.
20) Which of the following controls could help to prevent unauthorized overtime?
A) review by payroll supervisor of a report that lists all employees whose wage rate does not
match the permanent file
B) print a gap report for all employees who have not submitted their time reports for the current
pay period
C) review by payroll supervisor of a report that lists all employees working more than 44 hours
per week
D) have a calculation check for payroll calculations (gross pay less deductions = net pay)
21) The internal auditor is running a computer-assisted audit test that compares names and wage
rates in the personnel files (stored on optical disk) with the wage rates in the payroll master file
and the whole year’s payroll transaction files. What is the purpose of these tests?
A) determine whether any employees were not paid in the most recent pay
B) check for wage rates that are under the amount specified by the union contract
C) help with the reconciliation of wage rates to the T4 summary
D) determine whether terminated employees are still being paid
22) When manufacturing labour affects inventory valuation, a knowledgeable manager should
approve wage rate allocations to make sure that labour is distributed to the proper accounts.
Which of the following controls helps to prevent error in the resulting job costing?
A) comparison of wage rates to the authorized payroll master file
B) independent comparison of the approved amounts to the data entered
C) continuity check of the payroll cheque numbers issued
D) reconciliation of gross pay on the payroll register with gross pay according to the payroll
master file
23) To minimize the opportunity for fraud, unclaimed salary cheques should be
A) immediately returned for redeposit.
B) kept in the payroll department.
C) left with the employee’s supervisor.
D) held for the employee in the personnel department.
24) A weak internal control system allows a foreman to clock in daily for a fictitious employee
and to approve the time card at the end of the payroll period. This fraud would be detected if
other controls were in place, such as having an independent party
A) compare the date of the recorded cheque in the payroll journal with the date on the cancelled
cheques and time cards.
B) foot the payroll journal and trace postings to the general ledger and the payroll master file.
C) recompute hours worked from time cards.
D) distribute paycheques.
25) Which of the following controls prevents error and helps to ensure that only authorized
wages are paid by the payroll service provider?
A) duplicate signatures required on payments to the Receiver General
B) use of an imprest payroll account for the payment of all payroll payments
C) independent approval of the payroll journal prior to payroll payment release
D) reconciliation of the payroll imprest bank account on a timely basis
26) The careful and timely preparation of all payroll withholdings and employers’ portion of
withholdings is necessary to avoid heavy fines. The most important control in the timely
preparation of these returns is
A) computerized preparation of income 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) a Gantt chart.
27) A) Discuss three important differences between the human resources and payroll cycle and
other cycles in a typical audit.
B) Describe each of the six business functions in a typical human resources and payroll cycle.
C) Describe each of the primary documents and records used in the timekeeping and payroll
preparation function in the payroll and personnel cycle.
D) Discuss each of the primary documents and records used in the (1) payment of payroll
function, and (2) preparation of employee withholdings and benefits remittance forms function in
the payroll and personnel cycle.
28) The WhirlyGig Factory Ltd. manufactures WhirlyGigs of many different sizes and types.
The company employs 55 employees, all paid on an hourly basis.
Employees fill in time sheets and hand them in every Monday to the payroll clerk, Pamela. For
factory employees, the time sheet shows the hours worked by product job number, and indicates
if the job has been completed. The payroll clerk tracks the hours worked by job, and when a job
is complete, compares the totals to the estimate made by the owner, Faruq. A bonus is paid for
actual hours paid less than the estimated amount.
Every Wednesday, Pamela prepares the cheques and gives them to Faruq for signing. Pamela
then staples the cheques to the payroll stubs. Pamela hands out the office cheques and gives the
other cheques to the factory supervisor for distribution.
Required:
A) Identify control weaknesses and their impact, and provide recommendations for
improvement.
B) What is the impact of the control weaknesses upon your audit approach?
29) Joan has been the payroll supervisor at York Distribution Company (YDC) for ten years. She
has never missed a payroll and Farah, the owner of the company is delighted with her
conscientiousness and knowledge. This is particularly important, as Farah spends a lot of time on
the road drumming up new business, and needs competent personnel back at the office.
There are two accounting personnel at the office, a receptionist, five shipping and receiving
personnel, and thirty sales people employed by YDC. Office and shipping/receiving personnel
are paid a salary, while the sales people are paid a monthly base salary plus a percentage of their
sales, calculated quarterly. The base salary is low, at $20,000, with a 2% commission, calculated
based upon sales less any bad debts written off related to their customers.
Joan prints off the sales by customer every month, and uses this information to calculate
commission. She then prepares the payroll cheques and gives them to Farah, who signs them and
gives them to the sales staff at the monthly sales meeting. The cheques are written against a
payroll imprest bank account, kept at a balance of $1,000. This account is not reconciled, as the
staff are very overworked with the increasing volume of business handled by the company.
Required:
A) Identify control weaknesses and their impact, and provide recommendations for
improvement.
B) What is the impact of the control weaknesses upon your audit approach?
30) You have been working on the audit of Ballistic Defence Company for several years now.
There are about 15,000 employees working at the company in various positions.
Recently, the company contracted for a new customized payroll system, which is to be
implemented next month. You have been asked to assess the acceptance testing plan that is being
prepared by accounting staff. In particular, they want you to help assess controls that will
improve the accuracy of information entered into the new computer system.
The company uses mainframe computing systems. You need to assume that the typical payroll
information is available on computer files, i.e. employee number, employee name, social
insurance number, department code, payment type code (salaried or hourly), time worked, wage
rate, gross pay, deductions (by type), net pay, and cheque number.
Required:
Identify the tests that should be conducted by the company’s accounting staff with respect to
accuracy before accepting the software.
15.2 List typical audit tests of controls by assertion
1) General controls must be evaluated and their impact considered upon the human resources and
payroll transaction cycle because
A) there are frequently weaknesses in internal controls in the payroll cycle.
B) automated techniques are normally used to prepare and post payroll transactions.
C) the best way to test payroll transactions is usually by using test data.
D) the best way to test payroll transactions is usually by using generalized audit software.
2) Which of the following type of test is most important for the audit of payroll?
A) Internal control
B) Test of detail
C) Analytical review
D) Substantive test
3) When examining payroll transactions, an auditor is primarily concerned with the possibility of
A) overpayments and unauthorized payments.
B) posting of gross payroll amounts to incorrect salary expense accounts.
C) misfootings of employee time records.
D) excess withholding of amounts required to be withheld.
4) “Recorded payroll payments are for work actually performed by existing employees” is the
control objective of
A) authorization.
B) completeness.
C) occurrence.
D) accuracy.