Auditing and Assurance Services, 17e (Arens/Elder/Beasley)

Chapter 20 Audit of the Payroll and Personnel Cycle

20.1 Learning Objective 20-1

1) Which of the following statements about the payroll and personnel cycle is correct?
A)
There are three classes of Transactions are more Internal controls over payroll are
transactions within the significant than related effective for almost all
payroll cycle – salaried balance sheet accounts. companies, even small ones.
employees, hourly
employees, and
commissioned employees.
No No Yes

B)
There are three classes of Transactions are more Internal controls over payroll are
transactions within the significant than related effective for almost all
payroll cycle – salaried balance sheet accounts. companies, even small ones
employees, hourly
employees, and
commissioned employees.
Yes No Yes

C)
There are three classes of Transactions are more Internal controls over payroll are
transactions within the significant than related effective for almost all
payroll cycle – salaried balance sheet accounts. companies, even small ones
employees, hourly
employees, and
commissioned employees.
No Yes Yes

D)
There are three classes of Transactions are more Internal controls over payroll are
transactions within the significant than related effective for almost all
payroll cycle – salaried balance sheet accounts. companies, even small ones
employees, hourly
employees, and
commissioned employees.
No Yes No

Answer: C
Terms: Payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-1
AACSB: Reflective thinking
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2) Most companies, with the exception of small ones, have effective controls over the payroll
cycle.
Answer: FALSE
Terms: Effective controls over payroll cycle
Difficulty: Easy
Objective: LO 20-1
AACSB: Reflective thinking

3) While most cycles include at least two classes of transactions, the payroll and personnel cycle
includes only one class of transactions.
Answer: TRUE
Terms: Payroll and personnel cycle includes one class of transactions
Difficulty: Easy
Objective: LO 20-1
AACSB: Reflective thinking

4) Auditors typically test details of account balances in the audit of payroll.

Answer: FALSE
Terms: Audit tests of payroll cycle
Difficulty: Moderate
Objective: LO 20-1
AACSB: Reflective thinking

5) The overall audit objective in the audit of the payroll and the personnel cycle is to evaluate
whether the account balances affected by the cycle are fairly stated according to the applicable
accounting standards.
Answer: TRUE
Terms: Audit tests of payroll cycle
Difficulty: Easy
Objective: LO 20-1
AACSB: Reflective thinking

6) In most accounting systems, the accrued wages and salaries account is used only at the
beginning of an accounting period.
Answer: FALSE
Terms: Audit tests of payroll cycle
Difficulty: Moderate
Objective: LO 20-1
AACSB: Reflective thinking

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7) In most accounting systems, payroll expenses are charged when the employees are actually
paid rather than when the labor costs are actually incurred.
Answer: TRUE
Terms: Audit tests of payroll cycle
Difficulty: Moderate
Objective: LO 20-1
AACSB: Reflective thinking

8) In most accounting systems, accruals for salaries and wages are recorded by adjusting entries
at the end of the period for any earned-but-unpaid labor related costs.
Answer: TRUE
Terms: Audit tests of payroll cycle
Difficulty: Moderate
Objective: LO 20-1
AACSB: Reflective thinking

9) Discuss three important differences between the payroll and personnel cycle and other cycles
in a typical audit.
Answer: Three important differences between the payroll and personnel cycle and other cycles
in a typical audit are:
• There is only one class of transactions for payroll, whereas most cycles include at least two
classes of transactions. Payroll-related accounts such as accrued payroll and withheld taxes are
usually small compared to the total amount of transactions for the year.
• In the payroll cycle, transactions are far more significant than related balance sheet accounts.
• Internal controls over payroll are effective for almost all companies, even small ones. This is
primarily due to severe federal and state penalties for errors in withholding and paying payroll
taxes, and employee morale problems if employees are not paid or are underpaid.
Terms: Important differences between payroll and personnel cycle and other cycles in audit
Difficulty: Moderate
Objective: LO 20-1
AACSB: Reflective thinking

20.2 Learning Objective 20-2

1) Which of the following departments is most likely responsible for pay rate changes and
changes in deductible amounts for employees?
A) general accounting department
B) human resources department
C) treasurer
D) controller
Answer: B
Terms: Department responsible for pay rate changed
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

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2) The payroll and personnel cycle ends with which of the following events?
A) interviewing job candidates
B) hiring a new employee
C) existing employees submitting requests for payment for work performed
D) issuance of paychecks
Answer: D
Terms: Payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

3) Which of the following includes all payroll transactions processed by the accounting system
for a given period of time?
A) payroll journal
B) payroll transaction file
C) time report
D) payroll summary
Answer: B
Terms: Includes all payroll transactions processed by the accounting system
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

4) An imprest payroll account that has a significant balance may indicate the presence of
A) employees not cashing their payroll checks.
B) fraudulent transfer of funds by the company.
C) lack of controls over payroll distribution.
D) the company overpaying its employees.
Answer: A
Terms: Imprest payroll account has significant balance
Difficulty: Challenging
Objective: LO 20-2
AACSB: Analytic thinking

5) Records that include data about employees such as employment date, performance ratings and
pay rates are the
A) human resource records.
B) employee screening forms.
C) summary payroll reports.
D) employee folders.
Answer: A
Terms: Records that include data about employees
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

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6) The computer file used for recording payroll transactions for each employee and maintaining
total wages paid for the year to date is the
A) payroll transaction file.
B) payroll master file.
C) payroll bank account reconciliation.
D) payroll tax returns.
Answer: B
Terms: Computer file used for recording payroll transactions
Difficulty: Moderate
Objective: LO 20-2
AACSB: Reflective thinking

7) Which of the following is not one of the business functions for the payroll and personnel
cycle?
A) payment of payroll
B) timekeeping and payroll preparation
C) reconciliation of payroll account
D) human resources and employment
Answer: C
Terms: Payroll and personnel cycle
Difficulty: Challenging
Objective: LO 20-2
AACSB: Reflective thinking

8) The total of the individual employee earnings in the payroll master file should equal 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.
Answer: A
Terms: Total of individual employee earnings in payroll master file equals
Difficulty: Moderate
Objective: LO 20-2
AACSB: Reflective thinking

9) 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
Answer: C
Terms: Department authorized to add and delete employees from payroll
Difficulty: Moderate
Objective: LO 20-2
AACSB: Reflective thinking

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10) Hiring personnel initiates the payroll and personnel cycle.
Answer: TRUE
Terms: Initiates payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

11) Firing personnel terminates the payroll and personnel cycle.

Answer: FALSE
Terms: Terminates payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

12) Paying employees for their services ends the payroll and personnel cycle.
Answer: TRUE
Terms: Terminates payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

13) The deduction authorization form authorizes the rate of pay and the deductions for taxes,
dues, etc.
Answer: FALSE
Terms: Deduction authorization form
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

14) The job time ticket indicates the starting and stopping times of work during the pay period.
Answer: FALSE
Terms: Job time ticket
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

15) An imprest payroll account limits the client's exposure to payroll fraud.
Answer: TRUE
Terms: Imprest payroll account
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

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16) Imprest accounts usually carry a significant balance.
Answer: FALSE
Terms: Imprest accounts
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

17) Auditors must understand the business functions and documents and record for the payroll
and personnel cycle before they can assess control risk and design test of controls and
substantive tests of transactions.
Answer: TRUE
Terms: Assessing control risk in the payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

18) The human resources department is considered to be an independent source for interviewing
and hiring qualified personnel to work for a company.
Answer: TRUE
Terms: Human resources independent role in the payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

19) The human resources department is not considered to be an independent source for the
internal verification of wage information.
Answer: FALSE
Terms: Human resources independent role in the payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

20) Although some time records may be in paper form, most are electronically generated — for
example, employees may enter time worked into online systems, apps and other IT-based payroll
systems.
Answer: TRUE
Terms: Electronically generated time records
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

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21) An impress payroll account is a separate payroll bank account in which a large cash balance
is maintained.
Answer: FALSE
Terms: Impress payroll account
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

22) What events initiate and terminate the payroll and personnel cycle?
Answer: The hiring of an employee initiates the cycle and the payments to employees; the cycle
ends with paying governments and other institutions for withheld and accrued payroll taxes and
benefits.
Terms: Events that initiate and terminate the payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-2
AACSB: Reflective thinking

23) Discuss each of the following primary documents and records used in the personnel and
employment function in the payroll and personnel cycle: human resource records, deduction
authorization form, and the rate authorization form.
Answer:
• Human resource records. These records include employees' date of employment, personnel
investigations, rates of pay, authorized deductions, performance evaluations, and termination of
employment.
• Deduction authorization form. This form authorizes payroll deductions, including the number
of exemptions for withholding of income taxes, 401(k) and other retirement savings plans, health
insurance, and union dues.
• Rate authorization form. This form authorizes employees' rate of pay.
Terms: Primary documents and records used in personnel and employment function in payroll
and personnel cycle
Difficulty: Moderate
Objective: LO 20-2
AACSB: Reflective thinking

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24) Discuss each of the following documents and records used in the timekeeping and payroll
preparation function in the payroll and personnel cycle: time record, job time ticket, payroll
transaction file, payroll journal and payroll master file.
Answer: The primary documents and records used in the timekeeping and payroll preparation
function are:
• Time record. The time record is a document used to indicate the time the employee started
and stopped working each day and the number of hours the employee worked.
• Job time ticket. This document indicates jobs on which an employee worked on during a given
time period. This form is used only when an employee works on different jobs or in different
departments.
• Payroll transaction file. This computer-generated file includes all payroll transactions
processed by the accounting system for a period of time.
• Payroll journal. This report is generated from the payroll transaction file and typically
includes the employee name, date, gross and net payroll amounts, withholding amounts, and
account classifications for each transaction.
• Payroll master file. This computer file is used for recording payroll transactions for each
employee and maintaining total employee wages paid for the year to date.
Terms: Primary documents and records used in timekeeping and payroll preparation function in
payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-2
AACSB: Reflective thinking

25) State the purpose and the information contained on the W-2 Form and on the payroll tax
returns.
Answer: The primary documents and records used in the payment of payroll function and the
preparation of payroll tax returns and payment of taxes function are:
• W-2 form. This is a form sent to each employee that summarizes the employees' earnings for
the calendar year, including gross pay, income taxes withheld, and FICA withheld. This same
information is also submitted to the IRS and state and local tax commissions when applicable.
• Payroll tax returns. These are tax forms submitted to local, state, and federal units of
government for the payment of withheld taxes and the employer's tax. The nature and due dates
of the forms vary depending on the type of taxes.
Terms: Primary documents and records used in payment of payroll function in payroll and
personnel cycle
Difficulty: Moderate
Objective: LO 20-2
AACSB: Reflective thinking

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26) 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. human resource records

b. deduction authorization form
c. rate authorization form
d. time record
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 started and stopped working

________ 3. a form indicating which jobs an employee worked on during a given time period

________ 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, retirement savings plans, 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.

Answer: 1. k, 2. d, 3. e, 4. i, 5. b, 6. c, 7. a
Terms: Human resource records; Deduction authorization form; Rate authorization form; Time
card; Job time ticket; Payroll tax returns; Payroll master file
Difficulty: Moderate
Objective: LO 20-2
AACSB: Reflective thinking

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20.3 Learning Objective 20-3

1) Which of the following statements is false?

A) The payroll cycle consists of one class of transactions.
B) Balance sheet accounts related to payroll are generally more significant than related
transactions.
C) Internal controls over payroll are effective for most companies.
D) Small companies usually have effective controls over payroll.
Answer: B
Terms: Payroll cycle
Difficulty: Easy
Objective: LO 20-1 and LO 20-3
AACSB: Reflective thinking

2) Which of the following would have the least amount of importance 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.
C) Distribution of pay checks should be performed by someone who is not involved in the other
payroll functions.
D) Unclaimed paychecks should be immediately returned for redeposit.
Answer: B
Terms: Least important regarding controls over processing payroll
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

3) An auditor is vouching a sample of hourly employees from the payroll master file to approved
time clock or time sheet data in order to provide evidence that
A) employees work the number of hours for which they are paid.
B) payments are made at the contractual rate.
C) product cost information is accurate.
D) segregation of duties is present between the payroll function and the payment function for
cash disbursements.
Answer: A
Terms: Vouch from payroll master file to approved time sheets
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

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4) When the auditor compares the cancelled check or direct deposit with the payroll journal for
amount, they are concerned with the transaction-related audit objective of
A) occurrence.
B) accuracy.
C) classification.
D) timing.
Answer: B
Terms: Payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

5) Which of the following best describes the systems of internal control for payroll for large
companies?
A) loosely structured but well controlled
B) loosely structured and loosely controlled
C) highly structured and well controlled
D) highly structured but loosely controlled
Answer: C
Terms: Systems of internal control for payroll for large companies
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

6) When testing for fraudulent hours or fraudulent expense reports

A) it is easy for the auditor to discover fraudulent hours because of the abundance of available
evidence.
B) it is difficult to prevent fraud in these two areas with adequate internal controls.
C) management falsification of expense reports can be an indicator of disregard for internal
controls and the potential for fraud in other areas.
D) examining payroll records for approval is an important substantive test of transactions to
uncover fraudulent hours.
Answer: C
Terms: Fraudulent payroll hours and fraudulent expense reports
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

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7) In audits of companies in which payroll is a significant portion of inventory, the improper
account classification of payroll can
A)
Increase inventory asset valuations. Decrease inventory asset valuations.
Yes Yes

B)
Increase inventory asset valuations. Decrease inventory asset valuations.
No No

C)
Increase inventory asset valuations. Decrease inventory asset valuations.
Yes No

D)
Increase inventory asset valuations. Decrease inventory asset valuations.
No Yes

Answer: A
Terms: Audits of payroll in which payroll is a significant portion of inventory
Difficulty: Easy
Objective: LO 20-2 and LO 20-3
AACSB: Reflective thinking

8) To minimize the opportunity for fraud, unclaimed salary checks should be

A) redeposited.
B) kept in the payroll department.
C) left with the employee's supervisor.
D) held for the employee in the personnel department.
Answer: A
Terms: Minimize opportunity for fraud, unclaimed salary checks
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

9) When examining payroll transactions, an auditor is primarily concerned with the possibility of
A) incorrect summaries of employee time records.
B) overpayments and unauthorized payments.
C) under withholding of amounts required to be withheld.
D) posting of gross payroll amounts to incorrect salary expense accounts.
Answer: B
Terms: Examining payroll transactions, auditor primarily concerned with
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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10) The ________ has the responsibility for approving the number of hours worked for each
employee.
A) employee's supervisor
B) human resources department
C) chief financial officer
D) budgeting supervisor
Answer: A
Terms: Payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

11) Which of the following audit procedures would be the most effective in testing for
nonexistent employees?
A) Trace transactions recorded in the payroll journal to the human resources department to
determine employment status.
B) Examine cancelled checks for proper endorsement.
C) Recalculate net pay.
D) Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank
statement.
Answer: A
Terms: Audit procedures most effective in testing for nonexistent employees
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

12) 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 files.
Answer: C
Terms: Individual with access to time cards, payroll records, or checks should not have access to
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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13) The auditor ________ rely on the internal controls of the payroll service organization if the
service organization's auditor issues a report on the service organization's internal control.
A) must
B) cannot
C) can rarely
D) can often
Answer: D
Terms: Use of outside payroll services and responsibility regarding reliance on internal control
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

14) Many audits have a ________ risk of misstatement for the payroll cycle.
A) high
B) low
C) moderate
D) zero
Answer: B
Terms: Payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

15) 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) the use of an outside payroll service.
Answer: B
Terms: Control for careful and timely preparation of payroll tax returns
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

16) 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.
Answer: C
Terms: Audit test emphasized due to lack of independent third-party evidence related to payroll
transactions
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking
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17) The most important means of verifying account balances in the payroll and personnel cycle
are
A) tests of controls and substantive tests of transactions.
B) analytical procedures and tests of controls.
C) analytical procedures and substantive tests of transactions.
D) tests of controls and tests of details of balances.
Answer: A
Terms: Most important means of verifying account balances in payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

18) Audit tests of payroll are usually not extensive because

A)
Employees will Payroll Payroll transactions are
likely complain transactions are typically subject to audit by federal
if underpaid. uniform and and state governments.
uncomplicated.
Yes Yes Yes

B)
Employees will Payroll Payroll transactions are
likely complain transactions are typically subject to audit by federal
if underpaid. uniform and and state governments.
uncomplicated.
No Yes No

C)
Employees will Payroll Payroll transactions are
likely complain transactions are typically subject to audit by federal
if underpaid. uniform and and state governments.
uncomplicated.
No No Yes

D)
Employees will Payroll Payroll transactions are
likely complain transactions are typically subject to audit by federal
if underpaid. uniform and and state governments.
uncomplicated.
Yes No No

Answer: A
Terms: Audit tests of payroll are usually not extensive because
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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19) 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 the procedures manual and observe the recording of transactions.
C) Examine the payroll records for indication of pay rate approval.
D) Reconcile the payroll bank account.
Answer: A
Terms: Auditor tests completeness transaction-related audit objective in payroll and personnel
cycle, a test of control
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

20) 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.
Answer: C
Terms: Substantive test of transactions
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

21) 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) fraud awareness
B) doing tests of balances
C) doing tests of transactions
D) understanding the client's internal controls
Answer: D
Terms: Auditor's responsibility and review of preparation of at least one type of payroll tax form
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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22) Verifying that an adequate chart of accounts is used is a key internal control for the
transaction-related objective of
A) classification.
B) accuracy.
C) existence.
D) occurrence.
Answer: A
Terms: Assertion related to the classes of transactions underlying the payroll cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

23) 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 classification of payroll transactions.
D) completeness of recorded transactions.
Answer: C
Terms: Labor material part of inventory
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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24) What potential problems may arise when an auditor considers the relationship between
payroll and inventory valuation?
A)
Improper Improper The overpayment or
account allocation to jobs underpayment of factory
classification or processes employees
Yes Yes Yes

B)
Improper Improper The overpayment or
account allocation to jobs underpayment of factory
classification or processes employees
No Yes No

C)
Improper Improper The overpayment or
account allocation to jobs underpayment of factory
classification or processes employees
No No Yes

D)
Improper Improper The overpayment or
account allocation to jobs underpayment of factory
classification or processes employees
Yes Yes No

Answer: D
Terms: Potential problems considering relationship between payroll and inventory valuation
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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25) Which of the following errors gives the auditor 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.
Answer: D
Terms: Error that gives least concern in auditing payroll transactions
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

26) Auditors may extend their tests of payroll in which of the following circumstances?
A)
Payroll materially affects the The auditor is concerned there
valuation of inventory. may be nonexistent employees
on the payroll.
Yes Yes

B)
Payroll materially affects the The auditor is concerned there
valuation of inventory. may be nonexistent employees
on the payroll.
No No

C)
Payroll materially affects the The auditor is concerned there
valuation of inventory. may be nonexistent employees
on the payroll.
Yes No

D)
Payroll materially affects the The auditor is concerned there
valuation of inventory. may be nonexistent employees
on the payroll.
No Yes

Answer: A
Terms: Auditors may extend tests of payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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27) ________ is not a transaction-related audit objective for the classes of transactions
underlying the payroll cycle.
A) Classification
B) Existence
C) Timing
D) Completeness
Answer: B
Terms: Payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

28) 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.
Answer: C
Terms: Surprise payroll payoff means to check
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

29) Which of the following is the best way for an auditor to determine that every name on a
company's payroll for the Rodgers factory 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.
Answer: C
Terms: Audit procedure to verify bona fide employee name on payroll check
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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30) Which of the following best describes inherent risk for balance-related audit objectives as
they relate to payroll?
A) not considered
B) low
C) moderate
D) high
Answer: B
Terms: Inherent risk for balance-related audit objectives related to payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

31) 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
Answer: D
Terms: Payroll department responsible for functions
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

32) Which of the following best describes effective 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.
Answer: C
Terms: Effective internal control over payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

33) Which of the following is an accurate statement regarding nonexistent employees?

A) In order to prevent this type of fraud, the foreman should distribute the paychecks and
approve the time cards.
B) Records for all terminated employees should be destroyed to prevent this type of fraud.
C) The person committing this type of fraud is generally the CEO or CFO of the company.
D) This type of fraud often results from the continuance of an employee on the payroll after the
employee has been terminated.
Answer: D
Terms: Tests for nonexistent employees
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking
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34) Which of the following is a key control for the transaction-related audit objective of
accuracy?
A) The time records are approved by a supervisor.
B) The payroll checks are prenumbered and accounted for.
C) The payroll master file contents are internally verified.
D) The batch totals are compared with computer summary reports.
Answer: D
Terms: Key controls
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

35) 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 fraud
would 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.
Answer: A
Terms: Weak internal control system; Fraud of fictitious employee
Difficulty: Challenging
Objective: LO 20-3
AACSB: Reflective thinking

36) Which of the following is not a correct statement regarding fraudulent hours?
A) Fraudulent hours occur when an employee reports more time than was actually worked.
B) It is difficult for an auditor to discover fraudulent hours.
C) It is ordinarily easier for the client to prevent fraudulent hours by adequate internal controls
than for the auditor to detect it.
D) To detect fraudulent hours, the auditor should examine the cancelled checks written to the
employees.
Answer: D
Terms: Fraudulent payroll hours
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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37) 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.
Answer: D
Terms: Effect of payroll costs on inventory
Difficulty: Challenging
Objective: LO 20-3
AACSB: Reflective thinking

38) When auditing the payroll and personnel cycle, the auditor should keep in mind that
A) since payroll transactions are typically uniform, all companies have the same internal controls
over payroll.
B) the substantive tests of transactions for the payroll cycle are the same for all audit clients.
C) controls the auditor intends to rely on to reduce assessed control risk must be tested with tests
of controls.
D) the tests of controls and the substantive tests of transactions for payroll cannot be combined.
Answer: C
Terms: Controls and the payroll cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

39) In auditing payroll, the auditor wants to determine that the individuals included in her sample
were employees of the company for the period under review. What is the auditor's best source of
evidence?
A) examination of human resource records
B) examination of the payroll master file
C) examination of the payroll transaction file
D) examination of the payroll tax records
Answer: A
Terms: Auditor source of evidence to test individuals are employees of company
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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40) Auditors should determine whether the client has fulfilled its legal obligation in submitting
payments of all payroll withholdings as part of their payroll tests.
Answer: TRUE
Terms: Payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

41) Payroll checks should be distributed by someone independent of the payroll and timekeeping
functions.
Answer: TRUE
Terms: Payroll checks distributed by someone independent
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

42) Auditors seldom expect to find misstatements when testing payroll transactions.
Answer: TRUE
Terms: Misstatements when testing payroll transactions
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

43) The nature, extent, and timing of substantive tests of payroll transactions vary depending, in
part, on assessed control risk.
Answer: TRUE
Terms: Substantive tests of payroll transactions; Assessed control risk
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

44) "Physical control over assets" is not a type of control that is applicable to the payroll cycle.
Answer: FALSE
Terms: Physical control over assets control applicable to payroll cycle
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

45) When auditing the payroll and personnel cycle, tests of controls are routinely performed.
Answer: TRUE
Terms: Audit of payroll and personnel cycle and test of controls
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

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46) When labor is a material part of inventory valuation, auditors should emphasize testing
internal controls over proper classification of payroll transactions.
Answer: TRUE
Terms: Labor material part of inventory
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

47) A detailed reconciliation of the information on the payroll tax forms and the payroll records
must be prepared as part of the test of controls over the payroll cycle.
Answer: FALSE
Terms: Payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

48) For proper internal control, the person(s) responsible for signing the payroll checks should
not have access to timekeeping or be otherwise involved in the preparation of payroll.
Answer: TRUE
Terms: Proper internal control
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

49) It is usually very easy for an auditor to determine if an employee has overstated their hours
worked.
Answer: FALSE
Terms: Payroll and personnel cycle
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

50) For most clients, the balance sheet accounts related to payroll are normally insignificant,
except for labor charged to inventory.
Answer: TRUE
Terms: Payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

51) Separation of duties in the payroll and personnel cycle will prevent overpayments, but not
payments to nonexistent employees.
Answer: FALSE
Terms: Separation of duties
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking
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52) For good internal control, the payroll function should be independent of the human resources
department.
Answer: TRUE
Terms: Good internal control; Payroll function independent of human resources department
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

53) Since the amount of expense report reimbursements is insignificant, auditors can ignore
expense reports for officers and directors.
Answer: FALSE
Terms: Fraudulent expense reports
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

54) 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.
Answer: FALSE
Terms: Tests of controls and tests of details of balances
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

55) The primary purpose of a surprise payroll payoff is to detect employees who have reported
more time than was actually worked (fraudulent hours).
Answer: FALSE
Terms: Purpose of surprise payroll payoff
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

56) Because of confidentiality requirements and potential losses of payroll funds, outside service
center systems are rarely used by companies for payroll-related functions.
Answer: FALSE
Terms: Outside service centers for payroll-related functions
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

57) Internal control over payroll is normally highly structured and well controlled.
Answer: TRUE
Terms: Internal controls over payment of payroll function
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking
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58) Most monetary misstatements of payroll are corrected by internal verification controls or by
the PCAOB.
Answer: FALSE
Terms: Payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

59) Despite the large dollar amounts involved in the payroll and personnel cycle, auditors
typically spend less time auditing this cycle than others.
Answer: TRUE
Terms: Time spent auditing payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

60) It is generally more difficult for the auditor to detect payment of fraudulent hours than
payment of fictitious employees.
Answer: TRUE
Terms: Detect payment of fraudulent hours and payment of fictitious employees
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

61) Examining payroll records for an indication of authorization is part of the timing transaction-
related audit objective.
Answer: FALSE
Terms: Payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

62) The audit procedure "recompute hours worked from time cards" is normally performed when
testing the completeness objective for payroll.
Answer: FALSE
Terms: Testing completeness objective for payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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63) A transaction-related audit objective includes ensuring payroll transactions are properly
aggregated and disclosed in the financial statements.
Answer: TRUE
Terms: Financial statement presentation of payroll transactions
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

64) A key internal control which the auditor should determine if the client has procedures
designed to identify key provisions in employment contracts, compensation, and bonus plans
which may require financial statement disclosure.
Answer: TRUE
Terms: Testing completeness objective for payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

65) The treasurer in some firms may be a source for the auditor to trace information back to
regarding employment contracts, compensation, and bonus plans.
Answer: TRUE
Terms: Testing completeness objective for payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

66) Auditors should consider the use of data analytics tools to such for payroll-related anomalies
including duplicate employee names, missing data in the payroll master files, or duplicate direct
deposit bank account numbers.
Answer: TRUE
Terms: Testing completeness objective for payroll
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

67) Audit software also allows auditors to perform analytical auditing procedures on payroll-
related data at more disaggregated levels.
Answer: TRUE
Terms: Testing completeness objective for payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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68) Generally, is the inherent risk level for the audit of the payroll and personnel set at low,
moderate, or high? Explain.
Answer: Generally inherent risk is set low since there is only one class of transactions for
payroll. Also, internal control for payroll is normally highly structured and well controlled to
manage cash disbursed, to minimize employee complaints and dissatisfaction, and to minimize
payroll fraud. Payroll transactions are typically uniform and uncomplicated and payroll
transactions are subject to audit by federal and state governments for tax withholdings.
Terms: Inherent risk level for audit of payroll and personnel
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

69) Discuss the procedures involved in, and the purpose of a surprise payroll payoff.
Answer: A surprise payroll payoff is a procedure in which each employee must pick up and sign
for his or her check in the presence of a supervisor and the auditor. Any checks that are not
claimed are subject to an extensive investigation to determine whether an unclaimed check is
fraudulent. The purpose is to test for nonexistent employees; that is, the issuance of payroll
checks to individuals who do not work for the company.
Terms: Procedures and purpose of surprise payroll payoff
Difficulty: Easy
Objective: LO 20-3
AACSB: Reflective thinking

70) There are several key internal controls over the payment of payroll function that should be
present. For example, the payroll should be distributed by someone who is not involved in the
other payroll functions. Discuss other key internal controls over the payment of payroll function
as it relates to the physical control over assets and records.
Answer:
• If employees are paid through direct deposit, access to systems used to authorize payments
should be restricted.
• If employees are paid by check, access to unsigned payroll checks should be restricted.
• Checks should be signed by a responsible employee.
• Payroll should be distributed by someone independent of the payroll and timekeeping
functions.
• Any unclaimed checks should be returned for redeposit.
• If checks are signed by a signature machine, access to the machine should be restricted.
Terms: Internal controls over payment of payroll function
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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71) Discuss the two circumstances under which auditors would extend their procedures
considerably in the audit of payroll.
Answer: Auditors often extend their procedures considerably in the audit of payroll under the
following circumstances: (1) when payroll significantly affects the valuation of inventory and (2)
when the auditor is concerned about the possibility of material fraudulent payroll transactions,
such as nonexistent employees or fraudulent hours.
Terms: Circumstances for auditors to extend procedures in audit of payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

72) What is one audit procedure that may be used to test for proper handling of terminated
employees?
Answer: A procedure that tests for proper handling of terminated employees is to select several
files from the human resource records for employees who were terminated in the current year to
determine whether each received termination pay consistent with company policy. Continuing
payments to terminated employees can be tested by using audit software to compare termination
dates according to the human resources department to payroll disbursement dates in the payroll
journal to verify the employee is no longer being paid.
Terms: Audit procedure to test for proper handling of terminated employees
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

73) In testing for the transaction-related audit objective of occurrence, an auditor is verifying that
the recorded payroll payments are for work actually performed by existing employees. List three
key internal controls that a company should have in place in this area.
Answer:
• Time records are approved by the supervisor.
• Time clock is used to record time.
• Adequate human resource files are maintained.
• Employment is authorized.
• There is separation of duties among human resources, timekeeping,
and payroll disbursements.
• Only employees existing in the computer data files are accepted when they are entered.
• Disbursements are authorized before issuance.
Terms: Important internal controls in occurrence transaction-related audit objective for payroll
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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74) What key separation of duties should the auditor expect to find within the payroll and
personnel cycle?
Answer: The human resources department should be independent of the payroll function and
should be responsible for hiring and terminating employees, as well as changes in pay rates and
deductions. In addition, payroll processing should be separate from the issuance of payroll
disbursements.
Terms: Key separation of duties in payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

75) Describe at least five auditing procedures which an auditor can perform which could test for
the possibility of nonexistent employees being paid by an audit client.
Answer:
• Compare the names on cancelled payroll checks or the account into which payroll has been
deposited with time records and other records for authorized signatures and reasonableness of the
endorsements.
• Audit software can be used to compare all bank accounts numbers into which payroll is being
deposited to search for duplicates.
• Examine payroll checks that are recorded as voided to make sure these checks have not been
fraudulently used.
• If fraud is suspected, the auditor may access online banking records to review endorsements
on cancelled checks of suspected disbursements.
• Trace selected payroll transactions recorded in the payroll journal to the human resources
department to determine whether employees were actually employed during the payroll period.
• If payroll checks are being used, compare the endorsement on the cancelled payroll check
with the authorized signature on the employee's withholding authorization forms in human
resources.
• For a sample of terminated employees, obtain their files from human resources and determine
if their termination pay was consistent with company policies.
• Use audit software to compare termination dates to payroll disbursement dates in the payroll
journal.
• Request and perform a surprise payroll payoff.
Terms: Tests for nonexistent employees
Difficulty: Moderate
Objective: LO 20-3
AACSB: Reflective thinking

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20.4 Learning Objective 20-4

1) Which of the following types of audit procedures is ordinarily emphasized the least when
auditing payroll?
A) tests of controls
B) tests of transactions
C) substantive analytical procedures
D) tests of details of balances
Answer: D
Terms: Audit procedure emphasized least in auditing payroll
Difficulty: Easy
Objective: LO 20-4
AACSB: Reflective thinking

2) There is inherent risk of payroll fraud because most transactions involve

A) expense accounts.
B) accrued liabilities.
C) estimates.
D) cash.
Answer: D
Terms: Payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

3) 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.
Answer: C
Terms: Primary concern in testing payroll-related liabilities
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

4) 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.
Answer: C
Terms: Verification of legitimacy of unpaid bonuses
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking
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5) 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
A)
the SEC's 10-K report. the company's federal income
tax return.
Yes Yes

B)
the SEC's 10-K report. the company's federal income
tax return.
No No

C)
the SEC's 10-K report. the company's federal income
tax return.
Yes No

D)
the SEC's 10-K report. the company's federal income
tax return.
No Yes

Answer: A
Terms: Audit test for public company officer compensation
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

6) Which of the following is a major balance-related audit objective in testing payroll liabilities?
A) Payroll tax expense is properly recorded.
B) Transactions in the payroll and personnel cycle are recorded in the proper period.
C) Accrual of salaries is the same as the amounts paid on the payroll tax returns.
D) Time records are recorded by supervisors.
Answer: B
Terms: Balance-related audit objective in testing payroll liabilities
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

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7) 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
Answer: D
Terms: Major balance-related audit objective in testing payroll liabilities
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

8) 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.
Answer: A
Terms: Audit procedure to test for accuracy and cutoff for accruing wages
Difficulty: Challenging
Objective: LO 20-4
AACSB: Reflective thinking

9) 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.
Answer: A
Terms: Consideration in evaluating amounts for vacation pay, sick pay and other benefits
Difficulty: Challenging
Objective: LO 20-4
AACSB: Reflective thinking

10) When performing the tests of details of balances for expense accounts, ________ is (are)
generally not necessary.
A) extensive additional testing
B) analytical procedures
C) tests of controls
D) substantive tests of transactions
Answer: A
Terms: Payroll expense accounts; tests of details of balances
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

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11) An auditor traces a sample of electronic time cards before and after the bi-weekly payroll
report and then traces to the payroll master file to determine that payroll transactions are reported
in the correct period. The auditor is gathering evidence for which audit objective?
A) completeness
B) existence
C) cut-off
D) accuracy
Answer: C
Terms: Tracing to determine payroll transactions are reported in correct period is testing which
audit objective
Difficulty: Challenging
Objective: LO 20-4
AACSB: Analytic thinking

12) Although significant client business risks affecting payroll are unlikely for most companies,
an area that would have the most business risk would be
A) payment of hourly employees.
B) payment of salaried employees.
C) payments to employees for stock options and bonus plans.
D) payments to employees who have direct deposit of their payroll checks.
Answer: C
Terms: Payroll and personnel cycle
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

13) Required disclosures for payroll and personnel cycle transactions and balances are extensive.
Answer: FALSE
Terms: Presentation and disclosure objectives for payroll
Difficulty: Easy
Objective: LO 20-4
AACSB: Reflective thinking

14) The two major balance-related audit objectives in testing payroll liabilities are accuracy and
cutoff.
Answer: TRUE
Terms: Balance-related audit objectives in testing payroll liabilities; Accuracy and cutoff
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

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15) On most audits, the calculation for payroll tax expense is costly and is not necessary unless
analytical procedures indicate a problem that cannot be resolved through other procedures.
Answer: TRUE
Terms: Audit of payroll tax expense
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

16) An analytical procedure to determine a possible misstatement of commission expense is to

compare commission expense to salaries payable.
Answer: FALSE
Terms: Analytical procedures for payroll cycle
Difficulty: Easy
Objective: LO 20-4
AACSB: Reflective thinking

17) The Securities and Exchange Commission requires public companies to disclose the ratio of
the compensation of the chief executive officer (CEO) to the median compensation of its
employees in proxy statements and in annual reports requiring executive compensation
disclosure.
Answer: TRUE
Terms: Securities and Exchange Commission pay ratio disclosure
Difficulty: Easy
Objective: LO 20-4
AACSB: Reflective thinking

18) Payroll tax expense is tested by the auditor in connection with tests of the payroll tax
accruals; payroll tax expense can also be tested using audit software.
Answer: FALSE
Terms: Analytical procedures for payroll cycle
Difficulty: Easy
Objective: LO 20-4
AACSB: Reflective thinking

19) Mathews and Company has $112,000 in an accrued payroll account. The company's weekly
payroll is $186,700 and the accrual represents 3 days out of 5 working days. If the auditor has
determined that controls are effective over payroll, what additional work should the auditor

Answer: 186,700 ∗ 0.60 (3/5) = 112,020 which is very close to the actual accrual of 112,000.
perform for this account?

Auditor would accept the client balance with no further work.

Terms: Test of accruals
Difficulty: Moderate
Objective: LO 20-4
AACSB: Analytic thinking

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20) How do auditors commonly verify sales commission expense?
Answer: If all employees receive the same commission rate, then verifying the expense is done
by multiplying the commission rate by the amount of the sales. If there are different commission
rates, it is necessary first to determine the nature of the commission agreement and then test the
calculations based on the agreement. The auditor should compare the method of accruing
commissions with that of previous years for purposes of consistency.
Terms: Auditors verify sales commission expense
Difficulty: Moderate
Objective: LO 20-4
AACSB: Reflective thinking

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