Q&A Hero

Q: The audit test of control "Review and test procedures for issuing materials to manufacturing departments" provides assurance mainly for the occurrence assertion for inventory management.

Q: When the entity's perpetual inventory master files are inadequate, the auditor will probably choose to test the physical inventory prior to the balance sheet date.

Q: A comparison of the current year's inventory turnover ratio with previous years' may indicate the presence of obsolete inventory.

Q: An approved purchase requisition form authorizes shipment of goods to customers.

Q: In the audit of inventory, the entity is responsible for actually making and recording the count of physical inventory; the auditor's responsibility is to evaluate and observe the entity's procedures and draw conclusions about the adequacy of the physical inventory.

Q: Obsolete inventory should be written down to its current market value.

Q: The auditor's observation of inventory is a generally accepted auditing procedure.

Q: The three components that make up the cost of producing a product include materials, direct labor, and indirect labor.

Q: A high inventory turnover ratio normally indicates inefficient inventory policies.

Q: Inventory should be valued using the lower-of-cost-or-market rule.

Q: The major control procedure for preventing fictitious inventory transactions from being recorded is proper segregation of duties.

Q: Once the controls in the inventory system have been tested, the auditor sets the level of control risk.

Q: Sale of finished goods is a part of the inventory management process.

Q: 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?

Q: 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.

Q: 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?

Q: 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:

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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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 time clock punch cards.

Q: 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.

Q: 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.

Q: 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.

Q: Which of the following could test the occurrence assertion 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: Which of the following could test the assertion of classification 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 reporting as short- or long-term.

Q: 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.

Q: 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.

Q: 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.

Q: 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 exists between the preparation and distribution of the payroll. D. internal controls relating to unclaimed payroll checks are operating effectively.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: Tests of details of transactions are often conducted in conjunction with tests of controls.

Q: 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.

Q: 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.

Q: There are few inherent risk factors that directly affect the human resource management process and its related accounts for non-officers.

Q: Proper segregation of duties is critical for the human resource management process.

Q: The payroll-processing function is responsible for paying employees for services and benefits.

Q: The human resource function is responsible for managing the personnel needs of the organization.

Q: Employees must complete a W-4 form to authorize insurance deductions from his or her pay.

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

Q: Match the test of controls described below to the appropriate assertion it is used to test. Review entity's competitive bidding procedures Authorization Review the cash disbursements journal for reasonableness of account distribution Classification Trace a sample of receiving reports to their respective vendor invoices and vouchers Occurrence Review monthly bank reconciliations Completeness Test a sample of vouchers for the presence of authorized purchase order and receiving report Cutoff Compare the dates on the receiving reports with the dates of the relevant vouchers Accuracy

Q: Listed below are the major functions of the purchasing process. 1) Purchasing function. 2) General ledger function. 3) Invoice-processing function. 4) Disbursement function. 5) Accounts payable function. 6) Requisition and receiving function. Name four pairs of functions that should be segregated from each other and explain why the segregation is important. 1 should be separated from 6 - An individual who performs both of these duties can easily make fictitious purchases and steal cash. 2 should be separate from 5 - The segregation of these duties makes it difficult to cover up defalcation of the company's records. 3 should be separated from 5 - This segregation prevents an individual from overpaying for goods received and stealing cash. 4 should be separated from 5 - Unauthorized transactions can be made by an individual with control over both of these functions. This can lead to unauthorized checks being written and the individual stealing cash.

Q: Which of the following describes a permanent difference? A. A difference that will be corrected in an amended tax return. B. A difference arising from an uncertain tax position. C. A fundamental difference in what constitutes revenue or expense for GAAP and tax purposes. D. A timing difference between the recognition of revenue or expense under GAAP and tax purposes.

Q: Which of the following describes a temporary difference? A. A difference that will be corrected in an amended tax return. B. A difference arising from an uncertain tax position. C. A fundamental difference in what constitutes revenue or expense for GAAP and tax purposes. D. A timing difference between the recognition of revenue or expense under GAAP and tax purposes.

Q: If payables turnover has increased significantly since the prior year, this is an indication that which of the following assertions for accounts payable might be violated? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Valuation and allocation.

Q: Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? A. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? B. Are purchase requisitions prenumbered and independently matched with vendor invoices? C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Q: Which of the following test(s) of details of transactions can be used as a dual-purpose test in conjunction with tests of controls? A. Test a sample of purchase requisitions for proper authorization. B. Obtain selected vendors' statements and reconcile to vendor accounts. C. Obtain listing of accounts payable and compare total to general ledger. D. Review results of confirmations of selected accounts payable.

Q: Assertions about account balances at the period end include A. existence, completeness, and accuracy. B. existence, completeness, and classification. C. existence, rights and obligations, and completeness. D. existence, rights and obligations, and classification.