Chap 15 - Audit of the Human Resources and Payroll Cycle Flashcards
Explain the relationship between the human resources and payroll cycle and inventory valuation.
A.
In companies where payroll is a significant portion of inventory, as in manufacturing and construction companies, the improper account classification of payroll can significantly affect asset valuation for accounts such as work in process, finished goods, and construction in process. Similarly, if the indirect labour cost of individual employees is charged to specific jobs or processes, the valuation of inventory is affected if labour is improperly classified. When some jobs are billed on a cost plus basis, revenue and the valuation of inventory are both affected by improperly classifying labour to jobs.
.B.
In companies where payroll is a significant portion of inventory, as in manufacturing and construction companies, the improper account classification of payroll does not have an effect over accounts such as work in process, finished goods, or construction in process. Any indirect labour in the manufacturing or construction company is also automatically classified to a job based on percentage of revenue received on the goods. When jobs are billed on a cost plus basis, revenue and the valuation of inventory do not affect job costs.
C.
In companies where payroll is an insignificant portion of inventory, as in a manufacturing company, improperly classifying payroll does little to affect the asset valuation for inventory accounts, such as work in process, finished goods, or construction in process. Similarly, if the indirect labour costs of individual employees is not charged to specific manufacturing jobs or processes, the valuation of the inventory is significantly affected. Direct and indirect labour costs are always classified to jobs that require being billed on a cost plus basis.
D.
None of the above are correct.
A
Explain what is meant by an ‘imprest payroll account’. What is its purpose as a control over payroll?
A.
An imprest payroll account is a separate payroll bank account with a fluctuating balance. The balance of the imprest account, however, must be consistently significant enough to fund payroll on an ongoing basis. When a period’s payroll is paid, a cheque for the exact amount of the total net payroll is transferred from the general account to the imprest account. The purpose and advantage of an imprest payroll account is to ensure that the company has sufficient funds to pay its employees at all times.
B.
An imprest payroll account is a separate payroll bank account in which a constant balance, either zero or small, is maintained. When a period’s payroll is paid, a cheque for the exact amount of the total net payroll is transferred from the general account to the imprest account. The purpose and advantage of an imprest payroll account is that it limits the company’s exposure to payroll fraud by limiting the amount that may be misappropriated.
C.
An imprest payroll account is one in which cheques in excess of a material amount (such as $10 000) may be written. Such accounts typically require dual signatories (by authorized members of management) on each cheque written against the account. The purpose and advantage of an imprest payroll account is to limit the company’s exposure to payroll fraud by limiting the amount that may be misappropriated.
D.
None of the above is correct
B
the definition of a payroll master file and explain the purpose
A.
The payroll master file is a detailed report including such data as the date of employment or termination, performance evaluations, authorized deductions (health insurance, union dues, etc), and pay rate per employee. The purpose of this record is to maintain a breakout of employees gross pay rates, bonuses, and raises on a monthly basis. If the employee is salaried, the amount shown is a monthly lump amount to ensure the company can maintain the cash required for the salary expense accounts.
B.
The payroll master file is a breakout of salaried and non-salaried employees’ weekly income indicating a breakout for regular time, overtime, vacation time, or sick time. The amounts are broken out by gross pay, health insurance, and union dues. The purpose of this record is to provide a breakout of the expense accounts by employee so year end TD-1 work is an easier process.
C.
The payroll master file is maintained for each employee indicating the gross pay for each payment period, deductions from the gross pay, the net pay, the cheque number, and the date. The purpose of this record is to provide detailed information for federal and provincial income tax purposes and to serve as the final record of what each employee was actually paid.
D.
The payroll master file is a list of employees who do not use direct deposit for their payroll. It lists gross total monthly payroll and breakout of taxes remitted for federal and provincial income tax. The purpose of this record is to ensure that companies keep detailed records of non-direct deposit employees as proof of the expenses.
C
the definition of a TD-1 form and explain the purpose.
A.
The TD-1 form is required to be filled out for each new employee as part of the payroll process. It provides necessary information to the payroll department to know how many exemptions an employee is allowed to claim for payroll withholding.
B.
The TD-1 form is a year-end summary the client provides to the federal and provincial governments of the total amount of taxes withheld from every employee. It is a way for the government to match monthly payroll returns to the year end summary form and allow the company to “fix” any inconsistencies as needed.
C.
The TD-1 form is filled in by each employee to indicate the level of deductions available, which affects the amount of income tax that the employer deducts.
D.
The TD-1 form is a monthly breakout, by employee for the amount of payroll taxes that must be remitted to the federal and provincial income tax departments. It is a monthly filing the company must adhere to if they maintain more than 10 employees during the year.
C
the definition of a T4 payroll summary return and explain the purpose.
A.
A T4 payroll summary is the form required by and submitted to the federal government to reconcile the payment of withheld taxes and the employer’s portion of benefits with the amount actually owed.
B.
A T4 payroll summary is a required form that is submitted to the provincial and federal governments that lists the employees’ gross pay. The pay is broken into regular, vacation, sick, and holiday time so the government can determine the amount of taxes and provincial and federal unemployment compensation taxes that are due from the company.
C.
A T4 payroll summary is a form sent to the provincial and federal governments on a monthly basis providing them a reconciliation of the company’s total payroll expense by employee to know the amount of taxes remitted and provided to each government.
D.
None of the above is correct.
A
Explain why the percentage of total audit time in the cycle devoted to performing tests of controls may be more for the human resources and payroll cycle than for the sales and collection cycle.
A.
The percentage of total audit time in the cycle devoted to performing tests of controls is usually far greater in the human resources and payroll cycle than for the sales and collection cycle because payroll accounts include accounts such as insurance expense, accrued payroll taxes, and commission expense. In contrast, most accounts related to the sales and collection cycle are relatively small, except for the sales account, so they are considered immaterial.
B.
The percentage of total audit time in the cycle devoted to performing tests of controls is usually far greater in the human resources and payroll cycle than for the sales and collection cycle because there is relatively little independent third party evidence to verify the related payroll accounts. In contrast, the accounts related to the sales and collection cycle can usually be verified for the most part by confirmations from customers. In addition, in the sales and collection cycle, verification of the valuation of receivables and sales cut-off tests are important and time consuming.
.C.
The percentage of total audit time in the cycle devoted to performing tests of controls is usually far greater in the human resources and payroll cycle than for the sales and collection cycle because audit procedures dictate that the accounts related to the human resources and payroll cycle must be individually audited and tied-out. In contrast, the accounts related to the sales and collection cycle can be verified through taking random samples from each account to determine each account’s accuracy.
D.
The percentage of total audit time in the cycle devoted to performing tests of controls is usually far greater in the human resources and payroll cycle than for the sales and collection cycle because the accounts related, whether directly or indirectly, must be classified to each job. In contrast, the sales and collection cycle does not require as much audit time because performing a sales cut-off test is a simple task to verify accounts and transactions.
B
List the types of authorizations in the human resources and payroll cycle, and state the type of misstatement that is increased when each authorization is lacking.
A.
Deduction authorization - without which the wrong amount (or no deduction) may be deducted from the employee’s paycheque.
B.
Rate authorization - without which the employee may be getting paid at the wrong rate.
C.
Commission rate authorization - without which the salespeople might be improperly compensated for their sales efforts.
D.
Authorization to terminate an employee - without which the auditor might miscount the number of employees in the workforce.
E.
Authorization to hire a new employee - without which fictitious or unqualified personnel may be added to the payroll.
F.
Check writing authorization - without which the auditor cannot verify the signature for payroll cheques.
G.
Overtime approval authorization - without which the auditor cannot verify the employee is getting paid at the correct rate.
H.
Timecard authorization - without which the employee may be getting paid for the wrong quantity of hours worked.
I.
Payroll cheque authorization or e-payment - without which unauthorized funds may be paid out.
J.
Identification authorization - without which the auditor cannot verify the reliability of the employees’ information in the computer system.
A, B, C, E, H, I
In auditing payroll withholding and payroll benefits expense, explain why emphasis should normally be on evaluating the adequacy of the preparation procedures for employee withholding and benefits remittance forms rather than on the employee withholding and benefits liability. Explain the effect that inadequate preparation procedures will have on the remainder of the audit.
A.
The emphasis should normally be on evaluating the adequacy of the employee withholding and benefit remittance forms preparation procedures rather than the employee withholding and benefits liability, because a major reason for misstatements in the liability account is incorrect preparation of the forms in the past. If the preparation procedures are inadequate, and the amounts do not appear reasonable, then the auditor should expand his or her work and recompute the withholding and expense amounts to determine that the proper amount has been accrued.
B
The emphasis should normally be on evaluating the adequacy of the employee withholding and benefit remittance forms preparation procedures rather than the employee withholding and benefits liability because the preparation procedures are what determines the liability account. If the preparation procedures are inadequate, then the auditor should match the liability amounts against the past two previous years liability amounts to ensure consistency. If there are inconsistencies, the auditor should look into other factors that could affect any changes.
C.
The emphasis should normally be on evaluating the adequacy of the employee withholding and benefit remittance forms preparation procedures rather than the employee withholding and benefits liability because the liability account is simply based on the payroll tax forms which are prepared and reviewed monthly. If the preparation procedures are inadequate, then the auditor should review each prepared payroll tax forms, trace the amounts to the general ledger, and match it back to the accrued withholdings accounts.
A
A factory foreman at Steblecki Corporation discharged an hourly worker but did not notify the human resources department. The foreman then forged the worker’s signature on time cards and work tickets and, when giving out the cheques, diverted the payroll cheques drawn from the discharged worker to his own use. The most effective procedure for preventing this activity is to
1.
have someone other than persons who prepare or distribute the payroll obtain custody of unclaimed payroll cheques.
2.
require written authorization for all employees added to or removed from the payroll.
3.
from time to time, rotate persons distributing the payroll.
4.
have a paymaster who has no other payroll responsibility but to distribute the payroll cheques.
4
An auditor found that employee time records in one department are not properly approved by the supervisor. Which of the following could result?
1.
Duplicate paycheques might be issued.
2.
Payroll cheques might not be distributed to the appropriate employees.
3.
Employees might be paid for hours they did not work.
4.
The wrong hourly rate could be used to calculate gross pay.
3
Evaluate the following comment by an auditor:
”My job is to determine whether the payroll records are fairly stated in accordance with generally accepted accounting principles, not to find out whether client is following proper hiring and termination procedures. When I conduct an audit of payroll, I keep out of the personnel department and stick to the time cards, journals, and payroll cheques. I don’t care who the client hires or who it fires, as long as it properly pays the employees it has.”
A.
The auditor should be concerned with whether the personnel department is following the proper hiring and termination procedures to ensure that there are adequate safeguards against hiring and retaining incompetent and untrustworthy people.
.B.
Failure to follow proper termination procedures could lead to fraudulent payments for work not performed.
C.
It is necessary for the auditor to assure himself or herself that the client is hiring and terminating according to operations standards and procedures.
D.
It is necessary to see if the internal controls are working as planned before they can be effectively evaluated.
A, B, C, D
Ling is responsible for planning the audit over inventory and payroll cycles for a new client. Her supervisor gave her an internal control questionnaire for payroll, on which the supervisor had written the client’s answers to several questions about internal controls. After reviewing the internal control questionnaire, Ling felt that the questions asked were very thorough. Since the answers were all positive, indicating good internal controls, she recommended the internal control risk for payroll be assessed as low.
Ling proceeded to design substantive procedures for payroll transactions. She also tested the controls over the client’s payroll processing and inventory count procedures at year-end, just prior to the inventory count. Ling felt that she could not assess the control risks for the inventory count until she reviewed those procedures.
- Do you agree with Ling’s assessment of internal control risk for payroll as low?
A.
I agree; Ling’s assessment of control risk is reasonable because all the responses were positive and this indicates that the controls are well designed and pose a low control risk. Therefore, no further assessment of the internal controls is necessary.
B.
I disagree; Ling’s assessment of control risk is not correct. She cannot rely heavily on the questionnaire because a second questionnaire is needed to verify the results of the first questionnaire.
C.
I agree; Ling’s assessment of control risk is reasonable, but she still needs to do additional work before the control risk can be relied upon as being low. She should assess the design effectiveness of the internal controls. If they are good, then she would design tests of controls for the key controls. If key the controls can be relied upon, then few substantive tests of payroll would be required.
D.
I disagree; Ling’s assessment of control risk is not correct. She cannot rely heavily on the questionnaire because internal controls cannot be judged based on a questionnaire. - Do you agree that Ling should not assess the control risks for the inventory count until she reviewed those procedures?
A.
I disagree; Ling is incorrect about her assessment of controls over inventory because if the controls description is accurate, she would follow a similar process to that described in the payroll audit of inventory. She should design tests of controls for key controls.
B.
I disagree; Ling is incorrect about her assessment of controls over inventory because all the responses were positive and this indicates that the controls are well designed and pose a low control risk to inventory control. Therefore, no further assessment of the internal controls is necessary.
C.
I agree; Ling’s assessment of control risk over inventory is correct. When assessing controls over inventory, multiple questionnaires are required that are not necessary when assessing controls over payroll.
D.
I agree; Ling’s assessment of control risk over inventory is correct. The procedure to assess controls over inventory could be completely different than the procedure for payroll.
- C
2. A
Janbec Limited is a distributor of health care products. It has about $450 000 in accounts receivable and about $600 000 in inventory. It has been a tough winter, with many people sick with the flu or falling on ice, breaking legs or dislocating shoulders so that they could not come in to work.
As a result, people have been helping out in various departments. For example, the accounts receivable clerk has been helping with payroll data entry and in receiving and shipping, making sure that forms and documents are filled in properly. The accounting manager has been helping the purchasing desk when placing needed orders for inventory replenishment, and the warehouse supervisor has also been helping out with purchasing, making sure that quantities are ordered that will fit on the shelves.
A new clerk in the accounts receivable department is all thumbs at the computer and is painfully slow at data entry. However, she is bright and cheerful and seems to be catching up on the filing backlog. Her excellent telephone manner seems to also have sped up some of the late payments from customers, resulting in an excellent collection ratio in accounts receivable.
Janbec uses an application service provider (ASP) for its computing needs. Users log in via the internet, enter data, and request reports. The ASP is a local computer store a few blocks away, while the physical server is located downtown. Janbec prints all of the reports on premises after retrieving them from the ASP. If there are any problems with the software, they are dealt with by telephone.
- Explain control problems that could have arisen due to the employees’ “filling in” and how these potential problems could be mitigated by Janbec management
A.
Employees filling in other areas should not be an issue. The functions they are filling in on are related to the jobs they do on a regular basis so they are adequately aware of what is necessary to do that function. Therefore, there are no control problems.
B.
The accounts receivable clerk helping out with payroll could cause people to be under paid, not paid, or overpaid. Payroll journals should be reviewed by the owner for accuracy.
C.
Segregation of duties related to purchasing and inventory can result in fictitious suppliers being paid for non-existent purchases. The owner should review and approve purchase orders and receiving reports.
D.
Poor segregation of duties related to accounts receivable can result in employee error or fraud and not be detected. The owner could review the accounts receivable trial balance, authorize all accounts receivable write-offs, and approve the setup of new accounts and credit limits. - How does the use of the ASP affect the audit engagement?
A.
There shouldn’t be any effect on the audit engagement as Janbec does not appear to have control over program changes.
B.
The auditor would need to acquire knowledge of the business and determine what controls are present at the ASP.
C.
The auditor does not need to look at the ASP, since it is a separate company.
D.
The auditor would need to look at the process of designing and testing program changes to ensure that the application is functioning without errors.
E.
A combined audit approach would be needed to ensure there are programmed controls and adequate procedures at the ASP. - What risks are present for Janbec with respect to the ASP?
A.
There is privacy, confidentiality, and internet security risks if data is exposed to unauthorized individuals or not adequately protected.
B.
There really shouldn’t be any additional risks with today’s technology.
C.
There is a business continuity risks such as the computer store going out of business or a denial of service.
D.
Risks are really not an issue as no Janbec employees appear to have access to the programming.
E.
There is a quality of service risk if errors occur in the software or the software does not meet Janbec’s needs.
- B, C, D
- B, D, E
- A, C, E
