Question 1

The nature, extent, and timing of substantive tests of payroll transactions vary depending, in part, on assessed control risk.

Accepted Answer

The nature, extent, and timing of substantive tests of payroll transactions are dependent on assessed control risk. This means that if control risk is deemed to be high, more extensive substantive tests will be necessary to determine the veracity of payroll transactions. Alternatively, if control risk is deemed to be low, less extensive substantive tests will be necessary, as there is already a higher level of assurance that the transactions are accurate.

Question 2

In auditing payroll, the auditor wants to determine that the individuals included in her sample were employees of the company for the period under review. What is the auditor's best source of evidence?
A) examination of human resource records
B) examination of the payroll master file
C) examination of the payroll transaction file
D) examination of the payroll tax records

Accepted Answer

The human resource records would contain information on employee status (e.g. date of hire, termination, etc.) and would help ensure that the individuals included in the sample were actually employees during the period under review. The other choices may provide evidence regarding the accuracy and completeness of payroll transactions but do not directly address the issue of employee status.

Question 3

Payroll checks should be distributed by someone independent of the payroll and timekeeping functions.

Accepted Answer

Distributing payroll checks by someone independent of the payroll and timekeeping functions helps ensure accuracy and prevents potential conflicts of interest. This separation of duties is a fundamental principle of internal controls.

Question 4

Which of the following statements is correct?
A) The overhead charged to inventory at the balance sheet date can be understated if the salaries of administrative personnel are inadvertently or intentionally charged to indirect manufacturing overhead.
B) When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by charging labor to incorrect jobs.
C) Payroll is a significant portion of inventory for retail and service industry companies.
D) The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process.

Accepted Answer

The direct labor cost of individual employees has a direct impact on the valuation of inventory, and if it is improperly charged to the wrong job or process, it can result in an incorrect valuation of inventory. The other options are incorrect as the salaries of administrative personnel charged to indirect manufacturing overhead would not impact the inventory at balance sheet date, payroll is not a significant portion of inventory for retail and service industry companies, and charging labor to incorrect jobs would only impact the expenses, not revenue.

Question 5

A surprise payroll payoff in which employees must pick-up and sign for their pay check is one means of
A) identifying employees who do not have proper work credentials.
B) establishing a tightly controlled, fraud-free work environment.
C) testing for nonexistent employees.
D) identifying employees who have not submitted proper W-2 forms.

Accepted Answer

This method helps in identifying "ghost employees" or nonexistent employees who are on the payroll but do not actually work for the company. By requiring employees to physically pick up and sign for their paychecks, the company can ensure that each paycheck goes to an actual, present employee.

Question 6

Which of the following best describes effective internal control over payroll?
A) The preparation of the payroll must be under the control of the personnel department.
B) The confidentiality of employee payroll data should be carefully protected to prevent fraud.
C) The duties of hiring, payroll computation, and payment to employees should be segregated.
D) The payment of cash to employees should be replaced with payment by checks.

Accepted Answer

The segregation of duties is an important aspect of effective internal control over payroll. This ensures that the person who computes payroll is different from the person who authorizes payment, reducing the risk of fraud. Option A does not necessarily ensure proper internal control over payroll, while Option B is important but does not directly address segregation of duties. Option D is also important, but it is not the best choice for describing effective internal control over payroll.

Question 7

________ is not a transaction-related audit objective for the classes of transactions underlying the payroll cycle.
A) Classification
B) Existence
C) Timing
D) Completeness

Accepted Answer

Existence is a balance-related audit objective, not a transaction-related audit objective. It concerns whether balances actually exist at a given date. Transaction-related objectives, like classification, timing, and completeness, focus on the accuracy, recording time, and inclusion of all transactions, respectively.

Question 8

Which of the following best describes inherent risk for balance-related audit objectives as they relate to payroll?
A) not considered
B) low
C) moderate
D) high

Accepted Answer

Inherent risk for balance-related audit objectives as they relate to payroll is generally considered low because payroll transactions are typically routine, recurring, involve a limited number of simple calculations, and are subject to internal controls and regulatory oversight.

Question 9

It would be appropriate for the payroll department to be responsible for which of the following functions?
A) approval of employee time records
B) maintain records of employment, firings, and raises
C) temporary retention of unclaimed employee paychecks
D) preparation of governmental reports as to employees' earnings and withholding taxes

Accepted Answer

The preparation of governmental reports as to employees' earnings and withholding taxes is a key responsibility of the payroll department. This includes tasks such as calculating and withholding taxes from employees' paychecks and preparing and filing reports such as W-2s and 1099s with government agencies. The other functions listed may be the responsibility of other departments such as HR or accounting.

Question 10

Which of the following is not a correct statement regarding fraudulent hours?
A) Fraudulent hours occur when an employee reports more time than was actually worked.
B) It is difficult for an auditor to discover fraudulent hours.
C) It is ordinarily easier for the client to prevent fraudulent hours by adequate internal controls than for the auditor to detect it.
D) To detect fraudulent hours, the auditor should examine the cancelled checks written to the employees.

Accepted Answer

Examining cancelled checks written to employees may not be an effective way to detect fraudulent hours as the checks may be for legitimate work performed. Instead, the auditor would typically examine timesheets, attendance records, and payroll data to detect any discrepancies or irregularities.

Question 11

Which of the following is a key control for the transaction-related audit objective of accuracy?
A) The time records are approved by a supervisor.
B) The payroll checks are prenumbered and accounted for.
C) The payroll master file contents are internally verified.
D) The batch totals are compared with computer summary reports.

Accepted Answer

Comparing batch totals with computer summary reports provides a key control to ensure the accuracy of transactions, as it allows for identifying any discrepancies or errors during the processing of transactions. The other options relate to different controls, such as approval of time records (validity), prenumbering of payroll checks (completeness), and internal verification of the payroll master file (existence), but do not specifically address the accuracy objective.

Question 12

Auditors seldom expect to find misstatements when testing payroll transactions.

Accepted Answer

Payroll transactions are typically tested by auditors because they are a common source of misstatements.

Question 13

Auditors may extend their tests of payroll in which of the following circumstances?
A) 
B) 
C) 
D)

Accepted Answer

The question does not provide specific information regarding the circumstances where auditors may extend their tests of payroll. Therefore, none of the answer options can be determined as the best choice.

Question 14

Auditors should determine whether the client has fulfilled its legal obligation in submitting payments of all payroll withholdings as part of their payroll tests.

Accepted Answer

As part of their payroll testing, auditors should determine whether the client has fulfilled its legal obligation in submitting payments of all payroll withholdings. This is important to ensure that the client is compliant with all relevant laws and regulations and to identify any potential errors or fraud in the client's payroll function.

Question 15

"Physical control over assets" is not a type of control that is applicable to the payroll cycle.

Accepted Answer

Physical control over assets is applicable to other cycles such as the inventory and cash cycles, but not the payroll cycle as it deals with the compensation of employees rather than tangible assets.

Question 16

Which of the following is an accurate statement regarding nonexistent employees?
A) In order to prevent this type of fraud, the foreman should distribute the paychecks and approve the time cards.
B) Records for all terminated employees should be destroyed to prevent this type of fraud.
C) The person committing this type of fraud is generally the CEO or CFO of the company.
D) This type of fraud often results from the continuance of an employee on the payroll after the employee has been terminated.

Accepted Answer

Nonexistent employees can result from continued payment to employees who have been terminated. This can occur if payroll records are not updated or if someone is intentionally committing fraud by keeping a terminated employee on the payroll and pocketing their salary. Therefore, it is important to have regular audits to detect and prevent this type of fraud. Choices A, B, and C are not accurate statements regarding nonexistent employees.

Question 17

When auditing the payroll and personnel cycle, tests of controls are routinely performed.

Accepted Answer

Tests of controls are routinely performed when auditing the payroll and personnel cycle, in order to obtain assurance that relevant controls are in place and operating effectively. These tests include inquiries, observations, inspection of documents and processes, and reperformance of control procedures.

Question 18

When auditing the payroll and personnel cycle, the auditor should keep in mind that
A) since payroll transactions are typically uniform, all companies have the same internal controls over payroll.
B) the substantive tests of transactions for the payroll cycle are the same for all audit clients.
C) controls the auditor intends to rely on to reduce assessed control risk must be tested with tests of controls.
D) the tests of controls and the substantive tests of transactions for payroll cannot be combined.

Accepted Answer

The auditor should keep in mind that controls in the payroll and personnel cycle vary among companies, and therefore, controls the auditor intends to rely on to reduce assessed control risk must be tested with tests of controls. This ensures that the controls are operating effectively and consistently. The substantive tests of transactions for the payroll cycle may differ among audit clients based on the specific risks and internal controls in place. Therefore, the auditor should tailor their audit approach accordingly. The other choices are incorrect because they assume uniformity in the payroll and personnel cycle, which is not the case.

Question 19

A weak internal control system allows a department supervisor to "clock in" for a fictitious employee and then approve the employee's time card at the end of the pay period. This fraud would be detected if other controls were in place, such as having an independent party
A) distribute paychecks.
B) recompute hours worked from time cards.
C) foot the payroll journal and trace postings to the general ledger and the payroll master file.
D) compare the date of the recorded check in the payroll journal with the date on the canceled checks and time cards.

Accepted Answer

Having an independent party distribute paychecks would help detect the fraud because the fictitious employee would not be present to collect their paycheck, raising a red flag.

Question 20

It is usually very easy for an auditor to determine if an employee has overstated their hours worked.

Accepted Answer

The answer of It is usually very easy for an...

Quiz 20: Audit of the Payroll and Personnel Cycle

The nature, extent, and timing of substantive tests of payroll transactions vary depending, in part, on assessed control risk.

In auditing payroll, the auditor wants to determine that the individuals included in her sample were employees of the company for the period under review. What is the auditor's best source of evidence?

Payroll checks should be distributed by someone independent of the payroll and timekeeping functions.

Which of the following statements is correct?

A surprise payroll payoff in which employees must pick-up and sign for their pay check is one means of

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

________ is not a transaction-related audit objective for the classes of transactions underlying the payroll cycle.

Which of the following best describes inherent risk for balance-related audit objectives as they relate to payroll?

It would be appropriate for the payroll department to be responsible for which of the following functions?

Which of the following is not a correct statement regarding fraudulent hours?

Which of the following is a key control for the transaction-related audit objective of accuracy?

Auditors seldom expect to find misstatements when testing payroll transactions.

Auditors may extend their tests of payroll in which of the following circumstances?

Auditors should determine whether the client has fulfilled its legal obligation in submitting payments of all payroll withholdings as part of their payroll tests.

"Physical control over assets" is not a type of control that is applicable to the payroll cycle.

Which of the following is an accurate statement regarding nonexistent employees?

When auditing the payroll and personnel cycle, tests of controls are routinely performed.

When auditing the payroll and personnel cycle, the auditor should keep in mind that

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

It is usually very easy for an auditor to determine if an employee has overstated their hours worked.