Class 4/3 (Gleim 13.5) - Payroll cycle Flashcards Preview

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Flashcards in Class 4/3 (Gleim 13.5) - Payroll cycle Deck (27):
1

ASSERTIONS (8)

CAVE CROC

Completeness
Accuracy
Valuation & Allocation
Existence

Cutoff
Rights and Obligations
Occurence
Classification & Understandibility

2

Appropriate payroll balances include:

Payroll expense
Inventories (For manufacturing firms [direct labor])
Accrued payroll & vacation
Payroll tax liability
Pension costs and other post-employment (OPEB) costs

3

Auditors rely on....

Payroll internal controls

(substantive testing of payroll is limited if internal controls are good)

4

Key controls are...

Separation of Duties
Separate Human Resources Dept
Separate authorization from record keeping

5

Completeness analytical procedures include...

Are all transactions reflected in balances?

1) Compare current expense with expectations from prior periods
2) Compare budgets with actual results
3) Total hours worked with total payroll expense
4) Payroll ratios with industry

6

What question must we answer for Accuracy?

have balances been recorded appropriately?

Inquiries of management:
--contractual arrangements with officers
--Union contracts
--Pensions and OPEB costs

7

What are questions an auditor would ask about Valuation and allocation?

are balances reported in accordance with GAAP?

Trace cost to inventories (manufacturing)
Recalculate pension and OPEB costs

8

What are questions an auditor would ask about Existence?

Do the accounts and balances exist at balance sheet date?

Observe distribution of paychecks

9

What are questions an auditor would ask about Cutoff?

Record in proper period

Recalculate accruals

10

What are questions an auditor would ask about Rights and Obligations?

Are the assets, expenses and payables those of the entity?

Inspect cancelled checks

11

What are questions an auditor would ask about Occurrence?

Did the transactions relating to payroll occur?

Vouch a sample of transactions to make sure employees work the number of hours paid.

12

What are questions an auditor would ask about Classification and Undesirability?

Properly allocated to expense?
Properly classified as an asset (manufacturing)?
Liabilities properly current or non-current?
Disclosures adequate?
Read the financial statements and disclosures.

13

test for errors or fraud in individual transactions.
EX: An auditor may examine a large purchase of inventory by testing that the cost of the goods included on the invoice is properly recorded in the inventory and and accounts payable accounts.

Substantive Tests of Transactions

14

focus on the items that are contained in the financial statement account balances and disclosures.
EX: The auditor may want to test accounts payable by examining a sample of individual invoices that make up the ending balance of accounts payable.

Tests of details of account balances and disclosures -

15

An auditor most likely increases substantive tests of payroll when

a. Payroll expense is substantially higher than in the prior year.

b. Employees complain to management about too much overtime.

c. Overpayments are discovered in performing tests of details.

d. Payroll is extensively audited by the state government.

c. Overpayments are discovered in performing tests of details.

Answer C is correct.
During the application of substantive tests, the auditor may decide to extend the tests when unexpected findings (e.g., overpayments) are made. The purpose is to determine the extent of any fraud.

16

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

A. Internal controls relating to unclaimed payroll checks are operating effectively.

B. Employees work the number of hours for which they are paid.

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

D. Payments to employees are computed at authorized rates.

B. Employees work the number of hours for which they are paid.

Answer B is correct.
To test that payroll events actually occurred, an auditor vouches a sample of employee transactions recorded in the payroll-related balances to supporting documentation, including approved time cards, time tickets, and notations in personnel records. The purpose is to verify that employees work the hours for which they are paid.

17

Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?

A. The budgeted current year’s sales with the prior year’s sales.

B. The current year’s payroll expense with the prior year’s payroll expense.

C. The budgeted current year’s warranty expense with the current year’s contingent liabilities.

D. The current year’s accounts receivable with the prior year’s accounts receivable.

B. The current year’s payroll expense with the prior year’s payroll expense.

Answer B is correct.
Comparing the current year’s expense with that of the prior year’s is an analytical procedure. The objective of analytical procedures is to identify such things as the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning ramifications (AU-C 520).

18

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

A. Observing the distribution of paychecks.

B. Inspecting payroll tax returns.

C. Footing and crossfooting the payroll register.

D. Recalculating payroll accruals.

D. Recalculating payroll accruals

Answer D is correct.
When controls are judged to be effective, the auditor’s procedures are typically limited to analytical procedures and testing for completeness and cutoff of the year-end accruals.

19

Which of the following is the best reason an auditor should consider observing a client’s distribution of regular payroll checks?

A. Separation of payroll duties is not effective enough to reduce control risk.

B. Employee turnover is excessive.

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

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

A. Separation of payroll duties is not effective enough to reduce control risk.

Answer A is correct.
A surprise observation of the client’s payroll distribution is especially desirable when the various phases of payroll are not sufficiently segregated. The observation should establish whether payment is made only to bona fide employees

20

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

A. Employee time cards are approved by individual departmental supervisors.

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

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

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

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

Answer B is correct.
Analytical procedures, such as variance analysis, alert the auditor when actual results were not anticipated. Thus, the auditor should consider the possibility that payroll is fraudulently overstated.

21

An auditor most likely would perform substantive tests of details on payroll transactions and balances when

A. Analytical procedures indicate unusual fluctuations in recurring payroll entries.

B. Cutoff tests indicate a substantial amount of accrued payroll expense.

C. Accrued payroll expense consists primarily of unpaid commissions.

D. The assessed risk of material misstatement relative to payroll transactions is low.

A. Analytical procedures indicate unusual fluctuations in recurring payroll entries.

Answer A is correct.
The auditor should evaluate significant unexpected differences revealed by analytical procedures. The first step is to reconsider the methods and factors used in developing the expectations and to make inquiries of management. If a suitable explanation is not received, additional procedures to investigate the differences are necessary.

22

To check the accuracy of hours worked, an auditor would ordinarily compare clock cards with

A. Time recorded in the payroll register.

B. Labor variance reports.

C. Shop job time tickets.

D. Personnel records.

C. Shop job time tickets.

Answer C is correct.
The auditor should compare shop job time tickets with the clock cards to determine the accuracy of the hours worked. The job tickets, which contain the total hours worked on each job, should not vary significantly from the employee time cards used to compute payroll.

23

The auditor is most likely to verify accrued commissions payable in conjunction with the

A. Examination of trade accounts payable.

B. Review of post balance sheet date disbursements.

C. Verification of contingent liabilities.

D. Sales cutoff test.

D. Sales cutoff test.

Answer D is correct.
Sales commissions and accrued sales commissions payable are based upon sales of the period. The auditor verifies accrued commissions payable in conjunction with procedures applied to the sales cutoff test. The purpose is to obtain reasonable assurance that revenues and related liabilities are recorded in the same period in accordance with the matching principle.

24

A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents’ sales were $10,000,000. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be

A. $528,000
B. $588,000
C. $600,000
D. $540,000

B. $588,000

Answer B is correct.
Net sales are equal to total sales minus returns and allowances. Bad debts are not included in the calculation of net sales. Thus, the amount of accrued commissions due the agents is computed by multiplying net sales ($10,000,000 – 2% expected returns) by the 6% commission rate.
$10,000,000 × 98% × 6% = $588,000

25

Vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel provides evidence that

A. Only bona fide employees worked and their pay was properly computed.

B. Internal controls relevant to assertions about payroll disbursements were operating effectively.

C. Employees worked the number of hours for which their pay was computed.

D. Payroll checks were signed by an appropriate officer independent of the payroll preparation process.

C. Employees worked the number of hours for which their pay was computed.

Answer C is correct.
Effective internal control segregates the authorization, timekeeping, and payroll preparation functions. Preparation should be based on a list of authorized employees and pay rates originating in the human resources department and time records forwarded from the timekeeping department. By vouching entries from the payroll journal to approved employee time cards, the auditor can obtain evidence that the employees worked the number of hours for which their pay was computed.

26

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

A. Overpayments and unauthorized payments.

B. Excess withholding of amounts required to be withheld.

C. Posting of gross payroll amounts to incorrect salary expense accounts.

D. Misfooting of employee time records.

A. Overpayments and unauthorized payments.

Answer A is correct.
The auditor is primarily concerned about the possibility of errors in the amount of payment when auditing payroll transactions. Employee compensation is a major item of expense and is especially susceptible to fraud unless strong internal controls are present. The inherent risk for payroll transactions is increased by the need for rapid processing of the great mass of data generated in performing the payroll function.

27

The client’s bookkeeper perpetrated a theft by preparing erroneous W-2 forms. The bookkeeper’s FICA withheld was overstated by $2,000 and the FICA withheld from all other employees was understated by the same amount. Which of the following is an audit procedure that would detect such a fraud?

A. Footing and crossfooting of the payroll register followed by tracing postings to the general ledger.

B. Utilizing Form W-4 and withholding charts to determine whether deductions authorized per pay period agree with amounts deducted per pay period.

C. Vouching canceled checks to the appropriate federal tax form.

D. Multiplication of the applicable FICA rate by each individual’s gross annual taxable earnings.

D. Multiplication of the applicable FICA rate by each individual’s gross annual taxable earnings.

Answer D is correct.
One objective of the audit of payroll is to verify the client’s compliance with various legal requirements, e.g., income tax withholding, Social Security taxes, workers’ compensation, unemployment insurance, and wages and hours laws. The auditor should perform tests of controls by sampling payroll transactions. The deductions authorized by employees or required by law should be compared with those actually made. By comparing the recorded amounts withheld on individual employees’ W-2 forms with those independently calculated by the auditor, (s)he should detect any misstatement of FICA withholding.