Auditing and Assurance Services A Systematic Approach 9th Edition Messier Test Bank 1

Solution Manual for Auditing and Assurance Services A
Systematic Approach 9th Edition Messier Glover Prawitt

0077862333 9780077862336
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Chapter 12
Auditing the Human Resource Management Process
True / False Questions
1. Payroll-related expenses normally are not a material cost to the organization.
True False
2. Employees must complete a W-4 form to authorize insurance deductions from his or her pay.
True False
3. The human resource function is responsible for managing the personnel needs of the
organization.
True False
4. The payroll-processing function is responsible for paying employees for services and benefits.
True False
5. Proper segregation of duties is critical for the human resource management process.
True False
6. There are few inherent risk factors that directly affect the human resource management process
and its related accounts for non-officers.
True False
12-1
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
7. Inherent risk associated with officer compensation is frequently set high because officers have
motive and opportunity to take advantage of their high-ranking offices in the form of excessive
compensation.
True False
8. If the results of the control tests do not support the planned level of control risk, the detection risk
will have to be set higher.
True False
9. Tests of details of transactions are often conducted in conjunction with tests of controls.
True False
Multiple Choice Questions
10. Which of the following departments most likely would approve changes in pay rates and
deductions from employee salaries?
A. Human resource.
B. Treasurer.
C. Controller.
D. Payroll.
11. Possible misstatements related to the occurrence assertion for payroll transactions include all of
the following except:
A. Payments to fictitious employees.

B. Payments to terminated employees.
C. Payments to valid employees who have not worked.
D. Payments to valid employees at a rate in excess of the authorized amount.
12. The proper use of prenumbered termination notice forms by the Payroll Department should
provide assurance that all
A. Uncashed payroll checks were issued to employees who have not been terminated.
B. Personnel files are kept up to date.
C. Employees who have not been terminated receive their payroll checks.
D. Terminated employees are removed from the payroll.
12-2
13. When examining payroll transactions, an auditor is primarily concerned with the possibility of
A. Underpayments and properly authorized 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.
14. An auditor vouched data for a sample of employees in a payroll register to approved clock
card/time sheet data to provide assurance that
A. Payments to employees are computed at authorized rates.

B. Employees worked the number of hours for which they are paid.
C. Segregation of duties exist between the preparation and distribution of the payroll.
D. Internal controls relating to unclaimed payroll checks are operating effectively.
15. Which of the following internal control objectives is likely to be a larger concern in the audit of the
payroll cycle?
A. Payroll transactions are properly disclosed.

B. Recorded payroll transactions are valid.
C. Payroll transactions are recorded in the appropriate time period.
D. All payroll transactions have been recorded.
16. Which of the following circumstances most likely would cause an auditor to suspect an employee
payroll fraud scheme?
A. There are significant unexplained variances between standard and actual labor cost.
B. Payroll checks are disbursed by the same employee each payday.
C. Employee time sheets are approved by individual departmental supervisors.
D. A separate payroll bank account is maintained on an imprest basis.
17. Which of the following could test the assertion of cutoff for payroll-related liabilities?
A. Compare items in accrued payroll taxes to the supporting payroll tax return.
B. Search for unrecorded liabilities.
C. Examine payroll tax returns to determine that the expense was recorded in the proper period.
D. Review payroll liabilities for proper classification as short-or long-term.
18. Which of the following could test the assertion of classification for payroll-related liabilities?
D. Review payroll liabilities for proper reporting as short- or long-term.
12-3
19. All of the following are incorporated into valuation models except:
A. The exercise price of the option.

B. The term of the option.
C. Expected dividends.
D. Current tax rates.
20. A surprise observation by an auditor of an entity's regular distribution of paychecks is primarily

designed to satisfy the auditor that
A. All unclaimed payroll checks are properly returned to the cashier.

B. The paymaster is not involved in the distribution of payroll checks.
C. All employees have in their possession proper employee identification.
D. Names on the company payroll are those of bona fide employees presently on the job.
21. Which of the following is the best reason why an auditor should consider observing an entity's
distribution of regular payroll checks?
A. To ensure that names on the company payroll are those of bona fide employees presently on
the job.
B. Total payroll costs are a significant part of total operating costs.
C. The auditor did not observe the distribution of the entire regular payroll during the audit in the
prior year.
D. Employee turnover is excessive.
22. The purpose of segregating the duties of distributing payroll checks and hiring personnel is to
separate the
A. Duties within the accounting function.

B. Custody of assets from the accounting for those assets.
C. Authorization of transactions from the custody of related assets.
D. Operational responsibility from record keeping responsibility.
23. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to
separate the
A. Administrative controls from the internal accounting controls.

B. Human resources function from the controllership function.
C. Operational responsibility from the record-keeping responsibility.
D. Authorization of transactions from the custody of related assets.
12-4
24. Which of the following is an effective internal control used to prove that production department
employees are properly validating payroll timecards at a time-recording station?
A. Timecards should be carefully inspected by those persons who distribute pay envelopes to the
employees.
B. One person should be responsible for maintaining records of employee time for which salary
payment is not to be made.
C. Daily reports showing time charged to jobs should be approved by the foreman and compared
to the total hours worked on the employee timecards.
D. Internal auditors should make observations of distribution of paychecks on a surprise basis.
25. A large retail enterprise has established a policy that requires that the paymaster deliver all
unclaimed payroll checks to the Internal Auditing Department at the end of each payroll
distribution day. This policy was most likely adopted in order to
A. Assure that employees who were absent on a payroll distribution day are not paid for that day.
B. Prevent the paymaster from cashing checks that are unclaimed for several weeks.
C. Prevent a bona fide employee's check from being claimed by another employee.
D. Detect any fictitious employee who may have been placed on the payroll.
26. In the weekly computer run to prepare payroll checks, a check was printed for an employee who
had been terminated the previous week. Which of the following controls, if properly utilized, would
have been most effective in preventing the error or ensuring its prompt detection?
A. A control total for hours worked, prepared from time sheets collected by the Timekeeping
Department.
B. Requiring the treasurer's office to account for the numbers of the prenumbered checks issued
to the EDP department for the processing of the payroll.
C. Use of a check digit for employee numbers.
D. Use of a header label for the payroll input sheet.
27. Which of the following is the best way for an auditor to determine that every name on a company's
payroll is that of a bona fide employee presently on the job?
A. Examine personnel records for accuracy and completeness.

B. Examine employees' names listed on payroll accounting records.
C. Make a surprise observation of the company's regular distribution of paychecks.
D. Visit the working areas and confirm with employees their badge or identification numbers.
28. Transactions processed through the payroll process include all of the following except:
A. Payments to employees for services rendered.

B. Payments to independent contractors for services rendered.
C. Accrual of social security taxes.
D. Payment of unemployment taxes.
12-5
29. Vouching selected items from the payroll register to employee time sheets that have been
approved by supervisory personnel provides evidence that
A. Internal controls relating to payroll disbursements were operating effectively.

B. Payroll checks 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.
30. Which of the following activities most likely would detect whether payroll data are accurately
processed?
A. Monitor authorized distribution of data control sheets.

B. Use test data to verify the accurate performance of payroll processing.
C. Examine source documents for approval by supervisors.
D. Segregate duties between approval of hardware and software specifications.
31. When control risk is assessed as low for assertions related to payroll, substantive tests of payroll
balances most likely would be limited to applying substantive analytical procedures and
A. Observing the distribution of paychecks.

B. Footing and crossfooting the payroll register.
C. Inspecting payroll tax returns.
D. Recalculating payroll accruals.
32. Which of the following procedures would normally be performed by the auditor when conducting
tests of payroll transactions?
A. Interview employees selected in a statistical sample of payroll transactions.

B. Vouch number of hours worked as shown on payroll to time sheets and time reports signed by
the foreman.
C. Confirm amounts withheld from employees' salaries with proper governmental authorities.
D. Examine signatures on paid salary checks.
33. A substantive test of transactions to test the completeness assertion includes
A. Tracing a sample of time sheets to the payroll register.

B. Testing a sample of payroll checks for the presence of an authorized time sheet.
C. Testing postings to the payroll register for a sample of payroll checks.
D. Recomputing the accuracy of a sample of payroll checks.
12-6
34. Comparing selected items from the payroll register to employee time records that have been
approved by supervisory personnel tests which of the following assertions for payroll expense?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Cutoff.
35. An auditor most likely would extend substantive tests of payroll when
A. Payroll is extensively audited by the state government.

B. Payroll expense is substantially higher than in the prior year due to company growth.
C. Overpayments are discovered in performing tests of details.
D. Employees complain to management about too much overtime.
36. Which of the following could test the occurrence assertion for payroll-related liabilities?
D. Review payroll liabilities for proper classification as short- or long-term.
37. Which of the following is required of an auditor who is testing the fair value of options in share-
based compensation?
A. Using a specialist.
B. Testing the inputs used in the valuation model.
C. Becoming an expert in option-pricing.
D. Using the work of the internal audit function.
38. In an IT payroll system environment, an auditor would be least likely to use test data to test
controls related to
A. Missing employee numbers.

B. Proper approval of overtime by supervisors.
C. Time sheets with invalid job numbers.
D. Agreement of hours per clock cards with hours on time sheets.
39. Effective internal control over unclaimed payroll checks that are kept by the Treasury Department
would include Accounting Department procedures that require
A. Effective cancellation and stop payment orders for checks representing unclaimed wages.
B. Redepositing unclaimed wages after a period of 3 months.
C. Accounting for all unclaimed wages in a current liability account.
D. Periodic accounting for the actual checks representing unclaimed wages.
12-7
40. Effective internal control over the payroll function would include which of the following?
A. Total time recorded on time-clock punch cards should be reconciled to job reports by
employees responsible for those specific jobs.
B. Payroll Department employees should be supervised by the management of the Human
Resource Department.
C. Payroll Department employees should be responsible for maintaining employee personnel
records.
D. Total time spent on jobs should be compared with total time indicated on timeclock punch
cards.
41. 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
A. Distributing payroll checks to employees.

B. Reviewing and approving time reports for subordinate employees.
C. Hiring subordinate employees.
D. Initiating requests for salary adjustments for subordinate employees.
42. An auditor would consider internal control over an entity's payroll procedures to be ineffective if
the payroll department supervisor is responsible for
A. Hiring subordinate payroll department employees.

B. Having custody over unclaimed paychecks.
C. Updating employee earnings records.
D. Applying pay rates to time tickets.
43. Which of the following is a control activity that most likely could help prevent employee payroll
fraud?
A. The Human Resource department promptly sends employee termination notices to the payroll
supervisor.
B. Employees who distribute payroll checks forward unclaimed payroll checks to the absent
employees' supervisors.
C. Salary rates resulting from new hires are approved by the payroll supervisor.
D. Total hours used for determination of gross pay are calculated by the payroll supervisor.
44. An effective system of internal control over the payroll function would include
A. Verification of agreement of job time tickets with employee clock card hours by a payroll
department employee.
B. Reconciliation of totals on job time tickets with job reports by employees responsible for those
specific jobs.
C. Custody of rate authorization records by the supervisor of the payroll department.
D. Preparation of payroll transaction journal entries by an employee who reports to the supervisor
of the human resource department.
12-8
45. Key segregations of duties in the human resource management process include all of the
following except:
A. The supervision function should be separate from the payroll-processing function.

B. The disbursement function should be separate from the supervision function.
C. The human resource function should be separate from setting salaries.
D. The payroll-processing function should be separate from the general ledger function.
46. 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.
47. 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.
48. 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.
49. 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 tickets to record actual labor worked on production orders.
D. Reconciliation of work-in-process inventory with periodic cost budgets.
12-9
50. 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.
51. 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.
52. 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.
53. 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.
54. 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.
Short Answer Questions
12-10
55. Explain how the human resource management process can affect the financial statements.
56. 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.
12-11
57. 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:
58. 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?
12-12
59. 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.
60. 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.
61. For each of the following tests, identify the assertion to which the test applies.
12-13
62. 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.
63. 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.
64. FASB ASC Topic 715 requires specific disclosures regarding human resources, which of course
must be verified and audited by the CPA. What are those disclosures?
12-14
Chapter 12 Auditing the Human Resource Management Process Answer
Key
True / False Questions
1. Payroll-related expenses normally are not a material cost to the organization.
FALSE
AACSB: Communication
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Develop an understanding of the human resource management process.
Topic: Overview of the Human Resource Management Process
2. Employees must complete a W-4 form to authorize insurance deductions from his or her pay.
FALSE
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Know and describe the types of documents and records used in the payroll process.
Topic: Types of Documents and Records
3. The human resource function is responsible for managing the personnel needs of the
organization.
TRUE
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Understand the functions in the human resource management process.
Topic: The Major Functions
4. The payroll-processing function is responsible for paying employees for services and benefits.
FALSE
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
12-15
5. Proper segregation of duties is critical for the human resource management process.
TRUE
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-05 Know the appropriate segregation of duties for the human resource management process.
Topic: The Key Segregation of Duties
6. There are few inherent risk factors that directly affect the human resource management
process and its related accounts for non-officers.
TRUE
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Know and evaluate inherent risks relevant to the human resource management process.
Topic: Inherent Risk Assessment
7. Inherent risk associated with officer compensation is frequently set high because officers have
motive and opportunity to take advantage of their high-ranking offices in the form of excessive
compensation.
TRUE
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
8. If the results of the control tests do not support the planned level of control risk, the detection
risk will have to be set higher.
FALSE
AICPA BB: Industry
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 12-09 Understand how to relate the assessment of control risk to substantive procedures.
Topic: Relating the Assessed Level of Control Risk to Substantive Procedures
12-16
9. Tests of details of transactions are often conducted in conjunction with tests of controls.
TRUE
AICPA BB: Industry
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 12-11 Be familiar with substantive tests of transactions and tests of details of account balances and
disclosures used to audit payroll expense and payroll-related accrued expenses.
Topic: Tests of Details of Classes of Transactions, Account Balances, and Disclosures
Multiple Choice Questions
10. Which of the following departments most likely would approve changes in pay rates and
deductions from employee salaries?
A. Human resource.
B. Treasurer.
C. Controller.
D. Payroll.
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
11. Possible misstatements related to the occurrence assertion for payroll transactions include all
of the following except:
A. Payments to fictitious employees.

B. Payments to terminated employees.
C. Payments to valid employees who have not worked.
D. Payments to valid employees at a rate in excess of the authorized amount.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 12-08 Know key internal controls and develop relevant tests of controls for payroll transactions.
Topic: Control Activities and Tests of Controls
12-17
12. The proper use of prenumbered termination notice forms by the Payroll Department should
provide assurance that all
A. Uncashed payroll checks were issued to employees who have not been terminated.
B. Personnel files are kept up to date.
C. Employees who have not been terminated receive their payroll checks.
D. Terminated employees are removed from the payroll.
AICPA BB: Industry
Blooms: Apply
Difficulty: 1 Easy
13. When examining payroll transactions, an auditor is primarily concerned with the possibility of
A. Underpayments and properly authorized 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.
AACSB: Analytic
AICPA BB: Industry
Blooms: Analyze
Difficulty: 1 Easy
14. An auditor vouched data for a sample of employees in a payroll register to approved clock
card/time sheet data to provide assurance that
A. Payments to employees are computed at authorized rates.

B. Employees worked the number of hours for which they are paid.
C. Segregation of duties exist between the preparation and distribution of the payroll.
D. Internal controls relating to unclaimed payroll checks are operating effectively.
AICPA BB: Industry
Blooms: Apply
Difficulty: 1 Easy
12-18
15. Which of the following internal control objectives is likely to be a larger concern in the audit of
the payroll cycle?
A. Payroll transactions are properly disclosed.

B. Recorded payroll transactions are valid.
C. Payroll transactions are recorded in the appropriate time period.
D. All payroll transactions have been recorded.
AICPA BB: Industry
Blooms: Analyze
Difficulty: 1 Easy
16. Which of the following circumstances most likely would cause an auditor to suspect an
employee payroll fraud scheme?
A. There are significant unexplained variances between standard and actual labor cost.
B. Payroll checks are disbursed by the same employee each payday.
C. Employee time sheets are approved by individual departmental supervisors.
D. A separate payroll bank account is maintained on an imprest basis.
AICPA BB: Critical Thinking
Blooms: Apply
Difficulty: 1 Easy
17. Which of the following could test the assertion of cutoff for payroll-related liabilities?
C. Examine payroll tax returns to determine that the expense was recorded in the proper
period.
D. Review payroll liabilities for proper classification as short-or long-term.
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
12-19
18. Which of the following could test the assertion of classification for payroll-related liabilities?
period.
D. Review payroll liabilities for proper reporting as short- or long-term.
Blooms: Apply
Difficulty: 1 Easy
19. All of the following are incorporated into valuation models except:
A. The exercise price of the option.

B. The term of the option.
C. Expected dividends.
D. Current tax rates.
AACSB: Analytic
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-12 Understand how to evaluate the audit findings and reach a final conclusion on payroll expense and
payroll-related accrued expenses.
Topic: Evaluating the Audit Findings
20. A surprise observation by an auditor of an entity's regular distribution of paychecks is primarily

designed to satisfy the auditor that
A. All unclaimed payroll checks are properly returned to the cashier.

B. The paymaster is not involved in the distribution of payroll checks.
C. All employees have in their possession proper employee identification.
D. Names on the company payroll are those of bona fide employees presently on the job.
AICPA BB: Industry
Blooms: Apply
Difficulty: 2 Medium
12-20
21. Which of the following is the best reason why an auditor should consider observing an entity's
distribution of regular payroll checks?
A. To ensure that names on the company payroll are those of bona fide employees presently
on the job.
B. Total payroll costs are a significant part of total operating costs.
C. The auditor did not observe the distribution of the entire regular payroll during the audit in
the prior year.
D. Employee turnover is excessive.
Blooms: Apply
22. The purpose of segregating the duties of distributing payroll checks and hiring personnel is to
separate the
A. Duties within the accounting function.

B. Custody of assets from the accounting for those assets.
C. Authorization of transactions from the custody of related assets.
D. Operational responsibility from record keeping responsibility.
AICPA BB: Industry
Blooms: Understand
23. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to
separate the
A. Administrative controls from the internal accounting controls.

B. Human resources function from the controllership function.
C. Operational responsibility from the record-keeping responsibility.
D. Authorization of transactions from the custody of related assets.
AICPA BB: Industry
Blooms: Understand
12-21
24. Which of the following is an effective internal control used to prove that production department
employees are properly validating payroll timecards at a time-recording station?
A. Timecards should be carefully inspected by those persons who distribute pay envelopes to
the employees.
B. One person should be responsible for maintaining records of employee time for which
salary payment is not to be made.
C. Daily reports showing time charged to jobs should be approved by the foreman and
compared to the total hours worked on the employee timecards.
D. Internal auditors should make observations of distribution of paychecks on a surprise basis.
AICPA BB: Industry
Blooms: Apply
25. A large retail enterprise has established a policy that requires that the paymaster deliver all
unclaimed payroll checks to the Internal Auditing Department at the end of each payroll
distribution day. This policy was most likely adopted in order to
A. Assure that employees who were absent on a payroll distribution day are not paid for that
day.
B. Prevent the paymaster from cashing checks that are unclaimed for several weeks.
C. Prevent a bona fide employee's check from being claimed by another employee.
D. Detect any fictitious employee who may have been placed on the payroll.
AICPA BB: Industry
Blooms: Analyze
12-22
26. In the weekly computer run to prepare payroll checks, a check was printed for an employee
who had been terminated the previous week. Which of the following controls, if properly
utilized, would have been most effective in preventing the error or ensuring its prompt
detection?
A. A control total for hours worked, prepared from time sheets collected by the Timekeeping
Department.
B. Requiring the treasurer's office to account for the numbers of the prenumbered checks
issued to the EDP department for the processing of the payroll.
C. Use of a check digit for employee numbers.
D. Use of a header label for the payroll input sheet.
AICPA BB: Industry
Blooms: Apply
27. Which of the following is the best way for an auditor to determine that every name on a
company's payroll is that of a bona fide employee presently on the job?
A. Examine personnel records for accuracy and completeness.

B. Examine employees' names listed on payroll accounting records.
C. Make a surprise observation of the company's regular distribution of paychecks.
D. Visit the working areas and confirm with employees their badge or identification numbers.
AICPA BB: Industry
Blooms: Apply
28. Transactions processed through the payroll process include all of the following except:
A. Payments to employees for services rendered.

B. Payments to independent contractors for services rendered.
C. Accrual of social security taxes.
D. Payment of unemployment taxes.
AICPA BB: Industry
Blooms: Remember
Learning Objective: 12-02 Be familiar with the types of transactions in the human resource management process and the
financial statement accounts affected.
Topic: Types of Transactions and Financial Statements Accounts Affected
12-23
29. Vouching selected items from the payroll register to employee time sheets that have been
approved by supervisory personnel provides evidence that
A. Internal controls relating to payroll disbursements were operating effectively.

B. Payroll checks 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.
AACSB: Analytic
AICPA BB: Industry
Blooms: Apply
30. Which of the following activities most likely would detect whether payroll data are accurately
processed?
A. Monitor authorized distribution of data control sheets.

B. Use test data to verify the accurate performance of payroll processing.
C. Examine source documents for approval by supervisors.
D. Segregate duties between approval of hardware and software specifications.
AICPA BB: Industry
Blooms: Apply
Difficulty: 1 Easy
31. When control risk is assessed as low for assertions related to payroll, substantive tests of
payroll balances most likely would be limited to applying substantive analytical procedures and
A. Observing the distribution of paychecks.

B. Footing and crossfooting the payroll register.
C. Inspecting payroll tax returns.
D. Recalculating payroll accruals.
AACSB: Analytic
AICPA BB: Industry
Blooms: Analyze
12-24
32. Which of the following procedures would normally be performed by the auditor when
conducting tests of payroll transactions?
A. Interview employees selected in a statistical sample of payroll transactions.

B. Vouch number of hours worked as shown on payroll to time sheets and time reports signed
by the foreman.
C. Confirm amounts withheld from employees' salaries with proper governmental authorities.
D. Examine signatures on paid salary checks.
AICPA BB: Industry
Blooms: Apply
33. A substantive test of transactions to test the completeness assertion includes
A. Tracing a sample of time sheets to the payroll register.

B. Testing a sample of payroll checks for the presence of an authorized time sheet.
C. Testing postings to the payroll register for a sample of payroll checks.
D. Recomputing the accuracy of a sample of payroll checks.
AICPA BB: Industry
Blooms: Apply
34. Comparing selected items from the payroll register to employee time records that have been
approved by supervisory personnel tests which of the following assertions for payroll expense?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Cutoff.
AACSB: Analytic
AICPA BB: Industry
Blooms: Apply
12-25
35. An auditor most likely would extend substantive tests of payroll when
A. Payroll is extensively audited by the state government.

B. Payroll expense is substantially higher than in the prior year due to company growth.
C. Overpayments are discovered in performing tests of details.
D. Employees complain to management about too much overtime.
Blooms: Apply
36. Which of the following could test the occurrence assertion for payroll-related liabilities?
period.
D. Review payroll liabilities for proper classification as short- or long-term.
AICPA BB: Industry
Blooms: Apply
37. Which of the following is required of an auditor who is testing the fair value of options in share-
based compensation?
A. Using a specialist.
B. Testing the inputs used in the valuation model.
C. Becoming an expert in option-pricing.
D. Using the work of the internal audit function.
AICPA BB: Legal
Blooms: Apply
Learning Objective: 12-12 Understand how to evaluate the audit findings and reach a final conclusion on payroll expense and
payroll-related accrued expenses.
Topic: Evaluating the Audit Findings
12-26
38. In an IT payroll system environment, an auditor would be least likely to use test data to test
controls related to
A. Missing employee numbers.

B. Proper approval of overtime by supervisors.
C. Time sheets with invalid job numbers.
D. Agreement of hours per clock cards with hours on time sheets.
AICPA BB: Industry
Blooms: Understand
Difficulty: 3 Hard
39. Effective internal control over unclaimed payroll checks that are kept by the Treasury
Department would include Accounting Department procedures that require
A. Effective cancellation and stop payment orders for checks representing unclaimed wages.
B. Redepositing unclaimed wages after a period of 3 months.
C. Accounting for all unclaimed wages in a current liability account.
D. Periodic accounting for the actual checks representing unclaimed wages.
AICPA BB: Industry
Blooms: Understand
Difficulty: 3 Hard
40. Effective internal control over the payroll function would include which of the following?
A. Total time recorded on time-clock punch cards should be reconciled to job reports by
employees responsible for those specific jobs.
B. Payroll Department employees should be supervised by the management of the Human
Resource Department.
C. Payroll Department employees should be responsible for maintaining employee personnel
records.
D. Total time spent on jobs should be compared with total time indicated on timeclock punch
cards.
AICPA BB: Industry
Blooms: Understand
Difficulty: 3 Hard
12-27
41. 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
A. Distributing payroll checks to employees.

B. Reviewing and approving time reports for subordinate employees.
C. Hiring subordinate employees.
D. Initiating requests for salary adjustments for subordinate employees.
AICPA BB: Industry
Blooms: Understand
Difficulty: 3 Hard
42. An auditor would consider internal control over an entity's payroll procedures to be ineffective if
the payroll department supervisor is responsible for
A. Hiring subordinate payroll department employees.

B. Having custody over unclaimed paychecks.
C. Updating employee earnings records.
D. Applying pay rates to time tickets.
AICPA BB: Industry
Blooms: Understand
Difficulty: 3 Hard
12-28
43. Which of the following is a control activity that most likely could help prevent employee payroll
fraud?
A. The Human Resource department promptly sends employee termination notices to the
payroll supervisor.
B. Employees who distribute payroll checks forward unclaimed payroll checks to the absent
employees' supervisors.
C. Salary rates resulting from new hires are approved by the payroll supervisor.
D. Total hours used for determination of gross pay are calculated by the payroll supervisor.
AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard
44. An effective system of internal control over the payroll function would include
A. Verification of agreement of job time tickets with employee clock card hours by a payroll
department employee.
B. Reconciliation of totals on job time tickets with job reports by employees responsible for
those specific jobs.
C. Custody of rate authorization records by the supervisor of the payroll department.
D. Preparation of payroll transaction journal entries by an employee who reports to the
supervisor of the human resource department.
AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard
12-29
45. Key segregations of duties in the human resource management process include all of the
following except:
A. The supervision function should be separate from the payroll-processing function.

B. The disbursement function should be separate from the supervision function.
C. The human resource function should be separate from setting salaries.
D. The payroll-processing function should be separate from the general ledger function.
AICPA BB: Industry
Blooms: Remember
Difficulty: 3 Hard
46. 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.
AACSB: Analytic
AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard
47. 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.
AACSB: Technology
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
12-30
48. 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.
AICPA BB: Industry
Blooms: Analyze
Difficulty: 3 Hard
49. 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 tickets to record actual labor worked on production orders.
D. Reconciliation of work-in-process inventory with periodic cost budgets.
AICPA BB: Industry
Blooms: Analyze
Difficulty: 3 Hard
50. 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.
AACSB: Analytic
AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-07 Assess control risk for a human resource management process.
Topic: Control Risk Assessment
12-31
51. 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.
AICPA BB: Industry
Blooms: Analyze
Difficulty: 3 Hard
52. 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.
AICPA BB: Industry
Blooms: Analyze
Difficulty: 3 Hard
53. 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.
AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard
12-32
54. 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.
AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard
Short Answer Questions
55. Explain how the human resource management process can affect the financial statements.
The main human resource transaction that affects the financial statements is the payroll
process. This process affects accounts such as cash, inventory, and various expense accounts
and accruals. If there are weak controls in the human resource department, these accounts
could be materially misstated. Auditors should become familiar with the payroll process in order
to test these accounts.
AICPA BB: Industry
Blooms: Understand
Difficulty: 1 Easy
12-33
56. 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.
1) Time sheet.
2) Payroll Register.
3) Personnel record.
4) W-4.
5) Payroll Master File.
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
12-34
12-35
57. 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:
12-36
12-37
AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard
58. 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?
Inherent risk is normally set low for the human resource management process, due to the small
number of inherent risk factors that affect the process and its related accounts. However, this is
only true for non-officers. Inherent risk for officer compensation may be set higher, due to the
opportunity and motive of officers to take advantage of their higher ranking offices in the form
of excessive compensation.
Blooms: Understand
12-38
59. 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.
Possible answers:
Occurrence-The auditor will want to test for payments made that were not earned. This can be
tested by observing and evaluating proper segregation of duties and employees' use of the
time clock, reviewing and testing personnel files, reviewing and testing the entity's procedures
for changing employees' records and entering and removing employee numbers from the
payroll master file, and inspecting the time sheets for approval by the supervisor.
Accuracy-This assertion states that all transactions are recorded at the proper amount. To test
it, the auditor could review and test the entity's verification procedures, review the payroll
register for unusual amounts, review the entity's budgeting procedures and the reconciliation of
the payroll master file to the general ledger payroll accounts, examine the reconciliation of
"before and after" reports to the payroll master file, and review and test the entity's procedures
for changing employees' records.
Cutoff-To test that all transactions were recorded in the proper period, the auditor could review
and test the entity's procedures for changing employees' records, processing time sheets, and
recording payroll liabilities.
AICPA BB: Industry
Blooms: Apply
Difficulty: 1 Easy
12-39
60. Identify whether the following tests are substantive analytical procedures, tests of details of
transactions, or tests of details of account balances.
1) Tests of details of transactions.

2) Tests of details of transactions.
3) Tests of details of account balances.
4) Substantive analytical procedures.
5) Tests of details of account balances.
6) Substantive analytical procedures.
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 12-10 Be familiar with substantive analytical procedures used to audit payroll expense and payroll-related
accrued expenses.
Topic: Substantive Analytical Procedures
12-40
61. For each of the following tests, identify the assertion to which the test applies.
1) Occurrence.
2) Accuracy.
3) Rights and Obligations.
4) Occurrence.
5) Valuation and allocation.
6) Completeness.
Blooms: Understand
Difficulty: 1 Easy
accrued expenses.
62. 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.
Because the accrual is for three days, we can estimate the appropriate amount by taking the
total weekly payroll times 60 percent [(3 days/5 days) $156,000 * .6 = $93,600]. This
calculation is close to the actual amount and, therefore, no further work should be required.
AACSB: Analytic
AICPA BB: Industry
Blooms: Analyze
accrued expenses.
12-41
63. 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.
The accounts that need additional testing are those that are related to the officers of the
company. Limits on the amount of compensation received by officers can be set as a part of
lending agreements and information regarding executive salaries is needed for the federal tax
return. Also, there is an increased risk of fraud in these accounts, because officers have the
motive and opportunity to override the control activities and pay themselves more than is
authorized.
Note that FASB now requires share-based compensation to be valued at fair value. Due to the
complexity and judgment involved in computing compensation expense for share-based
compensation, extensive audit procedures may need to be performed.
AICPA BB: Industry
Blooms: Analyze
accrued expenses.
64. FASB ASC Topic 715 requires specific disclosures regarding human resources, which of
course must be verified and audited by the CPA. What are those disclosures?
FASB ASC Topic 715 requires significant disclosure regarding pension costs and
postretirement benefits. Also, there are requirements for stock-based compensation, profit-
sharing plans, and deferred compensation arrangements.
AICPA BB: Legal
AICPA FN: Reporting
Blooms: Remember
12-42

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Solution Manual for Auditing and Assurance Services A

Systematic Approach 9th Edition Messier Glover Prawitt

Auditing the Human Resource Management Process

True / False Questions

1. Payroll-related expenses normally are not a material cost to the organization.

Multiple Choice Questions

A. Payments to fictitious employees.

A. Underpayments and properly authorized payments.

A. Payments to employees are computed at authorized rates.

A. Payroll transactions are properly disclosed.

A. The exercise price of the option.

20. A surprise observation by an auditor of an entity's regular distribution of paychecks is primarily

A. All unclaimed payroll checks are properly returned to the cashier.

A. Duties within the accounting function.

A. Administrative controls from the internal accounting controls.

A. Examine personnel records for accuracy and completeness.

A. Payments to employees for services rendered.

A. Internal controls relating to payroll disbursements were operating effectively.

A. Monitor authorized distribution of data control sheets.

A. Observing the distribution of paychecks.

A. Interview employees selected in a statistical sample of payroll transactions.

33. A substantive test of transactions to test the completeness assertion includes

A. Tracing a sample of time sheets to the payroll register.

A. Payroll is extensively audited by the state government.

A. Missing employee numbers.

A. Distributing payroll checks to employees.

A. Hiring subordinate payroll department employees.

A. The supervision function should be separate from the payroll-processing function.

A. Telephone contacts with the employees.

A. The auditor must audit through the computer.

A. Reconciliation of work in process inventory with cost records.

A. Periodic independent counts of work-in-process for comparison to recorded amounts.

A. Examining authorization forms for new employees.

A. Verify that checks representing unclaimed wages are mailed.

Short Answer Questions

1) The document used to record hours worked by an employee.

True / False Questions

1. Payroll-related expenses normally are not a material cost to the organization.

Multiple Choice Questions

A. Payments to fictitious employees.

A. Underpayments and properly authorized payments.

A. Payments to employees are computed at authorized rates.

A. Payroll transactions are properly disclosed.

A. The exercise price of the option.

20. A surprise observation by an auditor of an entity's regular distribution of paychecks is primarily

A. All unclaimed payroll checks are properly returned to the cashier.

A. Duties within the accounting function.

A. Administrative controls from the internal accounting controls.

A. Examine personnel records for accuracy and completeness.

A. Payments to employees for services rendered.

A. Internal controls relating to payroll disbursements were operating effectively.

A. Monitor authorized distribution of data control sheets.

A. Observing the distribution of paychecks.

A. Interview employees selected in a statistical sample of payroll transactions.

33. A substantive test of transactions to test the completeness assertion includes

A. Tracing a sample of time sheets to the payroll register.

A. Payroll is extensively audited by the state government.

A. Missing employee numbers.

A. Distributing payroll checks to employees.