Chapter 12
There are six functions that are normally part of the payroll application. The six functions include:
(1) human resources, (2) supervision, (3) timekeeping, (4) payroll processing, (5) disbursement, and (6) general ledger
The principal objectives of the human resource management process are:
(1) record production and other types of payroll costs in the accounts (2) ensure that payroll costs are for legitimate entity activities and (3) accrue liabilities for salaries and wages, payroll taxes, and various employee benefit programs.
Which of the following activities performed by a departmental supervisor most likely would help in the prevention or detection of a payroll fraud? - Distributing paychecks directly to department employees. - Setting the pay rate for department employees. - Hiring employees and authorizing them to be added to the payroll. - Approving a summary of hours each employee worked during the pay period.
Approving a summary of hours each employee worked during the pay period.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the - Human resources function from the controllership function. - Administrative controls from the internal accounting controls. - Authorization of transactions from the custody of related assets. - Operational responsibility from the record keeping responsibility.
Authorization of transactions from the custody of related assets.
An auditor most likely would not rely on controls if the payroll department supervisor is responsible for - Examining authorization forms for new employees. - Comparing payroll registers with original batch transmittal data. - Authorizing payroll rate changes for all employees. - Hiring all subordinate payroll department employees.
Authorizing payroll rate changes for all employees.
An auditor vouches data for a sample of employees in a payroll register to approved clock card data to provide assurance that - Payments to employees are computed at authorized rates. - Employees work the number of hours for which they are paid. - Segregation of duties exists between the preparation and distribution of the payroll. - Internal controls relating to unclaimed payroll checks are operating effectively.
Employees work the number of hours for which they are paid.
An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to - Verify that payroll taxes are deducted from employees' gross pay. - Determine whether internal control activities are operating effectively. - Uncover fictitious employees who are receiving payroll checks. - Identify potential liabilities for unpaid payroll taxes.
Identify potential liabilities for unpaid payroll taxes.
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 - Observe the segregation of duties concerning personnel responsibilities and payroll disbursement. - Inspect evidence or accounting for pre-numbered payroll checks. - Recompute the payroll deductions for employee fringe benefits. - Verify the preparation of the monthly payroll account bank reconciliation.
Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
An auditor most likely would extend substantive tests of payroll when - Payroll is extensively audited by the state government. - Payroll expense is substantially higher than in the prior year. - Over-payments are discovered in performing tests of details. - Employees complain to management about too much overtime.
Over-payments are discovered in performing tests of details.
Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries? - Treasurer. - Controller. - Personnel. - Payroll.
Personnel.
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 tests and - Observing the manner in which pay is transmitted to employees (i.e., direct deposit, distribution of physical checks, mailing, etc.) - Footing and cross-footing the payroll register. - Inspecting payroll tax returns. - Recalculating payroll accruals.
Recalculating payroll accruals.
Which of the following payroll control activities would most effectively ensure that payment is made for work performed? - Require all employees to record arrival and departure by using a time clock or other electronic device. - Have a payroll clerk recalculate all time cards or electronic records. - Require all employees to sign their time cards. - Require employees to have their direct supervisors approve their time cards or other records of time worked.
Require employees to have their direct supervisors approve their time cards or other records of time worked.
An auditor who is testing controls in the payroll cycle has determined there to be a significant risk that not all payments to employees are recorded and expensed. The audited entity has put controls in place to reduce this risk of misstatement. Which of the following tests of controls would effectively address the completeness assertion? - Test a sample of checks before and after the reporting period end-date and trace them into the payroll register and related cash and expense accounts. - Test a sample of checks and vouch them to authorized time cards. - Test a sample of recorded payments and ensure they were appropriately authorized. - Inspect time sheets presented for approval by the supervisor.
Test a sample of checks before and after the reporting period end-date and trace them into the payroll register and related cash and expense accounts.
Which of the following procedures would most likely be considered a weakness in an entity's internal controls over payroll? - A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary. - The personnel department sends employees' termination notices to the payroll department. - The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department. - Payroll checks are prepared by the payroll department and signed by the treasurer.
The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
Which of the following procedures represents a weakness in internal controls for payroll? - The payroll department prepares checks. The chief financial officer signs the payroll checks. - The accounting department wires transfers funds to the payroll bank account. The transfer is based on totals from the payroll department summary. - The payroll department prepares checks using a signature plate. The treasurer supervises the process before payroll checks are distributed. - The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.
The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.
Which of the following is a control procedure that most likely could help prevent employee payroll fraud? - The personnel department promptly sends employee termination notices to the payroll supervisor. - Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors. - Salary rates resulting from new hires are approved by the payroll supervisor. - Total hours used for determination of gross pay are calculated by the payroll supervisor.
The personnel department promptly sends employee termination notices to the payroll supervisor.
Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme? - There are significant unexplained variances between standard and actual labor costs. - Payroll checks are disbursed by the same employee each payday. - Employee time cards are approved by individual departmental supervisors. - A separate payroll bank account is maintained on an imprest basis.
There are significant unexplained variances between standard and actual labor costs.
Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions? - Trace a sample of time sheets to the payroll register. - Trace a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity. - Recompute the mathematical accuracy of a sample of payroll checks. - Test a sample of time sheets for the presence of authorization.
Trace a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the: - authorization of transactions from the custody-related assets. - human resource function from the controllership function. - administrative controls from the internal accounting controls. - operational responsibility from the record-keeping responsibility.
authorization of transactions from the custody-related assets.
personnel records, including wage-rate or salary authorizations
contain information on each employee's work history, including hiring date, salary or wage rate, payroll deduction authorization forms, salary and wage rate adjustment authorizations, performance evaluations, and termination notices, if applicable
payroll master file changes report
contains a record of the changes made to the payroll master file
what function includes payment of employees' compensation and benefits?
disbursement
For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to: - payroll accounting department. - the timekeeping department. - general accounting within the entity's IT system. - the treasurer's department.
general accounting within the entity's IT system.
what function includes proper accumulation, classification, and summarization of payroll in the general ledger?
general ledger
what function includes authorization of hiring, firing, wage-rate and salary adjustments, and payroll deductions?
human resource
periodic payroll reports
may be prepared at the end of each week or month
various tax reports and forms
most companies are required to prepare these for both the federal and state governments
what function includes the computation of gross pay, deductions, and net pay, recording and summarizations of payments and verification of account distribution?
payroll processing
It would be appropriate for the payroll department to be responsible for which of the following functions? - distribution of paychecks to employees - maintenance of records of employment, discharges, and pay increases - preparation of periodic governmental reports as to employees' earnings and withholding taxes - approval of employee time records
preparation of periodic governmental reports as to employees' earnings and withholding taxes
An auditor is most likely to perform substantive tests of details on payroll transactions and balances when: - the level of control risk relative to payroll transactions is set at low. - accrued payroll expense consists primarily of unpaid commissions. - substantive analytical procedures indicate unusual fluctuations in recurring payroll entries. - cutoff tests indicate a substantial amount of accrued payroll expense.
substantive analytical procedures indicate unusual fluctuations in recurring payroll entries.
payroll check/direct deposit record
summarizes the amount paid to the employee for services rendered. the amount paid is the gross pay less any deductions
what function includes the review and approval of employees' attendance and time information, monitoring of employee scheduling, productivity, and payroll cost variances?
supervision
what function includes the processing of employees' attendance and time information and coding of account distribution?
timekeeping
In meeting the control objective of safeguarding of assets, which department should be responsible for custody of unclaimed paychecks?
treasurer
In meeting the control objective of safeguarding of assets, which department should be responsible for the distribution of paychecks?
treasurer
W-4 and other deduction authorization forms
used by an employee to authorize taxes and other deductions from his or her pay (taxes, medical insurance, retirement contributions, and other benefits)
payroll master file
used to record all of the entity's records related to payroll, including information on each employee (name, Social Security number, pay rate, salary, and authorized deductions)
time sheet
used to record the hours worked by hourly employees, including the time the employee has started and stopped work
payroll register
used to summarize all payroll payments issued to employees. normally indicates employee's gross pay, deductions, and net pay
Effective control activities over the payroll function may include: - reconciliation of totals on job time sheets with job reports by employees responsible for those specific jobs. - preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department. - custody of rate authorization records by the supervisor of the payroll department. - verification of agreement of job time sheets with employee recorded hours by a payroll department employee.
verification of agreement of job time sheets with employee recorded hours by a payroll department employee.
During the year being audited, the Matthews Corporation changed from a system of recording time worked on time sheets to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this change: - a generalized computer audit program must be used. - the potential for payroll-related fraud is diminished. - without paper time sheets, part of the audit trail is altered. - transactions must be processed in batches.
without paper time sheets, part of the audit trail is altered.
