Chapter 12 - Auditing The Human Resource Management Process

Chapter 12 - Auditing the Human Resource Management Process
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
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
12-2
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
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 work 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 cards are approved by individual departmental supervisors
D. A separate payroll bank account is maintained on an imprest basis
12-3
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?
period
D. Review payroll liabilities for proper reporting as short- or long-term
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 a client'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
12-4
21. Which of the following is the best reason why an auditor should consider observing a
client'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
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
12-5
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 which 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 cards 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
12-6
29. Vouching selected items from the payroll register to employee time cards 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
making 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 cards 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
12-7
33. A substantive test of transactions to test the completeness assertion includes

A. Tracing a sample of time cards to the payroll register
B. Testing a sample of payroll checks for the presence of an authorized time card
C. Testing postings to the payroll register for a sample of payroll checks
D. Recomputing the accuracy of a sample of payroll checks
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?
period
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 internal auditors
12-8
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 cards with invalid job numbers.
D. Agreement of hours per clock cards with hours on time cards.
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
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 time-clock punch
cards
41. A CPA reviews a client'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
12-9
42. An auditor would consider internal control over a client'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
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
12-10
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 cards
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
12-11
50. An auditor most likely would assess control risk at the maximum 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 cards before and after period end to the weekly payroll report
and tracing the weekly payroll report to the general ledger to verify payroll transactions are
recorded in the proper period would gather evidence primarily for which assertion:
A. Classification.
B. Occurrence.
C. Cutoff.
D. Valuation.
12-12
54. Comparing amounts selected from the payroll account analysis for payroll accruals to
supporting documentation would gather evidence primarily for which assertion:
A. Completeness.
B. Existence.
C. Classification.
D. Presentation and disclosure.
Short Answer Questions
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 employees.
2) The document that summarizes all payroll payments issued to employees.
3) This document contains information on each 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.
12-13
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 client's 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?
12-14
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.
12-15
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 done 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. Several FASB statements collectively require specific disclosures regarding human
resources, which of course must be verified and audited by the CPA. What are those
disclosures?
12-16
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: Communications
AICPA BB: Industry
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 1
2. Employees must complete a W-4 form to authorize insurance deductions from his or her
pay.
FALSE
AICPA BB: Industry
Bloom's: Knowledge
Difficulty: Easy
3. The human resource function is responsible for managing the personnel needs of the
organization.
TRUE
AICPA BB: Industry
Bloom's: Knowledge
Difficulty: Easy
12-17
4. The payroll-processing function is responsible for paying employees for services and
benefits.
FALSE
AICPA BB: Industry
Bloom's: Knowledge
Difficulty: Easy
5. Proper segregation of duties is critical for the human resource management process.
TRUE
AICPA BB: Industry
Bloom's: Knowledge
Difficulty: Easy
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
Bloom's: Knowledge
Difficulty: Easy
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
Bloom's: Knowledge
Difficulty: Easy
12-18
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
Bloom's: Analysis
Difficulty: Easy
9. Tests of details of transactions are often conducted in conjunction with tests of controls.
TRUE
AICPA BB: Industry
Bloom's: Application
Difficulty: Easy
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
Bloom's: Knowledge
Difficulty: Easy
12-19
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
Bloom's: Analysis
Difficulty: Easy
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
Difficulty: Easy
12-20
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
Bloom's: Analysis
Difficulty: 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 work 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
Difficulty: Easy
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
Bloom's: Analysis
Difficulty: Easy
12-21
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 cards are approved by individual departmental supervisors
D. A separate payroll bank account is maintained on an imprest basis
AICPA BB: Critical Thinking
Difficulty: Easy
17. Which of the following could test the assertion of cutoff for payroll-related liabilities?
period
AICPA FN: Measurement
Difficulty: Easy
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
Difficulty: Easy
12-22
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
Bloom's: Knowledge
Difficulty: Easy
20. A surprise observation by an auditor of a client'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
Difficulty: Moderate
12-23
21. Which of the following is the best reason why an auditor should consider observing a
client'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
AICPA BB: Industry
Bloom's: Comprehension
12-24
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
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
12-25
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 which 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
Bloom's: Analysis
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 cards 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
12-26
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
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
Bloom's: Knowledge
29. Vouching selected items from the payroll register to employee time cards 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
12-27
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
Difficulty: 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
Bloom's: Analysis
12-28
32. Which of the following procedures would normally be performed by the auditor when
making 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 cards 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
33. A substantive test of transactions to test the completeness assertion includes

A. Tracing a sample of time cards to the payroll register
B. Testing a sample of payroll checks for the presence of an authorized time card
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
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
12-29
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?
period
AICPA BB: Industry
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 internal auditors
AICPA BB: Legal
12-30
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 cards with invalid job numbers.
D. Agreement of hours per clock cards with hours on time cards.
AICPA BB: Industry
Difficulty: 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
Difficulty: Hard
12-31
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 time-clock punch
cards
AICPA BB: Industry
Difficulty: Hard
41. A CPA reviews a client'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
Difficulty: Hard
12-32
42. An auditor would consider internal control over a client'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
Difficulty: Hard
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
Difficulty: Hard
12-33
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
Difficulty: Hard
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
Bloom's: Knowledge
Difficulty: Hard
12-34
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
Difficulty: 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
Difficulty: Hard
12-35
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 cards
D. Reconciliation of the unfinished job summary and production cost records
AICPA BB: Industry
Bloom's: Analysis
Difficulty: 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
Bloom's: Analysis
Difficulty: Hard
12-36
50. An auditor most likely would assess control risk at the maximum 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
Difficulty: Hard
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
Bloom's: Analysis
Difficulty: Hard
12-37
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
Bloom's: Analysis
Difficulty: Hard
53. Tracing a sample of time cards before and after period end to the weekly payroll report
and tracing the weekly payroll report to the general ledger to verify payroll transactions are
recorded in the proper period would gather evidence primarily for which assertion:
A. Classification.
B. Occurrence.
C. Cutoff.
D. Valuation.
AICPA BB: Industry
Difficulty: Hard
54. Comparing amounts selected from the payroll account analysis for payroll accruals to
supporting documentation would gather evidence primarily for which assertion:
A. Completeness.
B. Existence.
C. Classification.
D. Presentation and disclosure.
AICPA BB: Industry
Difficulty: Hard
12-38

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
Difficulty: Easy
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 employees.
2) The document that summarizes all payroll payments issued to employees.
3) This document contains information on each 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 card/time sheet;
2) Payroll Register;
3) Personnel records;
4) W-4;
5) Payroll Master File;
AICPA BB: Industry
Bloom's: Knowledge
Difficulty: Easy
12-39
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 client's 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:
12-40
12-41
AICPA BB: Industry
Difficulty: 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 is 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.
12-42
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 client's procedures
for changing employees' records and entering and removing employee numbers from the
payroll master file, and inspecting the time cards 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 client's verification procedures, review the payroll
register for unusual amounts, review the client'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 client'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 client's procedures for changing employees' records, processing time
cards, and recording payroll liabilities.
AICPA BB: Industry
Difficulty: Easy
12-43
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
Difficulty: Hard
12-44
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;
Difficulty: Easy
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 done 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
Bloom's: Analysis
12-45
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.
Share-based compensation is now required by FASB 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
Bloom's: Analysis
64. Several FASB statements collectively require specific disclosures regarding human
resources, which of course must be verified and audited by the CPA. What are those
disclosures?
FAS Nos. 87, 106, 132R and 158 all require significant disclosure regarding pension costs and
postretirement benefits. Also, there are requirements for profit-sharing plans and deferred
compensation arrangements (e.g., FAS Nos. 123R, 148).
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Knowledge
12-46

Chapter 12 - Auditing The Human Resource Management Process

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Chapter 12 - Auditing the Human Resource Management Process

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