In Class Questions

Question 1

CH12
List the key segregation of duties of the HR management process (3).

Answer 1

• Separation of the SUPERVISION function from the personnel records and payroll processing functions.
• Separation of DISBURSEMENT function from personnel records, payroll processing, and supervision function.
• Separation of PAYROLL-PROCESSING function from the general ledger function

Question 2

CH12
What errors or fraud can occur if these duties are not segregated:

Separation of the SUPERVISION function from the personnel records and payroll processing functions.

Answer 2

Unauthorized payments to employees or payments to fictitious employees.

Question 3

CH12
What errors or fraud can occur if these duties are not segregated:

Separation of DISBURSEMENT function from personnel records, payroll processing, and supervision function.

Answer 3

Unauthorized payroll cheques may be issued.

Question 4

CH12
What errors or fraud can occur if these duties are not segregated:

Separation of PAYROLL-PROCESSING function from the general ledger function

Answer 4

Concealment of a defalcation/theft that would normally be detected by independent review of accounting entries made to the general ledger

Question 5

What risk factors associated with HR management could pose significant inherent risk?

Answer 5

For non-executive positions:
1. Supply of skilled workers
2. Economic conditions effects (on payroll costs)
3. Presence of labor contracts and legislation
4. Employee turnover frequency

For higher positions, key risk factors to consider are:
- Levels of performance-based compensation
- Closeness of key performance measures to the compensation/bonus thresholds
Same for SBC due to required assumptions and financial disclosures

Question 6

11. List 2 substantive analytical procedures that can be used to provide audit evidence related to the payroll expense accounts and payroll-related liabilities.

Answer 6

1. Payroll expense accounts
2. Use a reasonableness test to develop an expectation based on number of employees and prior year average compensation per employee category after considering pay rate changes. Compare the expectation to current-year balance and investigate the difference if it is greater than the threshold.
3. Compare the payroll costs as a percent of sales with prior years.
4. Compare labor utilization rates and statistics with industry data.
5. Compare budgeted payroll expenses with actual payroll expenses
6. Estimate sales commissions by application of commission formulas to recorded sales totals.
7. Payroll-related liabilities
8. Compare current-period balances in payroll-related accruals with the prior periods’ balances after adjusting for changes in conditions.
9. Test reasonableness on accrual balances.

Question 7

Describe several audit procedures that can be done to address the concern of the risk of overstatement of payroll transactions (not the internal controls)

Answer 7

Select a sample of payments to employees from the payroll register and compare each selected transaction to the related documents and records, and examine:
- Evidence in support of authorization of pay rate.
- Evidence in support of time on which compensation was based, such as approved time cards or attendance records.
- Evidence in support of proper authorization of payroll withholdings.
- Evidence in support of account distribution.
- The clerical accuracy of the transaction.
- The entry to the employee’s records used to summarize employee compensation for payroll reporting purposes.

Obtain the payroll register for a selected period and:
- Test the arithmetic accuracy of the payroll register.
- Determine whether payroll was approved in accordance with management’s prescribed procedures.
- Trace totals per the register to postings in the general ledger.

Observe the distribution of payroll checks.

Review the accounting for unclaimed wages.

Observe a sample of employees in the performance of their duties.

Perform analytical procedures.