5) Which of the following is a test of controls?
A) Review the payroll journal, general ledger, and payroll earnings records for large or unusual
amounts
B) Examine time cards for indication of supervisor approval
C) Compare cancelled cheques with payroll journal for name, amount, and date
D) Examine cancelled cheques for proper endorsement
6) Which of the following internal control tests would assist in satisfying the occurrence
transaction-related audit objective for payroll?
A) Examine payroll records for evidence of approval
B) Prove the payroll bank reconciliation
C) Review chart of accounts
D) Account for a sequence of payroll cheques
7) Which of the following internal controls helps ensure that recorded payroll payments are for
work actually performed by existing employees?
A) Procedures requiring the recording of transactions as soon as possible
B) Only valid employees from the computer data files are accepted for processing
C) Internal verification of payroll file contents
D) Independent preparation of payroll bank reconciliation
8) “Existing payroll transactions are recorded” is the control objective of
A) authorization.
B) completeness.
C) existence.
D) accuracy.
9) Which of the following internal controls would help ensure that existing payroll transactions
are recorded?
A) Time records are approved by supervisors
B) Time clock is used to record time
C) Independent preparation of payroll bank reconciliation
D) Comparison of payroll master file totals with general ledger control account
10) Which of the following tests of controls would pertain to whether existing payroll
transactions are recorded?
A) Compare cancelled cheques with payroll journal details
B) Compare cancelled cheques with payroll records
C) Foot payroll journal and trace details to general ledger
D) Conduct gap testing for a sequence of payroll cheques
11) “Recorded payroll transactions are for the amount of time actually worked and at the proper
pay rate; withholdings are properly calculated” relates to which control objective?
A) Authorization
B) Completeness
C) Existence
D) Accuracy
12) Which of the following internal controls would assist in ensuring that recorded payroll
transactions are for the amount of time actually worked and at the proper pay rate, and that
withholdings are properly calculated?
A) Comparison of batch totals with computer summary reports
B) Comparison of payroll master file with payroll general ledger totals
C) Adequate personnel files
D) Separation of duties between personnel, timekeeping, and payroll disbursements
13) Recomputing hours worked from time records provides evidence that
A) internal controls relating to payroll disbursements were operating effectively.
B) payroll cheques 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.
14) Which of the following internal control tests would be used in assessing that recorded payroll
transactions are for the amount of time actually worked and at the proper pay rate, and that
withholdings are properly calculated?
A) Foot payroll journal and trace to general ledger
B) Prove the bank reconciliation
C) Recompute gross pay
D) Review the payroll journal for large or unusual amounts
15) Which of the following internal control tests would help to assess whether payroll
transactions were properly classified?
A) Test clerical accuracy by footing the payroll journal
B) Recompute net pay and gross pay
C) Reconcile the disbursements in the payroll journal with the payroll bank statement
D) Review time records and job records, tracing to labour distribution
16) Which of the following internal control tests would help to assess whether payroll
transactions were recorded on the correct dates?
A) Compare cancelled cheques with payroll journal for name, amount, and date
B) Compare date on cheque with date the cheque cleared the bank
C) Compare cancelled cheques with personnel records
D) Recompute hours worked from pay records
17) The auditor should review the preparation of at least one of each type of payroll tax form the
client is responsible for filing, as a part of the auditor’s responsibility for
A) understanding internal controls.
B) doing tests of controls.
C) doing analytical procedures.
D) doing tests of balances.
18) To test whether the client has fulfilled its legal obligation in submitting payments for all
payroll withholdings, the auditor must first
A) contact client’s independent legal counsel.
B) know the dates when tax payments are due.
C) trace these payments to the imprest payroll account.
D) determine the client’s requirements for submitting the payments.
19) Which of the following is a substantive test of transactions?
A) Review personnel policies
B) Account for a sequence of payroll cheques
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
numbers
20) When labour is a material factor in inventory valuation, the auditor should place special
emphasis on testing the internal controls concerning
A) proper classification of transactions.
B) authorization of wage rates.
C) fictitious employees.
D) completeness of recorded transactions.
21) When the employees are paid automatically by bank deposits to the employees’ accounts, in
an effort to identify potential fraud, the auditor can look for
A) duplicated bank account numbers.
B) duplicated name in the master payroll files.
C) unusual employee names.
D) cancelled cheques.
22) Because of the lack of available evidence, it is usually difficult for an auditor to discover if
an employee records more time on his or her time card than actually worked. One procedure is to
reconcile the total hours
A) paid this period with a previous period.
B) paid according to the payroll records with an independent record of the total hours worked,
such as those maintained by production control.
C) worked this period with a previous period.
D) worked according to the summary payroll report with the total hours worked as recorded on
the time card for the period.
23) A) There are several internal controls in the human resources and personnel function that are
important from an audit perspective. For example, there should be an adequate investigation of
the competence and trustworthiness of new employees. Discuss other internal controls in the
personnel and employment function that are important from an audit perspective.
B) There are several key internal controls over the timekeeping and payroll preparation function
that should be present. For example, adequate control over the time on employees’ time records
includes the use of a time clock or other method of making certain that employees are paid for
the number of hours they worked. Discuss other key internal controls over the timekeeping and
payroll preparation function.
C) 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.
24) Even though the tests of controls are the most important part of testing payroll, many
auditors spend little time in this area. In many audits, there is a minimal risk of material
misstatements, even though payroll is frequently a significant part of total expenses.
Explain the reasons the auditors have for justifying this position.
25) State the six specific transactions-related audit objectives as related to payroll, and for each
objective, state one common test of controls that can be used to test the objective.
26) Discuss the two most common ways in which employees can defraud a company in the
payroll area.
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© 2013 Pearson Canada Inc.
27) You have been working on the audit of Big Insurance Company for several years now. There
are about 5,000 employees working at the company in various positions.
Your audit partner has indicated that this year, the firm will be implementing computer assisted
audit techniques (CAATs), using generalized audit software. The information systems audit
specialist will be assisting the audit team with the implementation of these tests. She wants you
to provide a draft list of CAATs that could assist with the coming year’s audit of payroll.
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:
Prepare a list of potential computer assisted audit techniques that could be prepared for the
payroll audit. Identify the audit objective to which they relate, and indicate if any manual
procedures are required to supplement the suggested CAAT.
28) As part of your audit of the payroll for Jones Chu Company Limited (JCC), you used
generalized audit software. You had available to you the payroll transactions for the month of
September and the employee master file as of the date of September 30. You conducted the
following tests, with results noted:
1. Ran a duplicates test on employee number in the transaction file. You found that one
employee, employee number 320, had been paid twice, using cheque numbers 12376 and 12377.
2. Check the calculation of “pay per period” in the employee master file. (Divide the salary field
by 12 to derive the monthly pay). It was found that for two employees these calculations did not
match. Employee #20 had a pay of $200 higher than the calculation, while employee # 220 had a
pay that was $65 higher than the calculations.
3. Check that “gross pay” less “unemployment insurance, Canada Pension Plan and income taxes
deducted” equals “net pay.” No errors were found.
Required:
For each audit test
(i) Describe the audit assertion associated with your audit test.
(ii) Discuss the results that the auditor would have expected before running the test.
(iii) Discuss the implications of the findings upon the audit process or upon specific audit
procedures.
15.3 Consider the impact of outsourcing on the controls over, and the audit of, payroll
1) Otto decided to outsource the payroll function to Magna Plus. From the purpose of an
assurance engagement, Magna is considered a
A) service organization.
B) user entity.
C) payroll administrator.
D) human resource company.
2) Otto decided to outsource the payroll function to Magna Plus. The controller of Otto should
still
A) recalculate the payroll and its remittance to ensure accuracy.
B) review and authorize each individual payments to employees.
C) review the payroll journal and compare the total hours worked with the payroll time records.
D) inquire with the manager of Magna Plus if they suspect any unusual transaction.
15.4 Highlight the misstatements that could be detected by an analytical review of payroll
1) The auditor’s primary concern in testing payroll liabilities is to make sure that
A) expense has not been overstated, thus reducing profits.
B) there are no understated or omitted accruals.
C) employees’ T-4 slips are accurate.
D) salaries of officers have not been misclassified as wages.
2) When auditing the human resources and payroll cycle, the auditor should verify the officers’
compensation because
A) officers are more likely to commit fraud.
B) officers’ compensation is likely more prone to error.
C) some officers may have complex compensation packages.
D) some officers may be in a position to pay themselves more than the authorized amounts.
3) The correct cutoff and valuation of accrued salaries and wages
A) is to calculate the exact hours of pay that were earned in the current period and paid in a
subsequent period.
B) is to compute an approximate proportion of the wages that were earned in the current period
and use that amount as the accrual.
C) allows the client to choose between A and B above each year.
D) depends on company policy and whether it is consistently followed.
4) Once the auditor has determined the company’s policy for accruing wages and knows it is
consistent with that of previous years, the appropriate audit procedure to test for cutoff and
accuracy is to
A) recalculate the client’s accruals.
B) compare the ledger balance with the journal and the T-4 form.
C) confirm the amount with employees.
D) compare the recorded accrued wages with the amount approved in the minutes of the Board.
5) An 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 the preceding year.
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.
6) 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 and recorded in the minutes of the board of directors.
D) paid in the subsequent period.