Auditing and assurance services a systematic approach 10th edition messier test bank download

Solution Manual for Auditing and Assurance Services A Systematic Approach 10th

Edition Messier Glover Prawitt

0077732502 9780077732509

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Chapter 12 Auditing the Human Resource Management Process

True / False Questions

1. Payroll-related expenses normally are not a material cost to the organization.

True False

2. Employees must complete a W-4 form to authorize insurance deductions from his or her pay.

True False

3. The human resource function is responsible for managing the personnel needs of the organization.

True False

4. The payroll-processing function is responsible for paying employees for services and benefits.

True False

5. Proper segregation of duties is critical for the human resource management process.

True False

6. There are few inherent risk factors that directly affect the human resource management process and its related accounts for non-officers.

True False

12-1

or distribution without the prior written consent of McGraw-Hill Education.

7. Inherent risk associated with officer compensation is frequently set high because officers have motive and opportunity to take advantage of their high-ranking offices in the form of excessive compensation.

True False

8. If the results of the control tests do not support the planned level of control risk, the detection risk will have to be set higher.

True False

9. Tests of details of transactions are often conducted in conjunction with tests of controls.

True False Multiple Choice Questions

10. Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

A. Human resource.

B. Treasurer.

C. Controller.

D. Payroll.

11. Possible misstatements related to the occurrence assertion for payroll transactions include all of the following except:

A. payments to fictitious employees.

B. payments to terminated employees.

C. payments to valid employees who have not worked.

D. payments to valid employees at a rate in excess of the authorized amount.

12. The proper use of prenumbered termination notice forms by the Payroll Department should provide assurance that all

A. uncashed payroll checks were issued to employees who have not been terminated.

B. personnel files are kept up to date.

C. employees who have not been terminated receive their payroll checks.

D. terminated employees are removed from the payroll.

12-2

13. When examining payroll transactions, an auditor is primarily concerned with the possibility of

A. underpayments and properly authorized 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.

14. An auditor vouched data for a sample of employees in a payroll register to approved clock card/time sheet data to provide assurance that

A. payments to employees are computed at authorized rates.

B. employees worked the number of hours for which they are paid.

C. segregation of duties exists between the preparation and distribution of the payroll.

D. internal controls relating to unclaimed payroll checks are operating effectively.

15. Which of the following internal control objectives is likely to be a larger concern in the audit of the payroll cycle?

A. Payroll transactions are properly disclosed.

B. Recorded payroll transactions are valid.

C. Payroll transactions are recorded in the appropriate time period.

D. All payroll transactions have been recorded.

16. Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?

A. There are significant unexplained variances between standard and actual labor cost.

B. Payroll checks are disbursed by the same employee each payday.

C. Employee time sheets are approved by individual departmental supervisors.

D. A separate payroll bank account is maintained on an imprest basis.

17. Which of the following could test the assertion of cutoff for payroll-related liabilities?

A. Compare items in accrued payroll taxes to the supporting payroll tax return.

B. Search for unrecorded liabilities.

C. Examine payroll tax returns to determine that the expense was recorded in the proper period.

D. Review payroll liabilities for proper classification as short-or long-term.

18. Which of the following could test the assertion of classification for payroll-related liabilities?

A. Compare items in accrued payroll taxes to the supporting payroll tax return.

B. Search for unrecorded liabilities.

C. Examine payroll tax returns to determine that the expense was recorded in the proper period.

D. Review payroll liabilities for proper reporting as short- or long-term.

12-3

19. All of the following are incorporated into valuation models except:

A. the exercise price of the option.

B. the term of the option.

C. expected dividends.

D. current tax rates.

20. A surprise observation by an auditor of an entity's regular distribution of paychecks is primarily designed to satisfy the auditor that

A. all unclaimed payroll checks are properly returned to the cashier.

B. the paymaster is not involved in the distribution of payroll checks.

C. all employees have in their possession proper employee identification.

D. names on the company payroll are those of bona fide employees presently on the job.

21. Which of the following is the best reason why an auditor should consider observing an entity's distribution of regular payroll checks?

A. To ensure that names on the company payroll are those of bona fide employees presently on the job.

B. Total payroll costs are a significant part of total operating costs.

C. The auditor did not observe the distribution of the entire regular payroll during the audit in the prior year.

D. Employee turnover is excessive.

22. The purpose of segregating the duties of distributing payroll checks and hiring personnel is to separate the

A. duties within the accounting function.

B. custody of assets from the accounting for those assets.

C. authorization of transactions from the custody of related assets.

D. operational responsibility from record keeping responsibility.

23. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the

A. administrative controls from the internal accounting controls.

B. human resources function from the controllership function.

C. operational responsibility from the record-keeping responsibility.

D. authorization of transactions from the custody of related assets.

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24. Which of the following is an effective internal control used to prove that production department employees are properly validating payroll timecards at a time-recording station?

A. Timecards should be carefully inspected by those persons who distribute pay envelopes to the employees.

B. One person should be responsible for maintaining records of employee time for which salary payment is not to be made.

C. Daily reports showing time charged to jobs should be approved by the foreman and compared to the total hours worked on the employee timecards.

D. Internal auditors should make observations of distribution of paychecks on a surprise basis.

25. A large retail enterprise has established a policy that requires that the paymaster deliver all unclaimed payroll checks to the Internal Auditing Department at the end of each payroll distribution day. This policy was most likely adopted in order to

A. assure that employees who were absent on a payroll distribution day are not paid for that day.

B. prevent the paymaster from cashing checks that are unclaimed for several weeks.

C. prevent a bona fide employee's check from being claimed by another employee.

D. detect any fictitious employee who may have been placed on the payroll.

26. In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week. Which of the following controls, if properly utilized, would have been most effective in preventing the error or ensuring its prompt detection?

A. A control total for hours worked, prepared from time sheets collected by the Timekeeping Department.

B. Requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the EDP department for the processing of the payroll.

C. Use of a check digit for employee numbers.

D. Use of a header label for the payroll input sheet.

27. Which of the following is the best way for an auditor to determine that every name on a company's payroll 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 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.

28. Transactions processed through the payroll process include all of the following except:

A. payments to employees for services rendered.

B. payments to independent contractors for services rendered.

C. accrual of social security taxes.

D. payment of unemployment taxes.

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29. Vouching selected items from the payroll register to employee time sheets that have been approved by supervisory personnel provides evidence that

A. internal controls relating to payroll disbursements were operating effectively.

B. payroll checks 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.

30. Which of the following activities most likely would detect whether payroll data are accurately processed?

A. Monitor authorized distribution of data control sheets.

B. Use test data to verify the accurate performance of payroll processing.

C. Examine source documents for approval by supervisors.

D. Segregate duties between approval of hardware and software specifications.

31. When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying substantive analytical procedures and

A. observing the distribution of paychecks.

B. footing and crossfooting the payroll register.

C. inspecting payroll tax returns.

D. recalculating payroll accruals.

32. Which of the following procedures would normally be performed by the auditor when conducting tests of payroll transactions?

A. Interview employees selected in a statistical sample of payroll transactions.

B. Vouch number of hours worked as shown on payroll to time sheets and time reports signed by the foreman.

C. Confirm amounts withheld from employees' salaries with proper governmental authorities.

D. Examine signatures on paid salary checks.

33. A substantive test of transactions to test the completeness assertion includes

A. tracing a sample of time sheets to the payroll register.

B. testing a sample of payroll checks for the presence of an authorized time sheet.

C. testing postings to the payroll register for a sample of payroll checks.

D. recomputing the accuracy of a sample of payroll checks.

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34. Comparing selected items from the payroll register to employee time records that have been approved by supervisory personnel tests which of the following assertions for payroll expense?

A. Occurrence.

B. Completeness.

C. Authorization.

D. Cutoff.

35. An auditor most likely would extend substantive tests of payroll when

A. payroll is extensively audited by the state government.

B. payroll expense is substantially higher than in the prior year due to company growth.

C. overpayments are discovered in performing tests of details.

D. employees complain to management about too much overtime.

36. Which of the following could test the occurrence assertion for payroll-related liabilities?

A. Compare items in accrued payroll taxes to the supporting payroll tax return.

B. Search for unrecorded liabilities.

C. Examine payroll tax returns to determine that the expense was recorded in the proper period.

D. Review payroll liabilities for proper classification as short- or long-term.

37. Which of the following is required of an auditor who is testing the fair value of options in sharebased compensation?

A. Using a specialist.

B. Testing the inputs used in the valuation model.

C. Becoming an expert in option-pricing.

D. Using the work of the internal audit function.

38. In an IT payroll system environment, an auditor would be least likely to use test data to test controls related to

A. missing employee numbers.

B. proper approval of overtime by supervisors.

C. time sheets with invalid job numbers.

D. agreement of hours per clock cards with hours on time sheets.

39. Effective internal control over unclaimed payroll checks that are kept by the Treasury Department would include Accounting Department procedures that require

A. effective cancellation and stop payment orders for checks representing unclaimed wages.

B. redepositing unclaimed wages after a period of 3 months.

C. accounting for all unclaimed wages in a current liability account.

D. periodic accounting for the actual checks representing unclaimed wages.

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40. Effective internal control over the payroll function would include which of the following?

A. Total time recorded on time-clock punch cards should be reconciled to job reports by employees responsible for those specific jobs.

B. Payroll Department employees should be supervised by the management of the Human Resource Department.

C. Payroll Department employees should be responsible for maintaining employee personnel records.

D. Total time spent on jobs should be compared with total time indicated on time clock punch cards.

41. A CPA reviews an entity's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for

A. distributing payroll checks to employees.

B. reviewing and approving time reports for subordinate employees.

C. hiring subordinate employees.

D. initiating requests for salary adjustments for subordinate employees.

42. An auditor would consider internal control over an entity's payroll procedures to be ineffective if the payroll department supervisor is responsible for

A. hiring subordinate payroll department employees.

B. having custody over unclaimed paychecks.

C. updating employee earnings records.

D. applying pay rates to time tickets.

43. Which of the following is a control activity that most likely could help prevent employee payroll fraud?

A. The Human Resource department promptly sends employee termination notices to the payroll supervisor.

B. Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors.

C. Salary rates resulting from new hires are approved by the payroll supervisor.

D. Total hours used for determination of gross pay are calculated by the payroll supervisor.

44. An effective system of internal control over the payroll function would include

A. verification of agreement of job time tickets with employee clock card hours by a payroll department employee.

B. reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs.

C. custody of rate authorization records by the supervisor of the payroll department.

D. preparation of payroll transaction journal entries by an employee who reports to the supervisor of the human resource department.

12-8

45. Key segregations of duties in the human resource management process include all of the following except:

A. the supervision function should be separate from the payroll-processing function.

B. the disbursement function should be separate from the supervision function.

C. the human resource function should be separate from setting salaries.

D. the payroll-processing function should be separate from the general ledger function.

46. In testing the payroll of a large company, the auditor wants to establish that the individuals included in a sample actually were employees of the company during the period under review. What will be the best source to determine this?

A. Telephone contacts with the employees.

B. Tracing from the payroll register to the employee's earnings records.

C. Confirmation with the union or other independent organization.

D. Examination of Human Resource Department records.

47. During the current year being audited, Hitech, Inc. changed from a conventional payroll punch clock to a computerized payroll time system. Factory employees now record time in and out with magnetic cards and the IT system automatically updates all payroll records. Because of this change

A. the auditor must audit through the computer.

B. internal control has improved.

C. without paper clock cards, part of the audit trail has been altered.

D. the potential for payroll related fraud has been diminished.

48. Which of the following internal control activities could best prevent direct labor from being charged to manufacturing overhead?

A. Reconciliation of work in process inventory with cost records.

B. Comparison of daily journal entries with the factory labor summary.

C. Comparison of period costs budgets and time sheets.

D. Reconciliation of the unfinished job summary and production cost records.

49. Which of the following internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead?

A. Periodic independent counts of work-in-process for comparison to recorded amounts.

B. Comparison of daily journal entries with approved production orders.

C. Use of time tickets to record actual labor worked on production orders.

D. Reconciliation of work-in-process inventory with periodic cost budgets.

12-9

50. An auditor most likely would assess control risk at high if the payroll department supervisor is responsible for

A. examining authorization forms for new employees.

B. comparing payroll registers with original batch transmittal data.

C. authorizing payroll rate changes for all employees.

D. hiring all subordinate payroll department employees.

51. In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and

A. observe the segregation of duties concerning human resource responsibilities and payroll disbursement.

B. inspect evidence that all prenumbered payroll checks are accounted for.

C. recompute the payroll deductions for employee fringe benefits.

D. verify the preparation of the monthly payroll account bank reconciliation.

52. In the substantive audit procedures for payroll where the control risk is set at low, an auditor most likely would

A. verify that checks representing unclaimed wages are mailed.

B. trace individual employee deductions to entity journal entries.

C. observe entity employees during a payroll distribution.

D. compare payroll costs with entity standards or budgets.

53. Tracing a sample of time sheets before and after period end to the weekly payroll report and tracing the weekly payroll report to the general ledger to verify that payroll transactions are recorded in the proper period would provide evidence primarily for which assertion?

A. Classification.

B. Occurrence.

C. Cutoff.

D. Valuation.

54. Comparing amounts selected from the payroll account analysis for payroll accruals to supporting documentation would provide evidence primarily for which assertion?

A. Completeness.

B. Existence.

C. Classification.

D. Presentation and disclosure. Short Answer Questions

12-10

55. Explain how the human resource management process can affect the financial statements.

56. Listed below are descriptions of various types of documents used in the payroll process. Identify the document being described for each of the following

1) The document used to record hours worked by an employee.

2) The document that summarizes all payroll payments issued to employees.

3) The document that contains information on an employee's work history.

4) The form used to authorize deductions from an employee's pay.

5) The computer file that contains all the entity's records related to payroll.

12-11

57. Brownstein, CPA, has been engaged to audit the financial statements of Young Computer Outlets, Inc., a new client. Young is a privately owned chain of retail stores that sells a variety of computer software and video products. Young uses an in-house payroll department at its corporate headquarters to compute payroll data and to prepare and distribute payroll checks to its 300 salaried employees. Brownstein is preparing an internal control questionnaire to assist in obtaining an understanding of Young's internal control and in setting control risk. Prepare a "Payroll" segment of Brownstein's internal control questionnaire that would assist in obtaining an understanding of Young's internal control and for setting the control risk. Do not prepare questions relating to cash payroll, IT applications, or payments based on hourly rates, piecework, commissions, employee benefits (pensions, health care, vacations, and so on), or payroll tax accruals other than withholdings. Use the following format:

Young Computer Outlets

Internal Control Questionnaire

Payroll

Question

1. Are payroll changes (hires, separations, salary changes, overtime, bonuses, promotions, etc.) properly authorized and approved?

Yes No

58. Generally, is the inherent risk level for the human resource management process set at low, moderate or high? For what area of the process might the appropriate level differ from the previous answer? Why?

12-12

59. Give an example of a test of controls that could be used by an auditor to test for the following assertions: Occurrence, Accuracy, and Cutoff.

60. Identify whether the following tests are substantive analytical procedures, tests of details of transactions, or tests of details of account balances.

1) Trace a sample of payroll checks to the master employee list to verify occurrence.

2) Recalculate the mathematical accuracy of a sample of payroll checks.

3) Test a sample of bank reconciliations for the payroll bank account.

4) Estimate sales commissions by applying commission formulas to recorded sales totals.

5) Compare amounts accrued to supporting documentation, such as payroll tax returns.

6) Compare payroll costs as a percentage of sales to industry data.

61. For each of the following tests, identify the assertion to which the test applies.

1) Trace a sample of payroll checks to the master employee list to verify occurrence.

2) Recalculate the mathematical accuracy of a sample of payroll checks.

3) Test a sample of bank reconciliations for the payroll bank account.

4) Estimate sales commissions by applying commission formulas to recorded sales totals.

5) Compare amounts accrued to supporting documentation, such as payroll tax returns.

6) Compare payroll costs as a percentage of sales to industry data.

12-13

62. The Hamster Stop has $93,650 in the Accrued Payroll account. Hamster's weekly payroll is $156,000 and the accrual represents payroll for 3 days. If controls are strong, determine whether additional audit work should be performed on this account.

63. When an auditor sets control risk low, sufficient evidence can be obtained for most payroll accounts through an understanding of internal controls, substantive analytical procedures, and tests of details of transactions. However, there are several accounts in the payroll cycle that may require more attention. Name the accounts and explain why the additional testing is necessary.

64. FASB ASC Topic 715 requires specific disclosures regarding human resources, which of course must be verified and audited by the CPA. What are those disclosures?

12-14

Chapter 12 Auditing the Human Resource Management Process Answer Key

True / False Questions

1. Payroll-related expenses normally are not a material cost to the organization. FALSE

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-01 Develop an understanding of the human resource management process. Topic: Overview of the Human Resource Management Process

2. Employees must complete a W-4 form to authorize insurance deductions from his or her pay. FALSE

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-03 Know and describe the types of documents and records used in the payroll process.

Topic: Types of Documents and Records

3. The human resource function is responsible for managing the personnel needs of the organization.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-04 Understand the functions in the human resource management process.

Topic: The Major Functions

4. The payroll-processing function is responsible for paying employees for services and benefits. FALSE

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-04 Understand the functions in the human resource management process.

Topic: The Major Functions

12-15

TRUE

5. Proper segregation of duties is critical for the human resource management process.

TRUE

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process.

Topic: The Key Segregation of Duties

6. There are few inherent risk factors that directly affect the human resource management process and its related accounts for non-officers. TRUE

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-06 Know and evaluate inherent risks relevant to the human resource management process.

Topic: Inherent Risk Assessment

7. Inherent risk associated with officer compensation is frequently set high because officers have motive and opportunity to take advantage of their high-ranking offices in the form of excessive compensation.

TRUE

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-06 Know and evaluate inherent risks relevant to the human resource management process.

Topic: Inherent Risk Assessment

8. If the results of the control tests do not support the planned level of control risk, the detection risk will have to be set higher. FALSE

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 12-09 Understand how to relate the assessment of control risk to substantive procedures. Topic: Relating the Assessment of Control Risk to Substantive Procedures

12-16

9. Tests of details of transactions are often conducted in conjunction with tests of controls.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

Multiple Choice Questions

10. Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

A. Human resource.

B. Treasurer.

C. Controller.

D. Payroll.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-04 Understand the functions in the human resource management process.

Topic: Overview of the Human Resource Management Process

Topic: The Major Functions

11. Possible misstatements related to the occurrence assertion for payroll transactions include all of the following except:

A. payments to fictitious employees.

B. payments to terminated employees.

C. payments to valid employees who have not worked.

D. payments to valid employees at a rate in excess of the authorized amount.

AICPA: BB Industry

AICPA: FN Decision Making

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: Substantive Analytical Procedures

12-17

TRUE

12. The proper use of prenumbered termination notice forms by the Payroll Department should provide assurance that all

A. uncashed payroll checks were issued to employees who have not been terminated.

B. personnel files are kept up to date.

C. employees who have not been terminated receive their payroll checks.

D. terminated employees are removed from the payroll.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-03 Know and describe the types of documents and records used in the payroll process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: Types of Documents and Records

13. When examining payroll transactions, an auditor is primarily concerned with the possibility of

A. underpayments and properly authorized 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.

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: Substantive Analytical Procedures

14. An auditor vouched data for a sample of employees in a payroll register to approved clock card/time sheet data to provide assurance that

A. payments to employees are computed at authorized rates.

B. employees worked the number of hours for which they are paid.

C. segregation of duties exists between the preparation and distribution of the payroll.

D. internal controls relating to unclaimed payroll checks are operating effectively.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 12-03 Know and describe the types of documents and records used in the payroll process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Types of Documents and Records

12-18

15. Which of the following internal control objectives is likely to be a larger concern in the audit of the payroll cycle?

A. Payroll transactions are properly disclosed.

B. Recorded payroll transactions are valid.

C. Payroll transactions are recorded in the appropriate time period.

D. All payroll transactions have been recorded.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

16. Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?

A. There are significant unexplained variances between standard and actual labor cost.

B. Payroll checks are disbursed by the same employee each payday.

C. Employee time sheets are approved by individual departmental supervisors.

D. A separate payroll bank account is maintained on an imprest basis.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

17. Which of the following could test the assertion of cutoff for payroll-related liabilities?

A. Compare items in accrued payroll taxes to the supporting payroll tax return.

B. Search for unrecorded liabilities.

C. Examine payroll tax returns to determine that the expense was recorded in the proper period.

D. Review payroll liabilities for proper classification as short-or long-term.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

12-19

18. Which of the following could test the assertion of classification for payroll-related liabilities?

A. Compare items in accrued payroll taxes to the supporting payroll tax return.

B. Search for unrecorded liabilities.

C. Examine payroll tax returns to determine that the expense was recorded in the proper period.

D. Review payroll liabilities for proper reporting as short- or long-term.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

19. All of the following are incorporated into valuation models except:

A. the exercise price of the option.

B. the term of the option.

C. expected dividends.

D. current tax rates.

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-12 Understand how to evaluate the audit findings and reach a final conclusion on payroll expense and payroll-related accrued expenses.

Topic: Evaluating the Audit Findings

Topic: Substantive Analytical Procedures

20. A surprise observation by an auditor of an entity's regular distribution of paychecks is primarily designed to satisfy the auditor that

A. all unclaimed payroll checks are properly returned to the cashier.

B. the paymaster is not involved in the distribution of payroll checks.

C. all employees have in their possession proper employee identification.

D. names on the company payroll are those of bona fide employees presently on the job.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-04 Understand the functions in the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: The Major Functions

12-20

21. Which of the following is the best reason why an auditor should consider observing an entity's distribution of regular payroll checks?

A. To ensure that names on the company payroll are those of bona fide employees presently on the job.

B. Total payroll costs are a significant part of total operating costs.

C. The auditor did not observe the distribution of the entire regular payroll during the audit in the prior year.

D. Employee turnover is excessive.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Decision Making

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

22. The purpose of segregating the duties of distributing payroll checks and hiring personnel is to separate the

A. duties within the accounting function.

B. custody of assets from the accounting for those assets.

C. authorization of transactions from the custody of related assets.

D. operational responsibility from record keeping responsibility.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process.

Topic: Overview of the Human Resource Management Process

Topic: The Key Segregation of Duties

12-21

23. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the

A. administrative controls from the internal accounting controls.

B. human resources function from the controllership function.

C. operational responsibility from the record-keeping responsibility.

D. authorization of transactions from the custody of related assets.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process.

Topic: Overview of the Human Resource Management Process

Topic: The Key Segregation of Duties

24. Which of the following is an effective internal control used to prove that production department employees are properly validating payroll timecards at a time-recording station?

A. Timecards should be carefully inspected by those persons who distribute pay envelopes to the employees.

B. One person should be responsible for maintaining records of employee time for which salary payment is not to be made.

C. Daily reports showing time charged to jobs should be approved by the foreman and compared to the total hours worked on the employee timecards.

D. Internal auditors should make observations of distribution of paychecks on a surprise basis.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

12-22

25. A large retail enterprise has established a policy that requires that the paymaster deliver all unclaimed payroll checks to the Internal Auditing Department at the end of each payroll distribution day. This policy was most likely adopted in order to

A. assure that employees who were absent on a payroll distribution day are not paid for that day.

B. prevent the paymaster from cashing checks that are unclaimed for several weeks.

C. prevent a bona fide employee's check from being claimed by another employee.

D. detect any fictitious employee who may have been placed on the payroll.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

26. In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week. Which of the following controls, if properly utilized, would have been most effective in preventing the error or ensuring its prompt detection?

A. A control total for hours worked, prepared from time sheets collected by the Timekeeping Department.

B. Requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the EDP department for the processing of the payroll.

C. Use of a check digit for employee numbers.

D. Use of a header label for the payroll input sheet.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

12-23

27. Which of the following is the best way for an auditor to determine that every name on a company's payroll 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 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.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

28. Transactions processed through the payroll process include all of the following except:

A. payments to employees for services rendered.

B. payments to independent contractors for services rendered.

C. accrual of social security taxes.

D. payment of unemployment taxes.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 12-02 Be familiar with the types of transactions in the human resource management process and the financial statement accounts affected.

Topic: Types of Transactions and Financial Statements Accounts Affected

29. Vouching selected items from the payroll register to employee time sheets that have been approved by supervisory personnel provides evidence that

A. internal controls relating to payroll disbursements were operating effectively.

B. payroll checks 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.

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-02 Be familiar with the types of transactions in the human resource management process and the financial statement accounts affected.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Substantive Analytical Procedures

Topic: Types of Transactions and Financial Statements Accounts Affected

12-24

30. Which of the following activities most likely would detect whether payroll data are accurately processed?

A. Monitor authorized distribution of data control sheets.

B. Use test data to verify the accurate performance of payroll processing.

C. Examine source documents for approval by supervisors.

D. Segregate duties between approval of hardware and software specifications.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

31. When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying substantive analytical procedures and

A. observing the distribution of paychecks.

B. footing and crossfooting the payroll register.

C. inspecting payroll tax returns.

D. recalculating payroll accruals.

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-09 Understand how to relate the assessment of control risk to substantive procedures.

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Relating the Assessment of Control Risk to Substantive Procedures

Topic: Substantive Analytical Procedures

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

32. Which of the following procedures would normally be performed by the auditor when conducting tests of payroll transactions?

A. Interview employees selected in a statistical sample of payroll transactions.

B. Vouch number of hours worked as shown on payroll to time sheets and time reports signed by the foreman.

C. Confirm amounts withheld from employees' salaries with proper governmental authorities.

D. Examine signatures on paid salary checks.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

12-25

33. A substantive test of transactions to test the completeness assertion includes

A. tracing a sample of time sheets to the payroll register.

B. testing a sample of payroll checks for the presence of an authorized time sheet.

C. testing postings to the payroll register for a sample of payroll checks.

D. recomputing the accuracy of a sample of payroll checks.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

34. Comparing selected items from the payroll register to employee time records that have been approved by supervisory personnel tests which of the following assertions for payroll expense?

A. Occurrence.

B. Completeness.

C. Authorization.

D. Cutoff.

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Substantive Analytical Procedures

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

35. An auditor most likely would extend substantive tests of payroll when

A. payroll is extensively audited by the state government.

B. payroll expense is substantially higher than in the prior year due to company growth.

C. overpayments are discovered in performing tests of details.

D. employees complain to management about too much overtime.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Decision Making

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

12-26

36. Which of the following could test the occurrence assertion for payroll-related liabilities?

A. Compare items in accrued payroll taxes to the supporting payroll tax return.

B. Search for unrecorded liabilities.

C. Examine payroll tax returns to determine that the expense was recorded in the proper period.

D. Review payroll liabilities for proper classification as short- or long-term.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

37. Which of the following is required of an auditor who is testing the fair value of options in sharebased compensation?

A. Using a specialist.

B. Testing the inputs used in the valuation model.

C. Becoming an expert in option-pricing.

D. Using the work of the internal audit function.

AACSB: Communication

AICPA: BB Legal

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 12-12 Understand how to evaluate the audit findings and reach a final conclusion on payroll expense and payroll-related accrued expenses.

Topic: Evaluating the Audit Findings

38. In an IT payroll system environment, an auditor would be least likely to use test data to test controls related to

A. missing employee numbers.

B. proper approval of overtime by supervisors.

C. time sheets with invalid job numbers.

D. agreement of hours per clock cards with hours on time sheets.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

12-27

39. Effective internal control over unclaimed payroll checks that are kept by the Treasury Department would include Accounting Department procedures that require

A. effective cancellation and stop payment orders for checks representing unclaimed wages.

B. redepositing unclaimed wages after a period of 3 months.

C. accounting for all unclaimed wages in a current liability account.

D. periodic accounting for the actual checks representing unclaimed wages.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process. Learning Objective: 12-04 Understand the functions in the human resource management process.

Topic: Overview of the Human Resource Management Process

Topic: The Major Functions

40. Effective internal control over the payroll function would include which of the following?

A. Total time recorded on time-clock punch cards should be reconciled to job reports by employees responsible for those specific jobs.

B. Payroll Department employees should be supervised by the management of the Human Resource Department.

C. Payroll Department employees should be responsible for maintaining employee personnel records.

D. Total time spent on jobs should be compared with total time indicated on time clock punch cards.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process. Learning Objective: 12-04 Understand the functions in the human resource management process. Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: The Major Functions

12-28

41. A CPA reviews an entity's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for

A. distributing payroll checks to employees.

B. reviewing and approving time reports for subordinate employees.

C. hiring subordinate employees.

D. initiating requests for salary adjustments for subordinate employees.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: The Key Segregation of Duties

42. An auditor would consider internal control over an entity's payroll procedures to be ineffective if the payroll department supervisor is responsible for

A. hiring subordinate payroll department employees.

B. having custody over unclaimed paychecks.

C. updating employee earnings records.

D. applying pay rates to time tickets.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: The Key Segregation of Duties

12-29

43. Which of the following is a control activity that most likely could help prevent employee payroll fraud?

A. The Human Resource department promptly sends employee termination notices to the payroll supervisor.

B. Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors.

C. Salary rates resulting from new hires are approved by the payroll supervisor.

D. Total hours used for determination of gross pay are calculated by the payroll supervisor.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-04 Understand the functions in the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: The Major Functions

44. An effective system of internal control over the payroll function would include

A. verification of agreement of job time tickets with employee clock card hours by a payroll department employee.

B. reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs.

C. custody of rate authorization records by the supervisor of the payroll department.

D. preparation of payroll transaction journal entries by an employee who reports to the supervisor of the human resource department.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-04 Understand the functions in the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: The Major Functions

12-30

45. Key segregations of duties in the human resource management process include all of the following except:

A. the supervision function should be separate from the payroll-processing function.

B. the disbursement function should be separate from the supervision function.

C. the human resource function should be separate from setting salaries.

D. the payroll-processing function should be separate from the general ledger function.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process.

Topic: Overview of the Human Resource Management Process

Topic: The Key Segregation of Duties

46. In testing the payroll of a large company, the auditor wants to establish that the individuals included in a sample actually were employees of the company during the period under review. What will be the best source to determine this?

A. Telephone contacts with the employees.

B. Tracing from the payroll register to the employee's earnings records.

C. Confirmation with the union or other independent organization.

D. Examination of Human Resource Department records.

AICPA: BB Industry

AICPA: FN Decision Making

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

Topic: Substantive Analytical Procedures

12-31

47. During the current year being audited, Hitech, Inc. changed from a conventional payroll punch clock to a computerized payroll time system. Factory employees now record time in and out with magnetic cards and the IT system automatically updates all payroll records. Because of this change

A. the auditor must audit through the computer.

B. internal control has improved.

C. without paper clock cards, part of the audit trail has been altered.

D. the potential for payroll related fraud has been diminished.

AACSB: Technology

AICPA: BB Leveraging Technology

AICPA: FN Leveraging Technology

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

48. Which of the following internal control activities could best prevent direct labor from being charged to manufacturing overhead?

A. Reconciliation of work in process inventory with cost records.

B. Comparison of daily journal entries with the factory labor summary.

C. Comparison of period costs budgets and time sheets.

D. Reconciliation of the unfinished job summary and production cost records.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

12-32

49. Which of the following internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead?

A. Periodic independent counts of work-in-process for comparison to recorded amounts.

B. Comparison of daily journal entries with approved production orders.

C. Use of time tickets to record actual labor worked on production orders.

D. Reconciliation of work-in-process inventory with periodic cost budgets.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: Overview of the Human Resource Management Process

50. An auditor most likely would assess control risk at high if the payroll department supervisor is responsible for

A. examining authorization forms for new employees.

B. comparing payroll registers with original batch transmittal data.

C. authorizing payroll rate changes for all employees.

D. hiring all subordinate payroll department employees.

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-04 Understand the functions in the human resource management process.

Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process. Learning Objective: 12-07 Assess control risk for a human resource management process.

Topic: Control Risk Assessment

Topic: Substantive Analytical Procedures

Topic: The Key Segregation of Duties

Topic: The Major Functions

12-33

51. In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and

A. observe the segregation of duties concerning human resource responsibilities and payroll disbursement.

B. inspect evidence that all prenumbered payroll checks are accounted for.

C. recompute the payroll deductions for employee fringe benefits.

D. verify the preparation of the monthly payroll account bank reconciliation.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Control Activities and Tests of Controls

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

52. In the substantive audit procedures for payroll where the control risk is set at low, an auditor most likely would

A. verify that checks representing unclaimed wages are mailed.

B. trace individual employee deductions to entity journal entries.

C. observe entity employees during a payroll distribution.

D. compare payroll costs with entity standards or budgets.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

53. Tracing a sample of time sheets before and after period end to the weekly payroll report and tracing the weekly payroll report to the general ledger to verify that payroll transactions are recorded in the proper period would provide evidence primarily for which assertion?

A. Classification.

B. Occurrence.

C. Cutoff.

D. Valuation.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-09 Understand how to relate the assessment of control risk to substantive procedures.

Topic: Relating the Assessment of Control Risk to Substantive Procedures

12-34

54. Comparing amounts selected from the payroll account analysis for payroll accruals to supporting documentation would provide evidence primarily for which assertion?

A. Completeness.

B. Existence.

C. Classification.

D. Presentation and disclosure.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

Short Answer Questions

55. Explain how the human resource management process can affect the financial statements.

The main human resource transaction that affects the financial statements is the payroll process. This process affects accounts such as cash, inventory, and various expense accounts and accruals. If there are weak controls in the human resource department, these accounts could be materially misstated. Auditors should become familiar with the payroll process in order to test these accounts.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Decision Making

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 12-01 Develop an understanding of the human resource management process.

Learning Objective: 12-02 Be familiar with the types of transactions in the human resource management process and the financial statement accounts affected.

Topic: Overview of the Human Resource Management Process

Topic: Types of Transactions and Financial Statements Accounts Affected

12-35

56. Listed below are descriptions of various types of documents used in the payroll process. Identify the document being described for each of the following

1) The document used to record hours worked by an employee.

2) The document that summarizes all payroll payments issued to employees.

3) The document that contains information on an employee's work history.

4) The form used to authorize deductions from an employee's pay.

5) The computer file that contains all the entity's records related to payroll.

1) Time sheet.

2) Payroll Register.

3) Personnel record.

4) W-4.

5) Payroll Master File.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 12-03 Know and describe the types of documents and records used in the payroll process.

Topic: Types of Documents and Records

12-36

12-37

57. Brownstein, CPA, has been engaged to audit the financial statements of Young Computer Outlets, Inc., a new client. Young is a privately owned chain of retail stores that sells a variety of computer software and video products. Young uses an in-house payroll department at its corporate headquarters to compute payroll data and to prepare and distribute payroll checks to its 300 salaried employees. Brownstein is preparing an internal control questionnaire to assist in obtaining an understanding of Young's internal control and in setting control risk. Prepare a "Payroll" segment of Brownstein's internal control questionnaire that would assist in obtaining an understanding of Young's internal control and for setting the control risk. Do not prepare questions relating to cash payroll, IT applications, or payments based on hourly rates, piecework, commissions, employee benefits (pensions, health care, vacations, and so on), or payroll tax accruals other than withholdings. Use the following format:

Young Computer Outlets

Internal Control Questionnaire Payroll

Question

1. Are payroll changes (hires, separations, salary changes, overtime, bonuses, promotions, etc.) properly authorized and approved?

Yes No

Young Computer Outlets Internal Control Questionnaire Payroll

Question

1. Are payroll changes (hires, separations, salary changes, overtime, bonuses, promotions, etc.) properly authorized and approved?

2. Are discretionary payroll deductions and withholdings authorized in writing by employees?

Are the employees who perform each of the following payroll functions independent of the other five functions?

• Personnel and approval of payroll changes

Yes No

3.

• Preparation of payroll data

• Approval of payroll

• Signing of paychecks

• Distribution of paychecks

• Reconciliation of payroll account

4. Are changes in the standard data on which payroll is based (hires, separations, salary changes, promotions, deduction and withholding changes, etc.) promptly input to the system to process the payroll?

5. Is gross pay determined by using authorized salary rates and time and attendance records?

6. Is there a suitable chart of accounts and/or established guidelines for determining salary account distribution and for recording payroll withholding liabilities?

7. Are clerical operations in payroll preparation verified?

8. Is payroll preparation and recording reviewed by supervisors or internal audit personnel?

9. Are payrolls approved by a responsible official before payroll checks are issued?

10. Are payrolls disbursed through an imprest account?

12-38

11. Is the payroll bank account reconciled monthly to the general ledger?

12. Are payroll bank reconciliations properly approved and differences promptly followed up?

13. Is the custody and follow-up of unclaimed salary checks assigned to a responsible official?

14. Are differences reported by employees followed up on a timely basis by persons not involved in payroll preparation?

15. Are there procedures (e. g., tickler files) to ensure proper and timely payment of withholdings to appropriate bodies and to file required information returns?

16. Are employee compensation records reconciled to control accounts?

17. Is access to personnel and payroll records, checks, forms, signature plates, etc., limited?

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 12-04 Understand the functions in the human resource management process.

Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process.

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

Topic: The Key Segregation of Duties

Topic: The Major Functions

58. Generally, is the inherent risk level for the human resource management process set at low, moderate or high? For what area of the process might the appropriate level differ from the previous answer? Why?

Inherent risk is normally set low for the human resource management process, due to the small number of inherent risk factors that affect the process and its related accounts. However, this is only true for non-officers. Inherent risk for officer compensation may be set higher, due to the opportunity and motive of officers to take advantage of their higher ranking offices in the form of excessive compensation.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Risk Analysis

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 12-06 Know and evaluate inherent risks relevant to the human resource management process.

Topic: Inherent Risk Assessment

12-39

59. Give an example of a test of controls that could be used by an auditor to test for the following assertions: Occurrence, Accuracy, and Cutoff.

Possible answers:

Occurrence-The auditor will want to test for payments made that were not earned. This can be tested by observing and evaluating proper segregation of duties and employees' use of the time clock, reviewing and testing personnel files, reviewing and testing the entity's procedures for changing employees' records and entering and removing employee numbers from the payroll master file, and inspecting the time sheets for approval by the supervisor.

Accuracy-This assertion states that all transactions are recorded at the proper amount. To test it, the auditor could review and test the entity's verification procedures, review the payroll register for unusual amounts, review the entity's budgeting procedures and the reconciliation of the payroll master file to the general ledger payroll accounts, examine the reconciliation of "before and after" reports to the payroll master file, and review and test the entity's procedures for changing employees' records.

Cutoff-To test that all transactions were recorded in the proper period, the auditor could review and test the entity's procedures for changing employees' records, processing time sheets, and recording payroll liabilities.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.

Topic: Control Activities and Tests of Controls

12-40

60. Identify whether the following tests are substantive analytical procedures, tests of details of transactions, or tests of details of account balances.

1) Trace a sample of payroll checks to the master employee list to verify occurrence.

2) Recalculate the mathematical accuracy of a sample of payroll checks.

3) Test a sample of bank reconciliations for the payroll bank account.

4) Estimate sales commissions by applying commission formulas to recorded sales totals.

5) Compare amounts accrued to supporting documentation, such as payroll tax returns.

6) Compare payroll costs as a percentage of sales to industry data.

1) Tests of details of transactions.

2) Tests of details of transactions.

3) Tests of details of account balances.

4) Substantive analytical procedures.

5) Tests of details of account balances.

6) Substantive analytical procedures.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 12-10 Be familiar with substantive analytical procedures used to audit payroll expense and payroll-related accrued expenses.

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Substantive Analytical Procedures

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

12-41

61. For each of the following tests, identify the assertion to which the test applies.

1) Trace a sample of payroll checks to the master employee list to verify occurrence.

2) Recalculate the mathematical accuracy of a sample of payroll checks.

3) Test a sample of bank reconciliations for the payroll bank account.

4) Estimate sales commissions by applying commission formulas to recorded sales totals.

5) Compare amounts accrued to supporting documentation, such as payroll tax returns.

6) Compare payroll costs as a percentage of sales to industry data.

1) Occurrence.

2) Accuracy.

3) Rights and Obligations.

4) Occurrence.

5) Valuation and allocation.

6) Completeness.

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 12-10 Be familiar with substantive analytical procedures used to audit payroll expense and payroll-related accrued expenses.

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Substantive Analytical Procedures

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

62. The Hamster Stop has $93,650 in the Accrued Payroll account. Hamster's weekly payroll is $156,000 and the accrual represents payroll for 3 days. If controls are strong, determine whether additional audit work should be performed on this account.

Because the accrual is for three days, we can estimate the appropriate amount by taking the total weekly payroll times 60 percent [(3 days/5 days) $156,000 * .6 = $93,600]. This calculation is close to the actual amount and, therefore, no further work should be required.

AICPA: BB Industry

AICPA: FN Decision Making

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-10 Be familiar with substantive analytical procedures used to audit payroll expense and payroll-related accrued expenses.

Topic: Substantive Analytical Procedures

12-42

63. When an auditor sets control risk low, sufficient evidence can be obtained for most payroll accounts through an understanding of internal controls, substantive analytical procedures, and tests of details of transactions. However, there are several accounts in the payroll cycle that may require more attention. Name the accounts and explain why the additional testing is necessary.

The accounts that need additional testing are those that are related to the officers of the company. Limits on the amount of compensation received by officers can be set as a part of lending agreements and information regarding executive salaries is needed for the federal tax return. Also, there is an increased risk of fraud in these accounts, because officers have the motive and opportunity to override the control activities and pay themselves more than is authorized.

Note that FASB now requires share-based compensation to be valued at fair value. Due to the complexity and judgment involved in computing compensation expense for share-based compensation, extensive audit procedures may need to be performed.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Risk Analysis

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 12-06 Know and evaluate inherent risks relevant to the human resource management process.

Learning Objective: 12-10 Be familiar with substantive analytical procedures used to audit payroll expense and payroll-related accrued expenses.

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Inherent Risk Assessment

Topic: Substantive Analytical Procedures

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

64. FASB ASC Topic 715 requires specific disclosures regarding human resources, which of course must be verified and audited by the CPA. What are those disclosures?

FASB ASC Topic 715 requires significant disclosure regarding pension costs and postretirement benefits. Also, there are requirements for stock-based compensation, profitsharing plans, and deferred compensation arrangements.

AACSB: Communication

AICPA: BB Legal

AICPA: FN Reporting

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and disclosures used to audit payroll expense and payroll-related accrued expenses.

Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures

12-43

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