The Human Resources Management and Payroll Cycle

7) Which of the following statements is regarding the

1) Which activity below is not performed by Human
use of incentives, commissions and false bonuses in the
Resources management (HRM)?
payroll system?
A) compensation
A) Using incentives, commissions, and bonuses requires
B) training
linking the payroll system and the information systems
C) discharge
of sales and other cycles in order to collect the data
D) recruitment and hiring
used to calculate bonuses.
B) Bonus/incentive schemes must be properly designed
2) Which department should have the sole ability to
with realistic, attainable goals that can be objectively
provide information to the AIS about hiring,
measured.
terminations, and pay rate changes?
C) Incentive schemes can result in undesirable behavior.
A) payroll D) All of the above are true.
B) timekeeping
C) production
8) Identify the item below that is a desired result of an
D) HRM
employee bonus systems. not

A) Employees may recommend unnecessary services to

3) Which of the following is generally a major source of
customers in order to exceed set sales quotas and earn
input to a payroll not system?
a bonus.
A) payroll rate changes B) Employees may look for ways to improve service.
B) time and attendance data C) Employees may analyze their work environment and
C) checks to insurance and benefits providers find ways to cut costs.
D) withholdings and deduction requests from D) Employees may work harder and may be more
employees motivated to exceed target goals to earn a bonus.

4) Who does the payroll system issue checks to? 9) ________ are used to transmit time and attendance
data directly to the payroll processing system.
A) employees and to banks participating in direct
deposit A) Badge readers
B) a company payroll bank account B) Electronic time clocks
C) government agencies C) Magnetic cards
D) All of the above are correct. D) none of the above

5) Experts estimate that, on average, the costs 10) Payroll deductions fall into the broad categories of
associated with replacing an employee are about ________ and ________.
________ the employee's annual salary.
A) payroll tax withholdings; voluntary deductions
A) one-quarter of B) unemployment; social security taxes
B) one-half of C) unemployment taxes; income taxes
C) one and one-half times D) voluntary deductions; income taxes
D) twice
11) Which of the following is classified as a voluntary
6) For recording time spent on specific work projects, deduction? not
manufacturing companies usually use a
A) pension plan contributions
A) job time ticket. B) social security withholdings
B) time card. C) insurance premiums
C) time clock. D) deductions for a charity organization
D) labor time card.
 B) payroll service bureau
12) Which type of payroll report contains information C) professional employer organization
such as the employees' gross pay, payroll deductions, D) paycheck distribution companies
and net pay in a multicolumn format?

A) payroll register 18) Which of the following is a benefit of using a payroll

B) deduction register service bureau or a professional fnot employer
C) employee earnings statement organization?
D) federal W-4 form
A) freeing up of computer resources
B) increased internal control
13) Which type of payroll report lists the voluntary C) reduced costs
deductions for each employee? D) wider range of benefits

A) payroll register
B) deduction register 19) Many companies offer their employees a "cafeteria"
C) earnings statement approach to voluntary benefits in which employees can
D) federal W-4 form pick and choose the benefits they want. This plan is
normally called a(n)

14) Which type of payroll report includes the details of A) elective plan.
the current paycheck and deductions as well as year-to- B) menu options benefit plan.
date totals? C) flexible benefit plan.
D) buffet plan.
A) payroll register
B) deduction register
C) earnings statement 20) Pay rate information should be stored in
D) federal W-4 form
A) employees' personnel files.
B) employee subsidiary ledgers.
15) An effective way an organization can eliminate C) the payroll master file.
paper paychecks while maintaining adequate D) electronic time cards.
accounting records is to

A) pay in cash only. 21) The payroll transaction file should contain
B) pay with money orders.
A) entries to add new hires.
C) use direct deposit.
B) time card data.
D) use Electronic Funds Transfer.
C) changes in tax rates.
D) All of the above are correct.
16) Companies that specialize in processing payroll are
22) The document that lists each employee's gross pay,
known as
payroll deductions, and net pay in a multicolumn format
A) paycheck distribution companies. is called
B) payroll service bureaus.
A) an employee earnings statement.
C) professional employer organizations.
B) the payroll register.
D) semi-governmental organizations.
C) a deduction register.
D) an employee time sheet summary.
17) Which organization provides payroll processing as
23) As each payroll transaction is processed, the system
well as other HRM services, like employee benefit
should also
design and administration?
A) allocate labor costs to appropriate general ledger
A) title companies
accounts
B) use cumulative totals generated from a payroll to
create a summary journal entry to be posted to the
general ledger
C) both A and B above
D) The HRM system should not perform either activity A
or B.
24) Direct deposit of employee paychecks is one way an
organization can improve efficiency and reduce payroll-
processing costs. Which statement regarding direct
deposit is false?
A) The cashier does not authorize the transfer of funds
from the organization's checking account to a payroll
checking account.
B) The cashier does not have to sign employee
paychecks.
C) Employees who are part of a direct deposit program
receive a copy of their paycheck indicating the amount
deposited.
D) Employees who are part of a direct deposit program
receive an earnings statement on payday rather than a
paper check.
25) The employer pays a portion of some payroll taxes
and employee benefits. Both the employee and
employer pay which benefit or tax listed below?
A) social security taxes
B) federal income taxes
C) state income taxes
D) none of the above
26) Identify the following item that should contribute to
the efficiency of a payroll system.
A) segregation of check distribution from payroll duties
B) prompt redeposit of unclaimed paychecks
C) a separate payroll bank account
D) direct deposit of checks
27) Which of the following documents would be likely
to yield the greatest cost saving by converting from
paper to electronic?
A) payroll register
B) earnings statement
C) deduction register
D) time card
34) A growing number of companies require some of
their upper level executives to spend time performing
job duties of rank-and-file employees. When the CEO of
Loews Hotels assumed the role of bellman, he
discovered
A) that the company's polyester uniform caused him to
sweat a great deal.
B) evidence of fraud in several hotel locations.
C) instances where company employees fell asleep on
the job.
D) situations where employees were not treating
customers properly.
35) Executive immersion experiences are important
because
A) CEOs often have no idea what rank-and-file
employees do on a daily basis.
B) employees who have positive attitudes contribute to
increasing company profits.
C) many employees feel upper management is out of
touch.
D) it is important for organizations to take social
responsibility seriously.
36) True or False: The HRM department should
immediately delete records of employees who quit to
prevent other employees from assuming their
identities.
37) Involving accountants in executive compensation
plans is often especially helpful
A) in keeping track of the executive compensation plan.
B) in identifying the appropriate metrics to use when
linking compensation to performance.
C) in reducing the total amount of compensation paid to
executives.
D) in suggesting the appropriate amount of
compensation executives should be paid.
38) Accountants can help executive compensation plan
boards
A) comply with legal and regulatory requirements.
B) by identifying the best ways to keep the details of
compensation plans out of the hands of external
parties.
C) avoid paying excessive amounts of "perks" to
executives.
D) distribute information regarding how well each
executive is performing their job.
39) Form 941
A) is filed each quarter to reconcile monthly tax
payments with total tax liability for the quarter.
B) is used in preparing labor-related reports for
government agencies.
C) is used for employee information and annual payroll
reports.
D) is used to document compliance with applicable
regulations.
40) A work for inventory report
A) is filed each quarter to reconcile monthly tax
payments with total tax liability for the quarter.
B) is used in preparing labor-related reports for
government agencies.
C) is used for employee information and annual payroll
reports.
D) is used to document compliance with applicable
regulations.
41) Professional employer organizations (PEOs) are
especially attractive to small and mid-sized businesses
for all of the following reasons except
A) reduced costs.
B) wider range of benefits.
C) freeing up computer resources.
D) improved service quality.
1) The sales department administrative assistant has
been assigning phone order sales to her brother-in-law,
a company sales person. Company policy is to pay
commissions only on orders directly received by sales
people, not on orders received over the phone. The
resulting fraudulent commission payments might best
have been prevented by requiring that
A) sales commission statements be supported by sales
order forms signed by the customer and approved by
the sales manager.
B) sales order forms be prenumbered and accounted for
by the sales department manager.
C) sales orders and commission statements be approved
by the accounting department.
D) disbursement vouchers for commission payments be
reviewed by the internal audit department and
compared to sales commission statements and sales
orders.
2) Because many HRM / payroll master databases
typically contain only descriptive information (such as
which employees possess which skills), many firms have
deployed ________ to more effectively leverage
employees knowledge and skills.
A) relational databases
B) knowledge management systems
C) Resources, Events, and Agents (REA) databases
D) cardinality systems
3) Identify the firm below where employees' knowledge
is likely to be more valuable than the value of a
company's tangible assets.
A) international airline
B) law firm
C) automobile manufacturer
D) railroad
4) True or False: Batch processing continues to be
widely used to process payroll transactions.
5) Knowledge management systems (KMS) permit
organizations to
A) store employee solutions to specific problems in a
shared database.
B) learn from individuals external to the organization.
C) perform background checks on potential employees.
D) gain competitive business intelligence on
competitors.
1) Why is a separate payroll account used to clear
payroll checks?
A) for internal control purposes, to help limit any
exposure to loss by the company
B) to make bank reconciliation easier
C) Banks don't like to commingle payroll and expense
checks.
D) All of the above are correct.
2) The following control can reduce the distribution of
fraudulent paychecks.
A) Have internal audit investigate unclaimed paychecks.
B) Allow department managers to investigate unclaimed
paychecks.
C) Immediately mark "void" across all unclaimed
paychecks.
D) Match up all paychecks with time cards.
3) When using electronic documents, ________
increase(s) the accuracy of data entry.
A) access controls
B) separation of duties
C) general controls
D) application controls
4) The most vital control in preventing unauthorized
changes to the payroll master file is
A) hiring totally honest people to access and make
changes to this file.
B) segregation of duties between the preparation of
paychecks and their distribution.
C) segregation of duties between the authorization of
changes and the physical handling of paychecks.
D) having the controller closely review and then
approve any changes to the master file.
5) Which of the following is a potential effect of
inaccurate data on employee time ca not rds?
A) increased labor expenses
B) erroneous labor expense reports
C) damaged employee morale
D) inaccurate calculation of overhead costs
6) Which control would be appropriate to address the
problem of inaccurate payroll most processing?
A) encryption
B) direct deposit
C) cross-footing of the payroll register
D) an imprest payroll checking account
7) The purpose of a general ledger payroll clearing
account is
A) to check the accuracy and completeness of payroll
recording and its allocation to cost centers.
B) to make the bank reconciliation easier.
C) to make sure that all employees are paid correctly
each week.
D) to prevent the cashier from having complete control
of the payroll cycle.
8) A "zero balance check" refers to which of the
following control procedures?
A) a type of batch total
B) cross-footing the payroll register
C) the payroll clearing account shows a zero balance
once all entries are posted
D) trial balance showing that debits equal credits
9) All of the following are controls that should be
implemented in a payroll process, exlept
A) supervisors distribute paychecks since they should
know all employees in their department.
B) someone independent of the payroll process should
reconcile the payroll bank account.
C) sequential numbering of paychecks and accounting
for the numbers.
D) restrict access to blank payroll checks and
documents.
10) What is the best control to reduce the risk of losing
payroll data?
A) passwords
B) physical security controls
C) backup and disaster recovery procedures
D) encryption
11) The threat of violation of employment laws relates
directly to which activity?
A) payroll processing
B) collecting employee time data
C) hiring and recruiting
D) all of the above
12) What is a potential threat to the specific activity of
payroll processing?
A) hiring unqualified employees
B) poor system performance
C) violations of employment laws
D) unauthorized changes to the payroll master file
13) The results of an internal audit finds that there is a
problem with inaccurate time data being entered into
the payroll system. What is an applicable control that
can help prevent this event from occurring in the
future?
 A) proper segregation of duties
B) automation of data collection
C) sound hiring procedures
D) review of appropriate performance metrics
c. Accounts payable verifies the accuracy of the payroll
register before transferring payroll funds to the general
checking accounting.
d. General ledger reconciles the labor distribution
summary and the payroll disbursement voucher.

14) Which of the following is a control that can be

2. The document that records the total amount of time
implemented to help prevent paychecks being issued to
spent on a production job is the
a "phantom" or "ghost" employee?

A) The cashier should sign all payroll checks. a. Time card

B) Sequentially prenumber all payroll checks. b. Job ticket
C) Use an imprest account to clear payroll checks. c. Labor distribution summary
D) Paychecks should be physically distributed by d. Personnel action form
someone who does not authorize time data or record
payroll. 3. Depreciation

a. Is calculated by the department that uses the fixed

15) The average annual management salary at Iyov asset
Management is $80,000. If the average turnover rate b. Allocated the cost of the asset over its useful life
for employees is ten per year, what is the approximate c. Is recorded weekly
average annual cost of turnover? d. Results in book value approximating fair market value

A) $80,000 4. In the payroll subsystem, which function should

B) $400,000 distribute paychecks? a. Personnel
C) $800,000 b. Timekeeping
D) $1,200,000 c. Paymaster
16) Which of the following will limit a firm's potential d. Payroll
loss exposure from paycheck forgery? 5. Payroll uses time card data to do all of the following
A) segregation of check distribution from payroll duties except
B) prompt redeposit of unclaimed paychecks a. Prepare the payroll register
C) a separate payroll bank account b. Update employee payroll records
c. Prepare the labor distribution summary
17) Which of the following is a control that addresses d. Prepare paychecks
the threat of unauthorized changes to the payroll
master file? 6. The document that captures the total amount of time
that individual workers spend on each production job is
A) field checks called a
B) batch totals
C) segregation of duties a. Time card
D) sound hiring procedures b. job ticket
c. Personnel action form
1. Which internal control is not an important part of the d. labor distribution form
payroll system?
7. Personnel action forms are used to do all of the
a. Supervisors verify the accuracy of employee time following except
cards.
a. Activate new employees
b. Paychecks are distributed by an independent
b. Terminate employees
paymaster.
c. Record hours worked
d. Change pay rates
8. The fixed asset system performs all of the following
except
a. Determines the need for new assets
b. Maintains depreciation records
c. Records retirement and disposal of assets
d. Tracks the physical location of fixed assets
9. The personnel action form provides authorization
control by
a. Preventing paychecks for terminated employees
b. Verifying pay rates for employees
c. Informing payroll of new hires
d. All of the above
10. Where does the responsibility lie for reconciling the
labor distribution summary and the payroll disbursement
voucher?
a. cash disbursement
b. cost accounting
c. personnel
d. general ledger
11.
a. formal analysis of the purchase request
b. review of the assumptions used in the capital
budgeting model
c. development of an economic order quantity model
d. estimates of anticipated cost savings
12. The payroll department performs all of the following
except
a. prepare paychecks
b. transfer adequate funds to the payroll imprest
account
c. updates employees paychecks
d. prepares the payroll register
13. Which transaction is not processed in the Fixed
Asset System?
a. purchase of building
b. improvement of equipment
c. purchase of raw materials
d. sale of company van
14. Depreciation
a. assures the assets are reported at fair market value
b. is discretionary for many firms
c. allocates the cost of an asset over its useful life
d. is the responsibility of the department using the asset
15. Payroll checks are typically drawn on
a. the regular checking account
b. payroll imprest account
c. a wage payable account
d. petty cash
16. The fixed asset system is similar to expenditure cycle
except
a. fixed asset transaction are non-routine and require
special authorization and controls b. fixed asset are
capitalized, not expensed
c. both a and b
d. none of the above
17. The personnel action form provides authorization
control by
a. preventing paychecks for terminated employees
b. verifying pay rates for employees
c. informing payroll of new hires
d. all of the above
18. Which of the following statement is not true?
a. Routine payroll processing begins with the
submission of time cards.
b. Payroll clerks must verify the hours reported on the
time cards.
c. Payroll reconciles personnel action forms with time
cards and prepares paychecks.
d. Cash disbursements signs paychecks and forwards
them to the paymaster for distribution.
19. The document that records the total amount of time
spent on a production job is the a. time card
b. job ticket
c. labor distribution summary
d. personnel action form
20. Cost accounting updates work-in-process accounts
from
a. time cards
b. the labor distribution summary
c. job tickets
d. personnel action forms
d.
Value stream push
accounting manufacturing
makes no b.
distinction zero defects
between direct c.
costs and indirect reduced setup
costs. time and small
lot sizes
ANS: B PTS: 1 d.
28. reliable vendors
Characteristics 1. Which one of the following functions is responsible
for submitting employee pay rate changes?

of lean
a. payroll
b. cash disbursements
c. personnel
d. Treasurer

manufacturing 2. Development of an economic order quantity (EOQ)

model is not a control in the fixed asset system.

include all of the a. True

b. False

following except 3. Which of the following is not a technology used to

capture accurate employee timekeeping data in real
time?

a. a. proximity cards
b. biometric time clocks
c. GPS tracking
d. magnetic swipe ID cards Hide Feedback
4. The primary advantage of payroll outsourcing is cost c. Distribution of pay checks should be performed by
savings. someone who is not involved in the other payroll
a. True functions.
b. False d. Unclaimed paychecks should be immediately
returned for redeposit.
5. Supervision is not required when employees are
clocking on or off the job.
4. Which of the following statements about the payroll
a. True
and personnel cycle is correct?
b. False
 There are three classes of transactions within the
6. Repair of equipment is one transaction that is not payroll cycle – salaried employees, hourly
processed in the fixed asset system. employees, and commissioned employees.
a. True  Transactions are less significant than related
b. False balance sheet accounts.
 Internal controls over payroll are effective for
7. The purchase of raw materials is processed in the almost all companies, even small ones.
fixed asset system. a. No No Yes
a. True b. Yes No Yes
b. False c. Yes Yes No
d. No Yes No
8. Which department performs the formal record
keeping function for fixed assets?
a. fixed assets 5. Which of the following types of audit procedures is
b. accounts payable ordinarily emphasized the least when auditing payroll?
c. cost accounting a. Tests of controls
d. cash disbursements b. Tests of transactions
c. Analytical procedures
ARENS d. Tests of details of balances

1. The payroll cycle consists of how many classes of 6. A form issued for each employee summarizing the
transactions? earnings and income tax deductions for the calendar
a. one year is the:
b. two a. rate authorization form.
c. three b. summary payroll report.
d. four c. payroll master file.
d. W-2 form.
2. Which of the following statements is false?
a. The payroll cycle consists of one class of transactions. 7. The payroll and personnel cycle begins with which of
b. Balance sheet accounts related to payroll are the following events?
generally more significant than related transactions. a. Interviewing job candidates.
c. Internal controls over payroll are effective for most b. Hiring a new employee.
companies. c. Existing employees submitting requests for payment
d. Small companies usually have effective controls over for work performed.
payroll. d. Issuance of paychecks.

3. Which of the following is not correct regarding
controls over the processing of payroll?
a. The person authorized to sign paychecks should not
be otherwise involved in the preparation of the payroll.
b. A check-signing machine should not be used to
replace a manual signature.
8. Most systems of internal control for payroll are:
a. loosely structured but well controlled.
b. loosely structured and loosely controlled.
c. highly structured and well controlled.
d. highly structured but loosely controlled.
9. The payroll and personnel cycle ends with which of
the following events? 15. To minimize the opportunity for fraud, unclaimed
a. Interviewing job candidates. salary checks should be:
b. Hiring a new employee. a. deposited in a special bank account.
c. Existing employees submitting requests for payment b. kept in the payroll department.
for work performed. c. left with the employee’s supervisor.
d. Issuance of paychecks. d. held for the employee in the personnel department.

10. The retirement savings deductions, number of
exemptions for withholding allowances, union dues
deductions, and other deductions are found on what
form?
a. Time cards
b. Deduction authorization form
c. Rate authorization form
d. Job time ticket
16. Which of the following type of employee typically
does not complete time cards?
a. Hourly employees.
b. Salaried employees.
c. All employees must complete time cards.
d. Time cards are typically completed by salaried
employees, but may also be completed by hourly
employees.

11. A ____________ includes all payroll transactions 17. When examining payroll transactions, an auditor is
processed by the accounting system for a given period primarily concerned with the possibility of:
of time. a. incorrect summaries of employee time records.
a. payroll journal b. overpayments and unauthorized payments.
b. payroll transaction file c. under withholding of amounts required to be
c. time report withheld.
d. payroll summary d. posting of gross payroll amounts to incorrect salary
expense accounts.
12. An imprest payroll account ordinarily carries a
balance that is: 18. For which of the following functions is the use of
a. larger than the other company bank accounts. prenumbered documents least important?
b. larger than the amount of the periodic payroll a. Use of prenumbered time cards in the payroll
disbursement. function.
c. small. b. Use of prenumbered sales invoices in the sales
d. below zero. function.
c. Use of prenumbered receiving reports in the
13. Records that include data such as employment date, acquisitions function.
performance ratings and pay rates are the: d. Use of prenumbered deposit slips in the cash receipts
a. personnel records. function.
b. employee screening forms.
c. summary payroll reports. 19. Which of the following statements about payroll
d. employee folders. checks is correct?
a. After a payroll check is cashed and returned to the
employee it is referred to as a depository check.
14. In audits of companies in which payroll is a b. As soon as a payroll check is signed by an authorized
significant portion of inventory, the improper account employee, it becomes an asset.
classification of payroll can: c. Payroll checks are written for the amount of gross pay
Increase asset valuations. Decrease asset valuations. due employees.
a. Yes Yes d. It is rare that payroll checks are direct-deposited into
b. No No employees’ bank accounts.
c. Yes No
d. No Yes
20. Which of the following is not an advantage of using
an imprest payroll account?
a. It limits the company’s exposure to payroll fraud.
b. It allows the delegation of payroll check-signing
duties.
c. Companies have fewer banking transactions.
d. It facilitates cash management.
21. No individual with access to time cards, payroll
records, or checks should also be permitted access to:
a. the computer.
b. job time tickets.
c. personnel records.
d. the canceled check file.
22. The file for recording each payroll transaction for
each employee and maintaining total employee wages
paid for the year to date is the:
a. payroll master file.
b. summary payroll report.
c. payroll journal.
d. job time ticket.
23. Many companies use outside payroll services to
process payroll. Auditors _____ rely on the internal
controls of these outside payroll services.
a. must
b. cannot
c. rarely
d. can often
24. The total of the individual employee earnings in the
payroll master file equals the total:
a. balance of gross payroll in general ledger accounts.
b. of the checks drawn to employees for payroll.
c. gross payroll plus the total contributed by the
employer for payroll taxes.
d. gross pay for the current week’s payroll.
25. If auditors rely on the internal controls of an outside
payroll service provider, they will receive a(n) _____
report.
a. reliance
b. SAS 70
c. outsourcer’s
d. quality assurance
26. Most companies use an imprest account to pay the
payroll. Which of the following is not an advantage of
such an account?
a. It facilitates cash management.
b. It limits the company’s exposure to payroll fraud.
c. It allows the delegation of payroll check-signing
duties.
d. It eliminates the requirement of keeping a minimum
balance in a checking account.
27. The careful and timely preparation of all payroll tax
returns is necessary to avoid penalties and criminal
charges. The most important control in the timely
preparation of these returns is:
a. computerized preparation of 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 Gaant chart.
28. Which of the following types of audit tests is usually
emphasized due to a lack of independent third-party
evidence related to payroll transactions?
a. Analytical procedures
b. Tests of details of balances
c. Tests of controls
d. Each of the above is emphasized.
29. The most important means of verifying account
balances in the payroll and personnel cycle are:
a. tests of controls and tests of transactions.
b. analytical procedures and tests of controls.
c. analytical procedures and tests of transactions.
d. test of controls and tests of details of balances.
30. Tests of payroll are usually not extensive because:
 employees will likely complain if underpaid.
 payroll transactions are uniform and
uncomplicated.
 payroll transactions are subject to audit by federal
and state governments.
a. Yes Yes Yes
b. No Yes No
c. No No Yes
d. Yes No No
31. If an auditor wishes to test the completeness
transaction-related audit objective in the payroll and
personnel cycle, which of the following would be a
reasonable test of control?
a. Account for a sequence of payroll checks.
b. Examine procedures manual and observe the
recording of transactions.
c. Examine payroll records for indication of pay rate
approval.
d. Reconcile the payroll bank account.
32. Which of the following is a substantive test of
transactions?
a. Review personnel policies.
b. Account for a sequence of payroll checks.
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 IDs.
33. As a part of the auditor’s responsibility for
____________, the auditor should review the
preparation of at least one of each type of payroll tax
form the client is responsible for filing.
a. doing tests of controls.
b. doing tests of balances.
c. doing tests of transactions.
d. understanding the client’s internal controls.
34. Which of the following is not an assertion related to
the classes of transactions underlying the payroll cycle?
a. Classification
b. Accuracy
c. Existence
d. Occurrence
35. Which of the following circumstances would not
cause an auditor to extend payroll procedures
considerably?
a. Payroll significantly affects inventory valuation.
b. There is a possibility of material fraudulent payroll
transactions.
c. There is a weak internal control structure.
d. There is a lack of independent third-party evidence,
such as confirmations.
36. When labor is a material factor in inventory
valuation, the auditor should place special emphasis on
testing the internal controls concerning:
a. fictitious employees.
b. authorization of wage rates.
c. proper valuation and allocation of balances.
d. completeness of recorded transactions.
37. Which of the following is not a procedure that can
be performed on canceled checks in an effort to detect
defalcations?
a. Compare the endorsements on checks with
authorized signatures.
b. Scan endorsements for unusual or recurring second
endorsements.
c. Examine voided checks to be sure they haven’t been
used.
d. Examine the payroll records in subsequent periods to
determine that terminated employees are no longer
being paid.
38. What potential problems may arise when an auditor
considers the relationship between payroll and
inventory valuation?
 Improper account classification.
 Improper allocation to jobs or processes.
 Non-manufacturing payroll expenses charged to
inventory.
a. Yes Yes Yes
b. No Yes No
c. No No Yes
d. Yes No No
39. The primary concern in testing payroll-related
liabilities is to make sure that:
a. accruals are properly valued.
b. transactions are recorded in the proper period.
c. there are no understated or omitted accruals.
d. the accruals are not overstated.
40. Which department should be authorized to add and
delete employees from the payroll or change pay rates
and deductions?
a. The supervising department.
b. The accounting department.
c. The human resources department.
d. The treasurer’s department.
41. Paychecks should be distributed by someone:
 independent of the timekeeping function.
 who reports to the company controller.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
42. 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 in the minutes of the board.
d. paid in the subsequent period.
43. Which of the following errors gives the auditor the
least concern in auditing payroll transactions?
a. An error that indicates possible fraud.
b. Computational errors in formulas when a
computerized system is used.
c. Classification errors in charging labor to inventory and
job cost accounts.
d. Each of the above gives the auditor significant
concern.
44. The usual audit test for a public company’s officer
compensation is to obtain the authorized salary of each
officer from the minutes of the board of directors and
compare it with:
 the SEC’s 10-K report.
 the company’s federal income tax return.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
45. Auditors may extend their tests of payroll in which
of the following circumstances?
 Payroll materially affects the valuation of inventory.
 The auditor is concerned there may be nonexistent
employees on the payroll.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
46. To check the accuracy of hours worked, an auditor
would ordinarily compare clock cards with:
a. personnel records.
b. job time tickets.
c. labor variance reports.
d. time recorded in the payroll register.
47. A surprise payroll payoff in which employees must
pick-up and sign for their pay check is one means of:
a. identifying employees who do not have proper work
credentials.
b. establishing a tightly controlled, fraud-free work
environment .
c. testing for nonexistent employees.
d. identifying employees who have not submitted
proper W-2 forms..
48. 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 tax
returns for agreement with 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.
49. Inherent risk is typically _____ for balance-related
audit objectives as they relate to payroll.
a. not considered
b. low
c. moderate
d. high
50. It would be appropriate for the payroll department
to be responsible for which of the following functions?
a. Approval of employee time records.
b. Maintain records of employment, firings, and raises.
c. Temporary retention of unclaimed employee
paychecks.
d. Preparation of governmental reports as to
employees’ earnings and withholding taxes.
51. What are the two major balance-related audit
objectives in testing payroll liabilities?
a. Accuracy and detail tie-in
b. Completeness and valuation
c. Completeness and rights and obligations
d. Accuracy and cutoff
52. Which of the following best describes proper
internal control over payroll?
a. The preparation of the payroll must be under the
control of the personnel department.
b. The confidentiality of employee payroll data should
be carefully protected to prevent fraud.
c. The duties of hiring, payroll computation, and
payment to employees should be segregated.
d. The payment of cash to employees should be
replaced with payment by checks.
53. The periodic payment from the general cash
account to the payroll account for net payroll should be
tested for at least one payroll period. The primary audit
procedure is a(n):
a. analytical review procedure that net pay is
reasonable.
b. test of controls that an imprest account is being used
for payroll.
c. substantive test that the correct amount was
transferred for this test period.
d. test of transactions that the check is prepared for the
proper amount and deposited before payroll checks are
handed out.
54. Once the auditor determines that the company’s
policy for accruing wages is consistent with prior years,
the appropriate audit procedure to test for accuracy
and cutoff is:
a. recalculating the client’s accrual.
b. performing extensive tests of controls.
c. performing extensive tests of details.
d. none of the above.
55. In auditing payroll, which of the following
procedures will ordinarily require the least amount of
auditor time under normal circumstances?
a. Tests of controls.
b. Substantive tests of transactions.
c. Analytical procedures.
d. Tests of details of balances.
56. A weak internal control system allows a department
supervisor to “clock in” for a fictitious employee and
then approve the employee’s time card at the end of
the pay period. This fraudwould be detected if other
controls were in place, such as having an independent
party:
a. distribute paychecks.
b. recompute hours worked from time cards.
c. foot the payroll journal and trace postings to the
general ledger and the payroll master file.
d. compare the date of the recorded check in the
payroll journal with the date on the canceled checks
and time cards.
57. The most 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 preceding periods.
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.
58. Effective internal accounting control over unclaimed
payroll checks that are kept by the company would
include accounting department procedures that require:
a. effective cancellation and stop payment orders for
checks representing unclaimed wages.
b. preparation of a list of unclaimed wages on a periodic
basis.
c. accounting for all unclaimed wages in a current
liability account.
d. periodic accounting for the actual checks
representing unclaimed wages.
59. Which of the following internal controls in the
payroll and personnel cycle is generally least important
to an auditor?
a. Formal methods of informing payroll personnel of
new employees.
b. Reconciliation of total payroll expense in the general
ledger with the payroll tax returns
and the W-2 forms.
c. Authorization of changes in pay rates.
d. Notice of the termination date of employees no
longer working for the company.
60. Which of the following statements is correct?
a. The overhead charged to inventory at the balance
sheet date can be understated if the salaries of
administrative personnel are inadvertently or
intentionally charged to indirect manufacturing
overhead.
b. When jobs are billed on a cost-plus basis, revenue
and total expenses are both affected by charging labor
to incorrect jobs.
c. Payroll is a significant portion of inventory for retail
and service industry companies.
d. The valuation of inventory is affected if the direct
labor cost of individual employees is improperly
charged to the wrong job or process.
61. Which of the following is an effective internal
accounting control used to prove that production
department employees are properly validating payroll
time cards at a time-recording station?
a. Internal auditors should make observations of
distribution of paychecks on a surprise basis.
b. Time cards should be carefully inspected by those
persons who distribute pay envelopes to the
employees.
c. One person should be responsible for maintaining
records of employee time for which salary payment is
not to be made.
d. Daily reports showing time charged to jobs should be
approved by the supervisor and compared to the total
hours worked on the employee time cards.
62. 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
tax form.
c. confirm the amount with employees.
d. compare the recorded accrued wages with the
amount approved in the minutes of the
Board.
Match seven of the terms for documents and records
(a-k) used in the payroll and personnel cycle with the
descriptions provided below (1-7):
a. Personnel records
b. Deduction authorization form
c. Rate authorization form
d. Time card
e. Job time ticket
f. Summary payroll report
g. Payroll check
h. W-2 form
i. Payroll tax returns
j. Payroll journal
k. Payroll master file
1. A file used for recording payroll transactions for each
employee and maintaining total employee wages paid
for the year to date.
2. A document indicating the time the hourly employee
stated and stopped working.
3. A document written in exchange for services received
from an employee.
4. Forms submitted to local, state, and federal units of
government for the payment of withheld taxes and the
employer’s tax.
5. A form authorizing payroll deductions, including the
number of exemptions for withholding of income taxes,
U.S. savings bonds, and union dues.
6. A form used to authorize the amount of pay.
7. Records including date of employment, personnel
investigations, rates of pay, etc.
TRUE OR FALSE
1. Payroll checks do not need to be distributed by
someone independent of the payroll and
timekeeping functions.
2. Hiring personnel initiates the payroll and personnel
cycle.
3. Firing personnel terminates the payroll and
personnel cycle.
4. Paying employees for their services ends the payroll
and personnel cycle.
5. Auditors seldom expect to find misstatements when
testing payroll transactions.
6. Most companies, with the exception of small ones,
have effective controls over the payroll cycle.
7. The nature, extent, and timing of substantive tests
of payroll transactions vary depending, in part, on
assessed control risk.
8. Inherent risk for payroll-related liabilities is normally
higher than for accounts receivable.
9. While most cycles include at least two classes of
transactions, the payroll and personnel cycle
includes only one class of transactions.
10. “Physical control over assets” is not a type of
control that is applicable to the payroll cycle.
11. The deduction authorization form authorizes the
rate of pay and the deductions for taxes, dues, etc.
12. When auditing the payroll and personnel cycle,
tests of controls are routinely performed.
13. When labor is a material part of inventory, auditors
should emphasize tests of details of balances.
14. A signed payroll check that has not been cashed is 29. Internal control over payroll is normally highly
considered an asset to the company that issued the structured and well controlled.
check. 30. Supervisory personnel in the functional department
15. For proper internal control, the person(s) responsible for evaluating employees should be
responsible for signing the payroll checks should not responsible for authorizing the addition and
have access to timekeeping or be otherwise deletion of employees from the payroll.
involved in the preparation of payroll. 31. Despite the large dollar amounts involved in the
16. The job time ticket indicates the starting and payroll and personnel cycle, auditors typically spend
stopping times of work during the pay period. less time auditing this cycle than others.
17. The use of an imprest payroll account prevents 32. It is generally more difficult for the auditor to detect
losses from payment of unauthorized payroll to no payment of fraudulent hours than payment of
more than the balance in the imprest account. fictitious employees.
18. Imprest accounts usually carry a significant balance. 33. One common substantive test of payroll
19. There is very little opportunity for confirmation transactions for the existence objective is to
from third parties of balance sheet accounts related compare canceled payroll checks with personnel
to the payroll and personnel cycle. records.
20. When a client uses an outside payroll service for 34. The audit procedure “Recompute hours worked
processing payroll, professional auditing standards from time cards” is normally performed when
permit the auditor to rely on the internal controls of 35. In most audits, payroll tax expense is not tested
the service organization if the service organization’s because the audit risk does not justify the time
auditor has issued a favorable report on the internal required to perform the tests.
controls of the service organization.
21. When a client uses an outside payroll service for
processing payroll, professional auditing standards
require the auditor to rely on the internal controls
of the service organization if the service
organization’s auditor has issued a favorable report
on internal controls.
22. For good internal control, the payroll function
should be independent of the personnel
department.
23. If an audit client is a public company, the
understanding of internal control must be sufficient
to identify opportunities to increase audit
effectiveness.
24. Tests of controls and tests of details of balances are
the auditor’s most important means of verifying
account balances in the payroll and personnel cycle.
25. Because of the cycle’s pervasive nature, audit tests
of the payroll cycle are usually extensive.
26. The primary purpose of a surprise payroll payoff is
to detect employees who have reported more time
than was actually worked (fraudulent hours).
27. The two major balance-related audit objectives in
testing payroll liabilities are accuracy and cutoff.
28. Because of confidentiality requirements and
potential losses of payroll funds, outside service
center systems are rarely used by companies for
payroll-related functions.