Q&A Hero

Q: State each of the seven specific balance-related audit objectives for manufacturing equipment additions and, for each objective, describe one common test of details of balances.

Q: Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as A) accounts payable. B) accrued liabilities. C) miscellaneous assets. D) unearned revenues.

Q: The most important objectives for amortization expense are valuation and A) accuracy. B) classification. C) cutoff. D) understandability.

Q: Ordinarily, it is unnecessary to test the valuation of capital assets recorded in prior periods because A) it will not affect the current valuations. B) they were verified in previous audits. C) the related amortization calculations for the current period are more important. D) the emphasis of the audit is on the income statement items, not the balance sheet items.

Q: A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that A) expenditures for capital assets have been recorded in the proper period. B) capital expenditures have been properly authorized. C) non-capitalizable expenditures have been properly expensed. D) expenditures for capital assets have been capitalized.

Q: The tests of details of balances procedure for manufacturing equipment which requires the auditor to examine vendors' invoices of closely related accounts such as repairs and maintenance to uncover items that should be manufacturing equipment would satisfy the audit objective of A) detail tie-in. B) existence. C) classification. D) accuracy.

Q: It is normal for the auditor to verify large and unusual transactions for the entire year as well as a representative sample of typical additions. The size of the sample for substantive testing depends on the auditor's A) sampling selection methodology used. B) assessed control risk and assessed inherent risks. C) understanding of the nature of internal controls. D) availability of client resources to pull supporting documentation.

Q: The starting point for the verification of current-year acquisitions of manufacturing equipment is normally A) the manufacturing equipment account in the general ledger. B) the acquisitions journal. C) the purchase requisitions file. D) a client schedule of all acquisitions recorded during the year.

Q: When verifying current-year additions to manufacturing equipment, the two major objectives for this part of the audit are A) accuracy and classification. B) detail tie-in and cutoff. C) disclosure and completeness. D) rights and existence.

Q: A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year amortization, and accumulated amortization is the A) capital asset master file. B) file of purchase requisitions. C) amortization schedule. D) acquisitions journal.

Q: Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).

Q: State five specific balance-related audit objectives for accounts payable and, for each objective, describe one common test of details of balances.

Q: Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because A) this is a duplication of cutoff tests. B) accounts payable balances at the balance sheet date may not be paid before the audit is completed. C) correspondence with the audit client's lawyer will reveal all legal action by vendors for nonpayment. D) there is likely to be other reliable external evidence available to support the balances.

Q: When an acquisition is on an FOB (freight on board) origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were A) received prior to the balance sheet date. B) shipped prior to the balance sheet date. C) both shipped and received prior to the balance sheet date. D) paid for.

Q: An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result A) is an understatement of net earnings. B) is an overstatement of net earnings. C) does not affect earnings. D) is indeterminable from the information given.

Q: In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the A) confirmation of accounts payable. B) tests on long-term liabilities. C) observation of inventory. D) cash count.

Q: The purpose of the audit procedure to "trace receiving reports issued before year-end to related vendors' invoices" is to determine that all A) merchandise received is included in accounts payable. B) merchandise received is included in inventory. C) merchandise was received. D) invoices have been paid.

Q: The purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to A) uncover liabilities on the balance sheet which should not have been recorded until a subsequent period. B) find the documentation relating to a cash disbursement. C) uncover payments made in a subsequent accounting period that represent liabilities at the balance sheet date. D) uncover cash disbursements recorded in a subsequent accounting period which should be recorded in that period.

Q: The main focus taken by the auditor in verifying liability balances is on the discovery of A) liabilities posted to the wrong account. B) overstated liabilities. C) understated or omitted liabilities. D) overstated or extraneous liabilities.

Q: The analytical procedure which requires the auditor to "inspect the list of accounts payable for unusual or non-vendor payables" would have the best chance of discovering which possible error? A) Misstatement of accounts payable and expenses B) Classification error for non-trade liabilities C) Unrecorded accounts or misstatements D) Invalid accounts or misstatements

Q: Comparing expenses to prior years is an effective analytical procedure for accounts payable because expenses from year to year are A) relatively stable. B) erratic. C) variable. D) dynamic.

Q: Which of the following situations would indicate increased inherent risk in the accounts payable and acquisition cycle? A) good quality internal controls for cash handling B) the use of packaged software for accounting (including accounts payable) C) the use of clear, standard terms when negotiating supplier discounts D) significant related party transactions

Q: Describe the three types of tests that need to be performed by the auditor when auditing a client's data conversion process.

Q: State each of the five specific transaction-related audit objectives for acquisitions and, for each objective, describe one common test of transactions.

Q: The test of details of balances procedure to "inspect the accounts payable trial balance and master file for related parties, notes, or other interest-bearing liabilities" satisfies the objective of A) existence. B) completeness. C) classification. D) detail tie-in.

Q: ZyCo has recently converted to a new online accounts payable system. To test that all vendor balances have been converted to the vendor master file (completeness), the auditor would A) conduct cut-off tests, for receiving reports and vendor invoices. B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch) system. C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online) system. D) conduct tests of programs, to verify that programs in the new systems are functioning as designed.

Q: ZyCo has recently converted to a new online accounts payable system. To test that only authorized vendors have been converted to the vendor master file (occurrence), the auditor would A) conduct cut-off tests, for receiving reports and vendor invoices. B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch) system. C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online) system. D) conduct tests of programs, to verify that programs in the new systems are functioning as designed.

Q: Which of the following controls help to ensure that the receipt of raw materials for inventory is recorded in the correct period? A) supplier details are automatically retrieved from the supplier master file B) receiving staff write down the date goods are received on the bill of lading C) accounting staff record the date that goods are received in the accounting systems D) transaction date entered must be the same as the system date

Q: The test of transactions which requires "the recomputing of cash discounts" satisfies the objective of A) occurrence. B) completeness. C) accuracy. D) posting and summarization.

Q: The control test which requires the auditor to "compare recorded transactions in the acquisitions journal with the vendor's invoice, receiving report, and other supporting documentation" satisfies the objective of A) occurrence. B) classification. C) completeness. D) accuracy.

Q: The internal control which requires an "independent verification of calculations and amounts" satisfies the objective of A) occurrence. B) completeness. C) accuracy. D) posting and summarization.

Q: The internal control which requires "purchase orders be prenumbered and accounted for" satisfies the objective of A) occurrence. B) completeness. C) accuracy. D) posting and summarization.

Q: The internal control which requires that "purchase orders, receiving reports, and vouchers are prenumbered and accounted for" satisfies the objective of A) occurrence. B) classification. C) completeness. D) accuracy.

Q: The internal control objective to determine that "existing acquisition transactions are recorded" describes the objective of A) occurrence. B) classification. C) completeness. D) accuracy.

Q: The internal control which requires "new vendors and changes to vendor file be approved" satisfies the objective of A) occurrence. B) completeness. C) accuracy. D) posting and summarization.

Q: The internal control which requires "approval of acquisitions at the proper level" satisfies the objective of A) occurrence. B) completeness. C) accuracy. D) posting and summarization.

Q: Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount A) in the expense account. B) used in the prior period. C) authorized and recorded in the minutes of the board of directors. D) paid in the subsequent period.

Q: An important consideration in evaluating the fairness of the amounts accrued for vacation pay, sick pay, and other benefits is the A) consistent accrual of these liabilities relative to those of the preceding year. B) actual expense incurred for the prior period. C) amount expended to date in the current period. D) profitability of the client which will enable these liabilities to be met.

Q: Once the auditor has determined the company's policy for accruing wages and knows it is consistent with that of previous years, the appropriate audit procedure to test for cutoff and accuracy is to A) recalculate the client's accruals. B) compare the ledger balance with the journal and the T-4 form. C) confirm the amount with employees. D) compare the recorded accrued wages with the amount approved in the minutes of the Board.

Q: The correct cutoff and valuation of accrued salaries and wages A) is to calculate the exact hours of pay that were earned in the current period and paid in a subsequent period. B) is to compute an approximate proportion of the wages that were earned in the current period and use that amount as the accrual. C) allows the client to choose between A and B above each year. D) depends on company policy and whether it is consistently followed.

Q: When auditing the human resources and payroll cycle, the auditor should verify the officers' compensation because A) officers are more likely to commit fraud. B) officers' compensation is likely more prone to error. C) some officers may have complex compensation packages. D) some officers may be in a position to pay themselves more than the authorized amounts.

Q: The auditor's primary concern in testing payroll liabilities is to make sure that A) expense has not been overstated, thus reducing profits. B) there are no understated or omitted accruals. C) employees' T-4 slips are accurate. D) salaries of officers have not been misclassified as wages.

Q: Otto decided to outsource the payroll function to Magna Plus. The controller of Otto should still A) recalculate the payroll and its remittance to ensure accuracy. B) review and authorize each individual payments to employees. C) review the payroll journal and compare the total hours worked with the payroll time records. D) inquire with the manager of Magna Plus if they suspect any unusual transaction.

Q: Otto decided to outsource the payroll function to Magna Plus. From the purpose of an assurance engagement, Magna is considered a A) service organization. B) user entity. C) payroll administrator. D) human resource company.

Q: As part of your audit of the payroll for Jones Chu Company Limited (JCC), you used generalized audit software. You had available to you the payroll transactions for the month of September and the employee master file as of the date of September 30. You conducted the following tests, with results noted: 1. Ran a duplicates test on employee number in the transaction file. You found that one employee, employee number 320, had been paid twice, using cheque numbers 12376 and 12377. 2. Check the calculation of "pay per period" in the employee master file. (Divide the salary field by 12 to derive the monthly pay). It was found that for two employees these calculations did not match. Employee #20 had a pay of $200 higher than the calculation, while employee # 220 had a pay that was $65 higher than the calculations. 3. Check that "gross pay" less "unemployment insurance, Canada Pension Plan and income taxes deducted" equals "net pay." No errors were found. Required: For each audit test (i) Describe the audit assertion associated with your audit test. (ii) Discuss the results that the auditor would have expected before running the test. (iii) Discuss the implications of the findings upon the audit process or upon specific audit procedures.

Q: You have been working on the audit of Big Insurance Company for several years now. There are about 5,000 employees working at the company in various positions. Your audit partner has indicated that this year, the firm will be implementing computer assisted audit techniques (CAATs), using generalized audit software. The information systems audit specialist will be assisting the audit team with the implementation of these tests. She wants you to provide a draft list of CAATs that could assist with the coming year's audit of payroll. The company uses mainframe computing systems. You need to assume that the typical payroll information is available on computer files, i.e. employee number, employee name, social insurance number, department code, payment type code (salaried or hourly), time worked, wage rate, gross pay, deductions (by type), net pay, and cheque number. Required: Prepare a list of potential computer assisted audit techniques that could be prepared for the payroll audit. Identify the audit objective to which they relate, and indicate if any manual procedures are required to supplement the suggested CAAT.

Q: Discuss the two most common ways in which employees can defraud a company in the payroll area.

Q: State the six specific transactions-related audit objectives as related to payroll, and for each objective, state one common test of controls that can be used to test the objective.

Q: Even though the tests of controls are the most important part of testing payroll, many auditors spend little time in this area. In many audits, there is a minimal risk of material misstatements, even though payroll is frequently a significant part of total expenses. Explain the reasons the auditors have for justifying this position.

Q: A) There are several internal controls in the human resources and personnel function that are important from an audit perspective. For example, there should be an adequate investigation of the competence and trustworthiness of new employees. Discuss other internal controls in the personnel and employment function that are important from an audit perspective. B) There are several key internal controls over the timekeeping and payroll preparation function that should be present. For example, adequate control over the time on employees' time records includes the use of a time clock or other method of making certain that employees are paid for the number of hours they worked. Discuss other key internal controls over the timekeeping and payroll preparation function. C) There are several key internal controls over the payment of payroll function that should be present. For example, the payroll should be distributed by someone who is not involved in the other payroll functions. Discuss other key internal controls over the payment of payroll function.

Q: Because of the lack of available evidence, it is usually difficult for an auditor to discover if an employee records more time on his or her time card than actually worked. One procedure is to reconcile the total hours A) paid this period with a previous period. B) paid according to the payroll records with an independent record of the total hours worked, such as those maintained by production control. C) worked this period with a previous period. D) worked according to the summary payroll report with the total hours worked as recorded on the time card for the period.

Q: When the employees are paid automatically by bank deposits to the employees' accounts, in an effort to identify potential fraud, the auditor can look forA) duplicated bank account numbers.B) duplicated name in the master payroll files.C) unusual employee names.D) cancelled cheques.

Q: When labour is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning A) proper classification of transactions. B) authorization of wage rates. C) fictitious employees. D) completeness of recorded transactions.

Q: Which of the following is a substantive test of transactions? A) Review personnel policies B) Account for a sequence of payroll cheques C) Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement D) Examine printouts of transactions rejected by the computer as having invalid employee numbers

Q: To test whether the client has fulfilled its legal obligation in submitting payments for all payroll withholdings, the auditor must first A) contact client's independent legal counsel. B) know the dates when tax payments are due. C) trace these payments to the imprest payroll account. D) determine the client's requirements for submitting the payments.

Q: The auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing, as a part of the auditor's responsibility for A) understanding internal controls. B) doing tests of controls. C) doing analytical procedures. D) doing tests of balances.

Q: Which of the following internal control tests would help to assess whether payroll transactions were recorded on the correct dates? A) Compare cancelled cheques with payroll journal for name, amount, and date B) Compare date on cheque with date the cheque cleared the bank C) Compare cancelled cheques with personnel records D) Recompute hours worked from pay records

Q: Which of the following internal control tests would help to assess whether payroll transactions were properly classified? A) Test clerical accuracy by footing the payroll journal B) Recompute net pay and gross pay C) Reconcile the disbursements in the payroll journal with the payroll bank statement D) Review time records and job records, tracing to labour distribution

Q: Which of the following internal control tests would be used in assessing that recorded payroll transactions are for the amount of time actually worked and at the proper pay rate, and that withholdings are properly calculated? A) Foot payroll journal and trace to general ledger B) Prove the bank reconciliation C) Recompute gross pay D) Review the payroll journal for large or unusual amounts

Q: Recomputing hours worked from time records provides evidence that A) internal controls relating to payroll disbursements were operating effectively. B) payroll cheques 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.

Q: Which of the following internal controls would assist in ensuring that recorded payroll transactions are for the amount of time actually worked and at the proper pay rate, and that withholdings are properly calculated? A) Comparison of batch totals with computer summary reports B) Comparison of payroll master file with payroll general ledger totals C) Adequate personnel files D) Separation of duties between personnel, timekeeping, and payroll disbursements

Q: "Recorded payroll transactions are for the amount of time actually worked and at the proper pay rate; withholdings are properly calculated" relates to which control objective? A) Authorization B) Completeness C) Existence D) Accuracy

Q: Which of the following tests of controls would pertain to whether existing payroll transactions are recorded? A) Compare cancelled cheques with payroll journal details B) Compare cancelled cheques with payroll records C) Foot payroll journal and trace details to general ledger D) Conduct gap testing for a sequence of payroll cheques

Q: Which of the following internal controls would help ensure that existing payroll transactions are recorded? A) Time records are approved by supervisors B) Time clock is used to record time C) Independent preparation of payroll bank reconciliation D) Comparison of payroll master file totals with general ledger control account

Q: "Existing payroll transactions are recorded" is the control objective of A) authorization. B) completeness. C) existence. D) accuracy.

Q: Which of the following internal controls helps ensure that recorded payroll payments are for work actually performed by existing employees? A) Procedures requiring the recording of transactions as soon as possible B) Only valid employees from the computer data files are accepted for processing C) Internal verification of payroll file contents D) Independent preparation of payroll bank reconciliation

Q: Which of the following internal control tests would assist in satisfying the occurrence transaction-related audit objective for payroll? A) Examine payroll records for evidence of approval B) Prove the payroll bank reconciliation C) Review chart of accounts D) Account for a sequence of payroll cheques

Q: Which of the following is a test of controls? A) Review the payroll journal, general ledger, and payroll earnings records for large or unusual amounts B) Examine time cards for indication of supervisor approval C) Compare cancelled cheques with payroll journal for name, amount, and date D) Examine cancelled cheques for proper endorsement

Q: "Recorded payroll payments are for work actually performed by existing employees" is the control objective of A) authorization. B) completeness. C) occurrence. D) accuracy.

Q: When examining payroll transactions, an auditor is primarily concerned with the possibility of A) overpayments and unauthorized 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.

Q: Which of the following type of test is most important for the audit of payroll? A) Internal control B) Test of detail C) Analytical review D) Substantive test

Q: General controls must be evaluated and their impact considered upon the human resources and payroll transaction cycle because A) there are frequently weaknesses in internal controls in the payroll cycle. B) automated techniques are normally used to prepare and post payroll transactions. C) the best way to test payroll transactions is usually by using test data. D) the best way to test payroll transactions is usually by using generalized audit software.

Q: You have been working on the audit of Ballistic Defence Company for several years now. There are about 15,000 employees working at the company in various positions. Recently, the company contracted for a new customized payroll system, which is to be implemented next month. You have been asked to assess the acceptance testing plan that is being prepared by accounting staff. In particular, they want you to help assess controls that will improve the accuracy of information entered into the new computer system. The company uses mainframe computing systems. You need to assume that the typical payroll information is available on computer files, i.e. employee number, employee name, social insurance number, department code, payment type code (salaried or hourly), time worked, wage rate, gross pay, deductions (by type), net pay, and cheque number. Required: Identify the tests that should be conducted by the company's accounting staff with respect to accuracy before accepting the software.

Q: Joan has been the payroll supervisor at York Distribution Company (YDC) for ten years. She has never missed a payroll and Farah, the owner of the company is delighted with her conscientiousness and knowledge. This is particularly important, as Farah spends a lot of time on the road drumming up new business, and needs competent personnel back at the office. There are two accounting personnel at the office, a receptionist, five shipping and receiving personnel, and thirty sales people employed by YDC. Office and shipping/receiving personnel are paid a salary, while the sales people are paid a monthly base salary plus a percentage of their sales, calculated quarterly. The base salary is low, at $20,000, with a 2% commission, calculated based upon sales less any bad debts written off related to their customers. Joan prints off the sales by customer every month, and uses this information to calculate commission. She then prepares the payroll cheques and gives them to Farah, who signs them and gives them to the sales staff at the monthly sales meeting. The cheques are written against a payroll imprest bank account, kept at a balance of $1,000. This account is not reconciled, as the staff are very overworked with the increasing volume of business handled by the company. Required: A) Identify control weaknesses and their impact, and provide recommendations for improvement. B) What is the impact of the control weaknesses upon your audit approach?

Q: The WhirlyGig Factory Ltd. manufactures WhirlyGigs of many different sizes and types. The company employs 55 employees, all paid on an hourly basis. Employees fill in time sheets and hand them in every Monday to the payroll clerk, Pamela. For factory employees, the time sheet shows the hours worked by product job number, and indicates if the job has been completed. The payroll clerk tracks the hours worked by job, and when a job is complete, compares the totals to the estimate made by the owner, Faruq. A bonus is paid for actual hours paid less than the estimated amount. Every Wednesday, Pamela prepares the cheques and gives them to Faruq for signing. Pamela then staples the cheques to the payroll stubs. Pamela hands out the office cheques and gives the other cheques to the factory supervisor for distribution. Required: A) Identify control weaknesses and their impact, and provide recommendations for improvement. B) What is the impact of the control weaknesses upon your audit approach?

Q: A) Discuss three important differences between the human resources and payroll cycle and other cycles in a typical audit. B) Describe each of the six business functions in a typical human resources and payroll cycle. C) Describe each of the primary documents and records used in the timekeeping and payroll preparation function in the payroll and personnel cycle. D) Discuss each of the primary documents and records used in the (1) payment of payroll function, and (2) preparation of employee withholdings and benefits remittance forms function in the payroll and personnel cycle.

Q: The careful and timely preparation of all payroll withholdings and employers' portion of withholdings is necessary to avoid heavy fines. The most important control in the timely preparation of these returns is A) computerized preparation of income tax returns. B) a well-defined set of policies that indicate when each form must be filed. C) independent verification of computer output by a competent individual. D) a Gantt chart.

Q: Which of the following controls prevents error and helps to ensure that only authorized wages are paid by the payroll service provider? A) duplicate signatures required on payments to the Receiver General B) use of an imprest payroll account for the payment of all payroll payments C) independent approval of the payroll journal prior to payroll payment release D) reconciliation of the payroll imprest bank account on a timely basis

Q: A weak internal control system allows a foreman to clock in daily for a fictitious employee and to approve the time card at the end of the payroll period. This fraud would be detected if other controls were in place, such as having an independent party A) compare the date of the recorded cheque in the payroll journal with the date on the cancelled cheques and time cards. B) foot the payroll journal and trace postings to the general ledger and the payroll master file. C) recompute hours worked from time cards. D) distribute paycheques.

Q: To minimize the opportunity for fraud, unclaimed salary cheques should be A) immediately returned for redeposit. B) kept in the payroll department. C) left with the employee's supervisor. D) held for the employee in the personnel department.