Question 1

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.

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Question 2

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:

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Question 3

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

Accepted Answer

The human resource function and setting salaries should not be separated because salary determination is a critical part of human resource management. Key segregations of duties in HRM include keeping the supervision function separate from the payroll-processing function, separating the disbursement function from the supervision function, and keeping the payroll-processing function separate from the general ledger function to minimize the risk of fraud, errors, and misuse of resources.

Question 4

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

Accepted Answer

When control risk is low, auditors rely more on analytical procedures like comparing payroll costs with standards or budgets, as these are efficient and effective for identifying discrepancies.

Question 5

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

Accepted Answer

Comparison of daily journal entries with the factory labor summary can ensure that direct labor is not mistakenly charged to the manufacturing overhead account. This control activity helps to detect and correct any errors or discrepancies in the recording of labor costs. Reconciliation of work in process inventory with cost records, comparison of period cost budgets and time sheets, and reconciliation of the unfinished job summary and production cost records are important control activities, but they are not specifically targeted at preventing direct labor from being charged to manufacturing overhead.

Question 6

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

Accepted Answer

If the payroll department supervisor is responsible for authorizing payroll rate changes for all employees, this represents a potential conflict of interest as they have the ability to increase their own pay or that of their friends and family. This increases the risk of errors, fraud, or abuse, which could lead to material misstatement in the financial statements. Therefore, an auditor would likely assess control risk to be high in this scenario. The other choices are not indicative of a high control risk.

Question 7

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.

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Question 8

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?

Accepted Answer

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 would help verify that payroll transactions are recorded in the proper period, which relates to the cutoff assertion. This test ensures that expenses and liabilities relating to payroll are recorded in the correct period, which in turn affects the accuracy of financial statements.

Question 9

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

Accepted Answer

Comparing amounts selected from the payroll account analysis to supporting documentation would provide evidence primarily for the existence assertion, which confirms that the payroll accruals recorded in the accounting records truly exist and that the transactions actually occurred.

Question 10

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

Accepted Answer

Using time tickets to record actual labor worked on production orders would prevent direct labor hours from being charged to manufacturing overhead because time tickets are used to record the actual amount of time employees spend working on specific production orders, ensuring that direct labor costs are accurately assigned to the appropriate job. Option A involves counting work-in-process inventory, which is unrelated to preventing direct labor hours from being charged to manufacturing overhead. Option B involves comparing journal entries with production orders, which may help prevent errors but does not specifically relate to direct labor charges. Option D involves reconciling work-in-process inventory with cost budgets, which may help catch discrepancies but does not specifically relate to direct labor charges.

Question 11

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

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Question 12

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

Accepted Answer

Verification of job time tickets with employee clock card hours by a payroll department employee ensures that the hours worked are accurately recorded and paid, which is a key component of internal control over payroll.

Question 13

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

Accepted Answer

Inquiring about and observing the segregation of duties concerning human resource responsibilities and payroll disbursement would provide evidence of the effectiveness of the entity's policies and procedures in preventing or detecting material misstatements related to the existence or occurrence assertion for payroll transactions. Options B, C, and D do not directly relate to this assertion.

Question 14

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

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Question 15

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.

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Question 16

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

Accepted Answer

Having custody over unclaimed paychecks could lead to misappropriation or fraud, as it combines record-keeping and custody functions, which should be segregated to ensure effective internal control.

Question 17

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?

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Question 18

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

Accepted Answer

As paper clock cards have been eliminated, part of the audit trail has been altered, which can make the audit process more challenging. The auditor will need to consider how to obtain and review electronic records, ensuring they are complete, accurate, and reliable. The other options are not necessarily true as the system change does not guarantee improved internal control or eliminate the potential for payroll fraud. The auditor still needs to test the new system to ensure that it's functioning correctly and effectively.

Question 19

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?

Accepted Answer

The Human Resource Department maintains the official records of company employees, including their hire date and termination date. Therefore, examining HR records is the best source to determine if individuals included in a sample were employees of the company during the period under review. Telephone contacts with employees or confirmation with an independent organization may not provide reliable or comprehensive information, and tracing from the payroll register to the employee's earnings records may not necessarily establish employment status.

Question 20

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

Accepted Answer

The Human Resource department promptly sending employee termination notices to the payroll supervisor is a control activity that can help prevent employee payroll fraud by ensuring that terminated employees are removed from the payroll in a timely manner, thus preventing unauthorized payments.

Quiz 12: Auditing the Human Resource Management Process