Question 1

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.
2)Recalculate a sample of payroll checks.
3)Review supporting documentation to determine that the entity is legally obligated to pay the liability.
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.

Accepted Answer

The answer of For each of the following tests, identify...

Question 2

In performing tests concerning the granting of stock options, an auditor should:
A)confirm the transaction with the Secretary of State in the state of incorporation.
B)verify the existence of option holders in the entity's payroll records or stock ledgers.
C)determine that sufficient treasury stock is available to cover any new stock issued.
D)trace the authorization for the transaction to a vote of the board of directors.

Accepted Answer

The auditor should trace the authorization for the granting of stock options to a vote of the board of directors to ensure that the transaction was properly approved.

Question 3

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.

Accepted Answer

Inquiring about the segregation of duties between human resources and payroll disbursement is relevant to the existence or occurrence assertion for payroll transactions. It helps to ensure that there is proper authorization and documentation for payroll transactions, as well as preventing errors or fraud. Inspecting prenumbered payroll checks, recomputing payroll deductions, and verifying bank reconciliations are not directly related to the existence or occurrence assertion.

Question 4

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.

Accepted Answer

The answer of The Hamster Stop has $93,650 in the...

Question 5

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

Accepted Answer

The answer of Explain how the human resource management process...

Question 6

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.

Accepted Answer

Comparing amounts selected from the payroll account analysis to supporting documentation would provide evidence primarily for the existence assertion, as it would substantiate that the payroll accruals actually exist and are not fictitious.

Question 7

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.

Accepted Answer

Tracing time sheets and payroll reports to the general ledger verifies that the payroll transactions are recorded in the proper period, providing evidence for the cutoff assertion. This ensures that expenses are recorded in the correct accounting period.

Question 8

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.

Accepted Answer

Without paper clock cards, part of the audit trail has been altered, making it harder to track the accuracy and completeness of the employees' time records. The auditor must evaluate the reliability and effectiveness of the IT system and perform additional procedures to ensure that the data entered by employees is valid and the system-generated reports are accurate. While the computerized payroll time system may improve internal control and diminish the potential for payroll related fraud, these factors are not directly related to the audit trail issue.

Question 9

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 sheets to record actual labor worked on production orders.
D)Reconciliation of work-in-process inventory with periodic cost budgets.

Accepted Answer

Use of time sheets to record actual labor worked on production orders would ensure that direct labor hours are accurately recorded and charged to the appropriate production order, rather than being erroneously charged to manufacturing overhead. Periodic independent counts of work-in-process, comparison of daily journal entries with approved production orders, and reconciliation of work-in-process inventory with periodic cost budgets all focus on ensuring the accuracy of inventory and cost records, but they do not directly address the issue of direct labor hours being charged to manufacturing overhead.

Question 10

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.

Accepted Answer

When control risk is low, auditors rely more on analytical procedures, such as comparing payroll costs with entity standards or budgets, to identify any unusual variances that may indicate errors or fraud.

Question 11

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.

Accepted Answer

Examination of Human Resource Department records would be the best source to determine if the individuals included in a sample were actual employees during the period under review. The Human Resource Department maintains the official employment records including the date of employment, employee status, salary, and benefits. This will provide the auditor with reliable information to verify the accuracy of the payroll. Telephone contacts with the employees may not be accurate or reliable, the tracing from the payroll register to the employee's earnings records may not prove if the employee was actually employed, and confirmation with the union or other independent organization may not provide the necessary information as not all employees may be affiliated with a union or any other independent organization.

Question 12

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.

Accepted Answer

Comparison of daily journal entries with the factory labor summary would ensure that direct labor costs are correctly charged to the appropriate job, rather than being erroneously charged to manufacturing overhead. The other options are important internal controls, but they are not specifically aimed at preventing direct labor from being charged to manufacturing overhead.

Question 13

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?

Accepted Answer

The answer of Generally, is the inherent risk level for...

Question 14

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.

Accepted Answer

The payroll department supervisor authorizing payroll rate changes for all employees creates a high risk for lack of segregation of duties. This lack of segregation can result in the supervisor manipulating the payroll to include unauthorized or excessive payments to themselves or others. Therefore, the auditor would assess control risk as high in this case.

Question 15

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.

Accepted Answer

The answer of Give an example of a test of...

Question 16

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.

Accepted Answer

The answer of Listed below are descriptions of various types...

Question 17

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.

Accepted Answer

The answer of When an auditor sets control risk low,...

Question 18

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.

Accepted Answer

The answer of Identify whether the following tests are substantive...

Quiz 12: Auditing the Human Resource Management Process

In performing tests concerning the granting of stock options, an auditor should:

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:

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.

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

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

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?

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:

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

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

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?

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

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?

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

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.