Deck 15: Audit of the Human Resources and Payroll Cycle

Question 1

The most important control in the payroll cycle is clear,proper documentation of the employees job responsibilities and wages by the appropriate level of authority.This control is associated with which audit objective?

A)completeness
B)classification
C)valuation
D)occurrence

Answer 1

D

Question 2

Which of the following controls helps to prevent error with set up of access rights,and also helps to prevent unauthorized changes to the access rights?

A)independent comparison to check that they have been set up properly
B)access rights forms that are signed by the user's manager
C)tracking all accesses in an access log by user identification code
D)using audit software to provide a list of who has accessed sensitive data

Answer 2

A

Question 3

Which of the following describes the class of transactions associated with payroll?

A)posting costs of purchasing inventory
B)payment of employee services
C)payment of withholding taxes and benefits
D)writing off damaged inventory dropped by employees

Answer 3

B

Question 4

The human resources and payroll cycle is the transaction cycle that begins with

A)processing the payment to the employees.
B)the creation of the employee profile in the payroll master file.
C)the employee performing work for the company.
D)the hiring of personnel.

Question 5

Which of the following is an example of semi-permanent information that would be included in personnel records?

A)gross pay for the monthly pay issued in September
B)net pay for the weekly pay issued in the first week of October
C)category of job the person is employed in
D)income tax deducted for the current pay

Question 6

Master file data is the semi-permanent data in an employee's file.Changes to the master file

A)should be adequately supported.
B)should be checked by the originator.
C)would be entered only once per month.
D)would be implemented on an annual basis.

Question 7

A)Discuss three important differences between the human resources and payroll cycle and other cycles in a typical audit.
B)Describe each of the six business functions in a typical human resources and payroll cycle.
C)Describe each of the primary documents and records used in the timekeeping and payroll preparation function in the payroll and personnel cycle.
D)Discuss each of the primary documents and records used in 1)the payment of payroll function,and 2)the preparation of employee withholdings and benefits remittance forms function in the payroll and personnel cycle.

Question 8

If there is an error in wage rates,such errors can typically escalate into material amounts.What characteristic of the human resources and payroll cycle causes this?

A)many repeated transactions
B)the presence of independent verification
C)the use of outsourcing organizations for payroll
D)an error in the starting cheque number in a cheque run

Question 9

Payroll and personnel costs at ABC Manufacturing are a major expense.This means that improper allocation or misclassification of labour costs could result in

A)a material misstatement of net income.
B)a net effect that is negligible when costing inventory.
C)quality control problems with respect to the production of finished products.
D)incorrect payment of payroll to employees.

Question 10

State the six functions that make up the human resources and payroll cycle and,for each function,identify the related documents and/or records that would be used by a company.

Question 11

In most audits,the amounts of the balance sheet accounts related to payroll are

A)large and require substantial effort to audit.
B)small compared with the transactions.
C)large on the liability side but small on the asset side.
D)significantly larger than the related accounts on the income statement.

Question 12

The human resources department would likely provide which of the following internal controls for the human resources and payroll cycle?

A)recalculation of net pay for every pay
B)independent verification of wage rate
C)account for the continuity of employee numbers
D)account for the continuity of payroll check numbers

Question 13

Which of the following type of test is most important for the audit of payroll?

A)internal control
B)test of detail
C)analytical review
D)substantive test

Question 14

Which is the only one class of transaction relating to the payroll cycle?

A)receiving of goods
B)obtaining of service
C)receipt of cash
D)sales

Question 15

Which of the following best describes proper internal control over payroll?

A)Preparation of the payroll must be under the control of the personnel department.
B)Confidentiality of employee payroll data should be carefully protected to prevent fraud.
C)Duties of hiring,payroll computation,and payment to employees should be segregated.
D)Payment by cheque to employees should be replaced with payment by automatic deposits.

Question 16

General controls must be evaluated and their impact considered upon the human resources and payroll transaction cycle because

A)there are frequently weaknesses in internal controls in the payroll cycle.
B)automated techniques are normally used to prepare and post payroll transactions.
C)the best way to test payroll transactions is usually by using test data.
D)the best way to test payroll transactions is usually by using generalized audit software.

Question 17

Discuss the two most common ways in which employees can defraud a company in the payroll area.

Question 18

Otto decided to outsource the payroll function to Magna Plus.For the purpose of an assurance engagement,Magna is considered a

A)service organization.
B)user entity.
C)payroll administrator.
D)human resource company.

Question 19

Which of the following is not a major risk in the payroll cycle?

A)paying fictitious employees
B)incorrect accounting of costs and expenses
C)overpayment for time and production
D)paying employees more than the market rate

Question 20

What are the risks of error or fraud in the human resources and payroll cycle?

Question 21

You have been working on the audit of Big Insurance Company for several years now.There are about 5000 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.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.

Question 22

When manufacturing labour affects inventory valuation,a knowledgeable manager should approve wage rate allocations to make sure that labour is distributed to the proper accounts.Which of the following controls helps to prevent error in the resulting job costing?

A)comparison of wage rates to the authorized payroll master file
B)independent comparison of the approved amounts to the data entered
C)continuity check of the payroll cheque numbers issued
D)reconciliation of gross pay on the payroll register with gross pay according to the payroll master file

Question 23

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.

Question 24

The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the

A)payroll master file.
B)payroll transaction file.
C)payroll journal.
D)job time ticket.

Question 25

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.

Question 26

The internal auditor is running a computer-assisted audit test that compares names and wage rates in the personnel files (stored on optical disk)with the wage rates in the payroll master file and the whole year's payroll transaction files.What is the purpose of these tests?

A)to determine whether any employees were not paid in the most recent pay
B)to check for wage rates that are under the amount specified by the union contract
C)to help with the reconciliation of wage rates to the T4 summary
D)to determine whether terminated employees are still being paid

Question 27

A weak internal control system allows a foreman to clock in daily for a fictitious employee and to approve the time card at the end of the payroll period.This fraud would be detected if other controls were in place,such as having an independent party

A)compare the date of the recorded cheque in the payroll journal with the date on the cancelled cheques and time cards.
B)foot the payroll journal and trace postings to the general ledger and the payroll master file.
C)recompute hours worked from time cards.
D)distribute paycheques.

Question 28

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.

Question 29

Which of the following controls could help to prevent unauthorized overtime?

A)review by payroll supervisor of a report that lists all employees whose wage rate does not match the permanent file
B)print a gap report for all employees who have not submitted their time reports for the current pay period
C)review by payroll supervisor of a report that lists all employees working more than the required hours per week
D)have a calculation check for payroll calculations (gross pay less deductions = net pay)

Question 30

Access rights management is important because it is the organization's method of

A)establishing data tables usage.
B)identifying master file data.
C)identifying transaction file data.
D)enforcing segregation of duties.

Question 31

Ricky recently changed jobs from payroll analyst to assistant regional manager of production.An employee at the production facility came to see Ricky and complained that he was not paid on the last payroll cheque for the overtime he had done.Ricky apologized for this mistake and logged into the payroll system to modify the next paycheque for the employee to ensure that he would be paid for the additional hours.Which of the following statements correctly applies to this scenario?

A)The company did not properly allocate access rights.
B)The company did not properly complete the access rights approval form.
C)The company did not properly check employee background when they hired Ricky.
D)Ricky did not do anything wrong since the employee had worked the hours.

Question 32

Which of the following controls best prevents employees from checking in for more than one employee?

A)use of numerically controlled punch-in cards
B)placing the punch clock in full view of the receptionist
C)time cards stored in a wall rack
D)a personalized swipe card

Question 33

Which of the following controls prevents error and helps to ensure that only authorized wages are paid by the payroll service provider?

A)duplicate signatures required on payments to the Receiver General
B)use of an imprest payroll account for the payment of all payroll payments
C)independent approval of the payroll journal prior to payroll payment release
D)reconciliation of the payroll imprest bank account on a timely basis

Question 34

A wage rate form that also documents a change in job responsibility for one of the warehouse employees should be approved by

A)human resources and the corporate controller.
B)the warehouse supervisor and human resources.
C)the warehouse supervisor.
D)human resources.

Question 35

You have been working on the audit of Ballistic Defence Company for several years now.There are about 15 000 employees working at the company in various positions.
Recently,the company contracted for a new customized payroll system,which is to be implemented next month.You have been asked to assess the acceptance testing plan that is being prepared by accounting staff.In particular,they want you to help assess controls that will improve the accuracy of information entered into the new computer system.
The company uses mainframe computing systems.Assume that the typical payroll information is available on computer files (i.e. ,employee number,employee name,social insurance number,department code,payment type code (salaried or hourly),time worked,wage rate,gross pay,deductions (by type),net pay,and cheque number).
Required:
Identify the tests that should be conducted by the company's accounting staff with respect to accuracy before accepting the software.

Question 36

To minimize the opportunity for fraud,unclaimed salary cheques should be

A)immediately returned for redeposit.
B)kept in the payroll department.
C)left with the employee's supervisor.
D)held for the employee in the personnel department.

Question 37

The WhirlyGig Factory Ltd.manufactures whirly gigs of many different sizes and types.The company employs 55 employees,all paid on an hourly basis.Employees fill in time sheets and hand them in every Monday to the payroll clerk,Pamela.For factory employees,the time sheet shows the hours worked by product job number,and indicates if the job has been completed.The payroll clerk tracks the hours worked by job.When a job is complete,she compares the totals to the estimate made by the owner,Faruq.A bonus is paid for actual hours paid less than the estimated amount.
Every Wednesday,Pamela prepares the cheques and gives them to Faruq for signing.Pamela then staples the cheques to the payroll stubs.Pamela hands out the office cheques and gives the other cheques to the factory supervisor for distribution.
Required:A)Identify control weaknesses and their impact,and provide recommendations for improvement.B)What is the impact of the control weaknesses upon your audit approach?

Question 38

Joan has been the payroll supervisor at York Distribution Company (YDC)for ten years.She has never missed a payroll and Farah,the owner of the company,is delighted with her conscientiousness and knowledge.This is particularly important,as Farah spends a lot of time on the road drumming up new business,and needs competent personnel back at the office.
There are two accounting personnel at the office,a receptionist,five shipping and receiving personnel,and thirty sales people employed by YDC.Office and shipping/receiving personnel are paid a salary,while the sales people are paid a monthly base salary plus a percentage of their sales,calculated quarterly.The base salary is low,at $20 000,with a 2% commission,calculated based on sales less any bad debts written off related to their customers.
Joan prints off the sales by customer every month and uses this information to calculate commissions.She then prepares the payroll cheques and gives them to Farah,who signs them and gives them to the sales staff at the monthly sales meeting.The cheques are written against a payroll imprest bank account,kept at a balance of $1000.This account is not reconciled,as the staff are very overworked with the increasing volume of business handled by the company.
Required:A)Identify control weaknesses and their impact,and provide recommendations for improvement.B)What is the impact of the control weaknesses upon your audit approach?

Question 39

The careful and timely preparation of all payroll withholdings and employer's portion of withholdings is necessary to avoid heavy fines.The most important control in the timely preparation of these returns is

A)computerized preparation of income tax returns.
B)a well-defined set of policies that indicate when each form must be filed.
C)independent verification of computer output by a competent individual.
D)a Gantt chart.

Question 40

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.

Question 41

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.

Question 42

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 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 #320,had been paid twice,using cheque numbers 12376 and 12377.
2.Checked the calculation of "pay per period" in the employee master file (divided 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.Checked 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 on the audit process or on specific audit procedures.

Question 43

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.

Question 44

"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

Question 45

Which of the following is most likely to approve changes in pay rates and deductions from employee salaries?

A)controller
B)personnel department
C)treasurer
D)payroll department

Question 46

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 payment 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 transactions.

Question 47

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

Question 48

Which of the following internal controls would help ensure that existing payroll transactions are recorded?

A)time records are approved by supervisors
B)a 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

Question 49

Which of the following controls will help to detect unauthorized changes to payroll master files and help to detect whether terminated employees are still being paid?

A)use of authorized change forms
B)periodic review of master files
C)use of master files to print T4s
D)use of master files to print payroll cheques

Question 50

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 the payroll journal and trace details to the general ledger.
D)Conduct gap testing for a sequence of payroll cheques.

Question 51

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.

Question 52

"Existing payroll transactions are recorded" is the control objective of

A)authorization.
B)completeness.
C)existence.
D)accuracy.

Question 53

"Recorded payroll payments are for work actually performed by existing employees" is the control objective of

A)authorization.
B)completeness.
C)occurrence.
D)accuracy.

Question 54

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

Question 55

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.

Question 56

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 the payroll journal and trace to the general ledger.
B)Prove the bank reconciliation.
C)Recompute gross pay.
D)Review the payroll journal for large or unusual amounts.

Question 57

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

A)overpayments and unauthorized payments.
B)posting of gross payroll amounts to incorrect salary expense accounts.
C)misfootings of employee time records.
D)excess withholding of amounts required to be withheld.

Question 58

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.

Question 59

Which of the following is a test of controls?

A)reviewing the payroll journal,general ledger,and payroll earnings records for large or unusual amounts
B)examining time cards for indication of supervisor approval
C)comparing cancelled cheques with payroll journal for name,amount,and date
D)examining cancelled cheques for proper endorsement

Question 60

Which of the following internal control tests would assist in satisfying the occurrence transaction-related audit objective for payroll?

A)examining payroll records for evidence of approval
B)proving the payroll bank reconciliation
C)reviewing the chart of accounts
D)accounting for a sequence of payroll cheques

Question 61

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.

Question 62

List the common key controls for the human resources and payroll cycle.

Question 63

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 names in the master payroll files.
C)unusual employee names.
D)cancelled cheques.

Question 64

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 they 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.

Question 65

A form issued for each employee summarizing the earnings record for the calendar year is the

A)rate authorization form.
B)summary payroll report.
C)payroll master file.
D)T4 form.

Question 66

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' T4 slips are accurate.
D)salaries of officers have not been misclassified as wages.

Question 67

In auditing the imprest payroll account,which of the following procedures will take the least amount of auditor time?

A)tests of controls
B)risk analysis and obtaining an understanding of controls
C)analytical procedures
D)tests of details of balances

Question 68

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.

Question 69

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.

Question 70

Which of the following procedures carried out by the personnel department best reduces the risk of payroll fraud and represents an appropriate responsibility for the department?

A)authorizing overtime hours
B)authorizing the addition or removal of employees from the payroll
C)distributing paycheques
D)collecting and retaining unpaid paycheques

Question 71

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.

Question 72

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.

Question 73

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 T4 form.
C)confirm the amount with employees.
D)compare the recorded accrued wages with the amount approved in the minutes of the Board.

Question 74

List examples of substantive test of details of balances for the accrued commission,accrued salaries and wages,and accrued bonuses accounts within the human resources and payroll cycle.