Chapter 12 - Auditing the Human Resource Management Process

Chapter 12 Auditing the Human Resource Management Process

True / False Questions

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

2. !mployees must complete a "-# $orm to authorize insurance deductions $rom his or her pay. True alse

%. The human resource $unction is responsi&le $or managing the personnel needs o$ the organization. True alse

#. The payroll-processing $unction is responsi&le $or paying employees $or ser'ices and &ene$its. True alse

(. Proper segregation o$ duties is critical $or the human resource management process. True alse

). There are $e* inherent ris+ $actors that directly a$$ect the human resource management process and its related accounts $or non-o$$icers. True alse

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Chapter 12 - Auditing the Human Resource Management Process

,. -nherent ris+ associated *ith o$$icer compensation is $re.uently set high &ecause o$$icers ha'e moti'e and opportunity to ta+e ad'antage o$ their high-ran+ing o$$ices in the $orm o$ excessi'e compensation. True alse

/. -$ the results o$ the control tests do not support the planned le'el o$ control ris+0 the detection ris+ *ill ha'e to &e set higher. True alse

1. Tests o$ details o$ transactions are o$ten conducted in con2unction *ith tests o$ controls. True alse

Multiple Choice Questions

13. "hich o$ the $ollo*ing departments most li+ely *ould appro'e changes in pay rates and deductions $rom employee salaries4 A. Human resource. 5. Treasurer. C. Controller. 6. Payroll.

11. Possi&le misstatements related to the occurrence assertion $or payroll transactions include all o$ the $ollo*ing except7 A. Payments to $ictitious employees. 5. Payments to terminated employees. C. Payments to 'alid employees *ho ha'e not *or+ed. 6. Payments to 'alid employees at a rate in excess o$ the authorized amount.

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Chapter 12 - Auditing the Human Resource Management Process

12. The proper use o$ prenum&ered termination notice $orms &y the Payroll 6epartment should pro'ide assurance that all A. 8ncashed payroll chec+s *ere issued to employees *ho ha'e not &een terminated. 5. Personnel $iles are +ept up to date. C. !mployees *ho ha'e not &een terminated recei'e their payroll chec+s. 6. Terminated employees are remo'ed $rom the payroll.

1%. "hen examining payroll transactions0 an auditor is primarily concerned *ith the possi&ility o$ A. 8nderpayments and properly authorized payments. 5. Posting o$ gross payroll amounts to incorrect salary expense accounts. C. Mis$ootings o$ employee time records. 6. !xcess *ithholding o$ amounts re.uired to &e *ithheld.

1#. An auditor 'ouched data $or a sample o$ employees in a payroll register to appro'ed cloc+ card9time sheet data to pro'ide assurance that A. Payments to employees are computed at authorized rates. 5. !mployees *or+ed the num&er o$ hours $or *hich they are paid. C. :egregation o$ duties exist &et*een the preparation and distri&ution o$ the payroll. 6. -nternal controls relating to unclaimed payroll chec+s are operating e$$ecti'ely.

1(. "hich o$ the $ollo*ing internal control o&2ecti'es is li+ely to &e a larger concern in the audit o$ the payroll cycle4 A. Payroll transactions are properly disclosed. 5. Recorded payroll transactions are 'alid. C. Payroll transactions are recorded in the appropriate time period. 6. All payroll transactions ha'e &een recorded.

1). "hich o$ the $ollo*ing circumstances most li+ely *ould cause an auditor to suspect an employee payroll $raud scheme4 A. There are signi$icant unexplained 'ariances &et*een standard and actual la&or cost. 5. Payroll chec+s are dis&ursed &y the same employee each payday. C. !mployee time cards are appro'ed &y indi'idual departmental super'isors. 6. A separate payroll &an+ account is maintained on an imprest &asis.

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Chapter 12 - Auditing the Human Resource Management Process

1,. "hich o$ the $ollo*ing could test the assertion o$ cuto$$ $or payroll-related lia&ilities4 A. Compare items in accrued payroll taxes to the supporting payroll tax return. 5. :earch $or unrecorded lia&ilities. C. !xamine payroll tax returns to determine that the expense *as recorded in the proper period. 6. Re'ie* payroll lia&ilities $or proper classi$ication as short- or long-term.

1/. "hich o$ the $ollo*ing could test the assertion o$ classi$ication $or payroll-related lia&ilities4 A. Compare items in accrued payroll taxes to the supporting payroll tax return. 5. :earch $or unrecorded lia&ilities. C. !xamine payroll tax returns to determine that the expense *as recorded in the proper period. 6. Re'ie* payroll lia&ilities $or proper reporting as short- or long-term.

11. All o$ the $ollo*ing are incorporated into 'aluation models except7 A. The exercise price o$ the option. 5. The term o$ the option. C. !xpected di'idends. 6. Current tax rates.

23. A surprise o&ser'ation &y an auditor o$ a client;s regular distri&ution o$ paychec+s is primarily designed to satis$y the auditor that A. All unclaimed payroll chec+s are properly returned to the cashier. 5. The paymaster is not in'ol'ed in the distri&ution o$ payroll chec+s. C. All employees ha'e in their possession proper employee identi$ication. 6. <ames on the company payroll are those o$ &ona $ide employees presently on the 2o&.

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Chapter 12 - Auditing the Human Resource Management Process

21. "hich o$ the $ollo*ing is the &est reason *hy an auditor should consider o&ser'ing a client;s distri&ution o$ regular payroll chec+s4 A. To ensure that names on the company payroll are those o$ &ona $ide employees presently on the 2o&. 5. Total payroll costs are a signi$icant part o$ total operating costs. C. The auditor did not o&ser'e the distri&ution o$ the entire regular payroll during the audit in the prior year. 6. !mployee turno'er is excessi'e.

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Chapter 12 - Auditing the Human Resource Management Process

22. The purpose o$ segregating the duties o$ distri&uting payroll chec+s and hiring personnel is to separate the A. 6uties *ithin the accounting $unction. 5. Custody o$ assets $rom the accounting $or those assets. C. Authorization o$ transactions $rom the custody o$ related assets. 6. =perational responsi&ility $rom record +eeping responsi&ility.

2%. The purpose o$ segregating the duties o$ hiring personnel and distri&uting payroll chec+s is to separate the A. Administrati'e controls $rom the internal accounting controls. 5. Human resources $unction $rom the controllership $unction. C. =perational responsi&ility $rom the record-+eeping responsi&ility. 6. Authorization o$ transactions $rom the custody o$ related assets.

2#. "hich o$ the $ollo*ing is an e$$ecti'e internal control used to pro'e that production department employees are properly 'alidating payroll timecards at a time-recording station4 A. Timecards should &e care$ully inspected &y those persons *ho distri&ute pay en'elopes to the employees. 5. =ne person should &e responsi&le $or maintaining records o$ employee time $or *hich salary payment is not to &e made. C. 6aily reports sho*ing time charged to 2o&s should &e appro'ed &y the $oreman and compared to the total hours *or+ed on the employee timecards. 6. -nternal auditors should ma+e o&ser'ations o$ distri&ution o$ paychec+s on a surprise &asis.

2(. A large retail enterprise has esta&lished a policy that re.uires that the paymaster deli'er all unclaimed payroll chec+s to the -nternal Auditing 6epartment at the end o$ each payroll distri&ution day. This policy *as most li+ely adopted in order to A. Assure that employees *ho *ere a&sent on a payroll distri&ution day are not paid $or that day. 5. Pre'ent the paymaster $rom cashing chec+s that are unclaimed $or se'eral *ee+s. C. Pre'ent a &ona $ide employee;s chec+ $rom &eing claimed &y another employee. 6. 6etect any $ictitious employee *ho may ha'e &een placed on the payroll.

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Chapter 12 - Auditing the Human Resource Management Process

2). -n the *ee+ly computer run to prepare payroll chec+s0 a chec+ *as printed $or an employee *ho had &een terminated the pre'ious *ee+. "hich o$ the $ollo*ing controls0 i$ properly utilized0 *ould ha'e &een most e$$ecti'e in pre'enting the error or ensuring its prompt detection4 A. A control total $or hours *or+ed0 prepared $rom time cards collected &y the Time+eeping 6epartment. 5. Re.uiring the treasurer;s o$$ice to account $or the num&ers o$ the prenum&ered chec+s issued to the !6P department $or the processing o$ the payroll. C. 8se o$ a chec+ digit $or employee num&ers. 6. 8se o$ a header la&el $or the payroll input sheet.

2,. "hich o$ the $ollo*ing is the &est *ay $or an auditor to determine that e'ery name on a company;s payroll is that o$ a &ona $ide employee presently on the 2o&4 A. !xamine personnel records $or accuracy and completeness. 5. !xamine employees; names listed on payroll accounting records. C. Ma+e a surprise o&ser'ation o$ the company;s regular distri&ution o$ paychec+s. 6. >isit the *or+ing areas and con$irm *ith employees their &adge or identi$ication num&ers.

2/. Transactions processed through the payroll process include all o$ the $ollo*ing except7 A. Payments to employees $or ser'ices rendered. 5. Payments to independent contractors $or ser'ices rendered. C. Accrual o$ social security taxes. 6. Payment o$ unemployment taxes.

21. >ouching selected items $rom the payroll register to employee time cards that ha'e &een appro'ed &y super'isory personnel pro'ides e'idence that A. -nternal controls relating to payroll dis&ursements *ere operating e$$ecti'ely. 5. Payroll chec+s *ere signed &y an appropriate o$$icer independent o$ the payroll preparation process. C. =nly &ona $ide employees *or+ed and their pay *as properly computed. 6. !mployees *or+ed the num&er o$ hours $or *hich their pay *as computed.

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Chapter 12 - Auditing the Human Resource Management Process

%3. "hich o$ the $ollo*ing acti'ities most li+ely *ould detect *hether payroll data are accurately processed4 A. Monitor authorized distri&ution o$ data control sheets. 5. 8se test data to 'eri$y the accurate per$ormance o$ payroll processing. C. !xamine source documents $or appro'al &y super'isors. 6. :egregate duties &et*een appro'al o$ hard*are and so$t*are speci$ications.

%1. "hen control ris+ is assessed as lo* $or assertions related to payroll0 su&stanti'e tests o$ payroll &alances most li+ely *ould &e limited to applying su&stanti'e analytical procedures and A. =&ser'ing the distri&ution o$ paychec+s. 5. ooting and cross$ooting the payroll register. C. -nspecting payroll tax returns. 6. Recalculating payroll accruals.

%2. "hich o$ the $ollo*ing procedures *ould normally &e per$ormed &y the auditor *hen conducting tests o$ payroll transactions4 A. -nter'ie* employees selected in a statistical sample o$ payroll transactions. 5. >ouch num&er o$ hours *or+ed as sho*n on payroll to time cards and time reports signed &y the $oreman. C. Con$irm amounts *ithheld $rom employees; salaries *ith proper go'ernmental authorities. 6. !xamine signatures on paid salary chec+s.

%%. A su&stanti'e test o$ transactions to test the completeness assertion includes A. Tracing a sample o$ time cards to the payroll register. 5. Testing a sample o$ payroll chec+s $or the presence o$ an authorized time card. C. Testing postings to the payroll register $or a sample o$ payroll chec+s. 6. Recomputing the accuracy o$ a sample o$ payroll chec+s.

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Chapter 12 - Auditing the Human Resource Management Process

%#. Comparing selected items $rom the payroll register to employee time records that ha'e &een appro'ed &y super'isory personnel tests *hich o$ the $ollo*ing assertions $or payroll expense4 A. =ccurrence. 5. Completeness. C. Authorization. 6. Cuto$$.

%(. An auditor most li+ely *ould extend su&stanti'e tests o$ payroll *hen A. Payroll is extensi'ely audited &y the state go'ernment. 5. Payroll expense is su&stantially higher than in the prior year due to company gro*th. C. ='erpayments are disco'ered in per$orming tests o$ details. 6. !mployees complain to management a&out too much o'ertime.

%). "hich o$ the $ollo*ing could test the occurrence assertion $or payroll-related lia&ilities4 A. Compare items in accrued payroll taxes to the supporting payroll tax return. 5. :earch $or unrecorded lia&ilities. C. !xamine payroll tax returns to determine that the expense *as recorded in the proper period. 6. Re'ie* payroll lia&ilities $or proper classi$ication as short- or long-term.

%,. "hich o$ the $ollo*ing is re.uired o$ an auditor *ho is testing the $air 'alue o$ options in share-&ased compensation4 A. 8sing a specialist. 5. Testing the inputs used in the 'aluation model. C. 5ecoming an expert in option-pricing. 6. 8sing the *or+ o$ internal auditors.

%/. -n an -T payroll system en'ironment0 an auditor *ould &e least li+ely to use test data to test controls related to A. Missing employee num&ers. 5. Proper appro'al o$ o'ertime &y super'isors. C. Time cards *ith in'alid 2o& num&ers. 6. Agreement o$ hours per cloc+ cards *ith hours on time cards.

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Chapter 12 - Auditing the Human Resource Management Process

%1. !$$ecti'e internal control o'er unclaimed payroll chec+s that are +ept &y the Treasury 6epartment *ould include Accounting 6epartment procedures that re.uire A. !$$ecti'e cancellation and stop payment orders $or chec+s representing unclaimed *ages. 5. Redepositing unclaimed *ages a$ter a period o$ % months. C. Accounting $or all unclaimed *ages in a current lia&ility account. 6. Periodic accounting $or the actual chec+s representing unclaimed *ages.

#3. !$$ecti'e internal control o'er the payroll $unction *ould include *hich o$ the $ollo*ing4 A. Total time recorded on time-cloc+ punch cards should &e reconciled to 2o& reports &y employees responsi&le $or those speci$ic 2o&s. 5. Payroll 6epartment employees should &e super'ised &y the management o$ the Human Resource 6epartment. C. Payroll 6epartment employees should &e responsi&le $or maintaining employee personnel records. 6. Total time spent on 2o&s should &e compared *ith total time indicated on timecloc+ punch cards.

#1. A CPA re'ie*s a client;s payroll procedures. The CPA *ould consider internal control to &e less than e$$ecti'e i$ a payroll department super'isor *as assigned the responsi&ility $or A. 6istri&uting payroll chec+s to employees. 5. Re'ie*ing and appro'ing time reports $or su&ordinate employees. C. Hiring su&ordinate employees. 6. -nitiating re.uests $or salary ad2ustments $or su&ordinate employees.

#2. An auditor *ould consider internal control o'er a client;s payroll procedures to &e ine$$ecti'e i$ the payroll department super'isor is responsi&le $or A. Hiring su&ordinate payroll department employees. 5. Ha'ing custody o'er unclaimed paychec+s. C. 8pdating employee earnings records. 6. Applying pay rates to time tic+ets.

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Chapter 12 - Auditing the Human Resource Management Process

#%. "hich o$ the $ollo*ing is a control acti'ity that most li+ely could help pre'ent employee payroll $raud4 A. The Human Resource department promptly sends employee termination notices to the payroll super'isor. 5. !mployees *ho distri&ute payroll chec+s $or*ard unclaimed payroll chec+s to the a&sent employees; super'isors. C. :alary rates resulting $rom ne* hires are appro'ed &y the payroll super'isor. 6. Total hours used $or determination o$ gross pay are calculated &y the payroll super'isor.

##. An e$$ecti'e system o$ internal control o'er the payroll $unction *ould include A. >eri$ication o$ agreement o$ 2o& time tic+ets *ith employee cloc+ card hours &y a payroll department employee. 5. Reconciliation o$ totals on 2o& time tic+ets *ith 2o& reports &y employees responsi&le $or those speci$ic 2o&s. C. Custody o$ rate authorization records &y the super'isor o$ the payroll department. 6. Preparation o$ payroll transaction 2ournal entries &y an employee *ho reports to the super'isor o$ the human resource department.

#(. ?ey segregations o$ duties in the human resource management process include all o$ the $ollo*ing except7 A. The super'ision $unction should &e separate $rom the payroll-processing $unction. 5. The dis&ursement $unction should &e separate $rom the super'ision $unction. C. The human resource $unction should &e separate $rom setting salaries. 6. The payroll-processing $unction should &e separate $rom the general ledger $unction.

#). -n testing the payroll o$ a large company0 the auditor *ants to esta&lish that the indi'iduals included in a sample actually *ere employees o$ the company during the period under re'ie*. "hat *ill &e the &est source to determine this4 A. Telephone contacts *ith the employees. 5. Tracing $rom the payroll register to the employee;s earnings records. C. Con$irmation *ith the union or other independent organization. 6. !xamination o$ Human Resource 6epartment records.

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Chapter 12 - Auditing the Human Resource Management Process

#,. 6uring the current year &eing audited0 Hitech0 -nc. changed $rom a con'entional payroll punch cloc+ to a computerized payroll time system. actory employees no* record time in and out *ith magnetic cards and the -T system automatically updates all payroll records. 5ecause o$ this change A. The auditor must audit through the computer. 5. -nternal control has impro'ed. C. "ithout paper cloc+ cards0 part o$ the audit trail has &een altered. 6. The potential $or payroll related $raud has &een diminished.

#/. "hich o$ the $ollo*ing internal control acti'ities could &est pre'ent direct la&or $rom &eing charged to manu$acturing o'erhead4 A. Reconciliation o$ *or+ in process in'entory *ith cost records. 5. Comparison o$ daily 2ournal entries *ith the $actory la&or summary. C. Comparison o$ period costs &udgets and time cards. 6. Reconciliation o$ the un$inished 2o& summary and production cost records.

#1. "hich o$ the $ollo*ing internal control acti'ities most li+ely *ould pre'ent direct la&or hours $rom &eing charged to manu$acturing o'erhead4 A. Periodic independent counts o$ *or+-in-process $or comparison to recorded amounts. 5. Comparison o$ daily 2ournal entries *ith appro'ed production orders. C. 8se o$ time tic+ets to record actual la&or *or+ed on production orders. 6. Reconciliation o$ *or+-in-process in'entory *ith periodic cost &udgets.

(3. An auditor most li+ely *ould assess control ris+ at the maximum i$ the payroll department super'isor is responsi&le $or A. !xamining authorization $orms $or ne* employees. 5. Comparing payroll registers *ith original &atch transmittal data. C. Authorizing payroll rate changes $or all employees. 6. Hiring all su&ordinate payroll department employees.

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Chapter 12 - Auditing the Human Resource Management Process

(1. -n determining the e$$ecti'eness o$ an entity;s policies and procedures relating to the existence or occurrence assertion $or payroll transactions0 an auditor most li+ely *ould in.uire a&out and A. =&ser'e the segregation o$ duties concerning human resource responsi&ilities and payroll dis&ursement. 5. -nspect e'idence that all prenum&ered payroll chec+s are accounted $or. C. Recompute the payroll deductions $or employee $ringe &ene$its. 6. >eri$y the preparation o$ the monthly payroll account &an+ reconciliation.

(2. -n the su&stanti'e audit procedures $or payroll *here the control ris+ is set at lo*0 an auditor most li+ely *ould A. >eri$y that chec+s representing unclaimed *ages are mailed. 5. Trace indi'idual employee deductions to entity 2ournal entries. C. =&ser'e entity employees during a payroll distri&ution. 6. Compare payroll costs *ith entity standards or &udgets.

(%. Tracing a sample o$ time cards &e$ore and a$ter period end to the *ee+ly payroll report and tracing the *ee+ly payroll report to the general ledger to 'eri$y that payroll transactions are recorded in the proper period *ould pro'ide e'idence primarily $or *hich assertion4 A. Classi$ication. 5. =ccurrence. C. Cuto$$. 6. >aluation.

(#. Comparing amounts selected $rom the payroll account analysis $or payroll accruals to supporting documentation *ould pro'ide e'idence primarily $or *hich assertion4 A. Completeness. 5. !xistence. C. Classi$ication. 6. Presentation and disclosure.

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Chapter 12 - Auditing the Human Resource Management Process

Short Answer Questions

((. !xplain ho* the human resource management process can a$$ect the $inancial statements.

(). @isted &elo* are descriptions o$ 'arious types o$ documents used in the payroll process. -denti$y the document &eing descri&ed $or each o$ the $ollo*ing 1A The document used to record hours *or+ed &y an employee. 2A The document that summarizes all payroll payments issued to employees. %A The document that contains in$ormation on an employee;s *or+ history. #A The $orm used to authorize deductions $rom an employee;s pay. (A The computer $ile that contains all the entity;s records related to payroll.

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Chapter 12 - Auditing the Human Resource Management Process

(,. 5ro*nstein0 CPA0 has &een engaged to audit the $inancial statements o$ Boung Computer =utlets0 -nc.0 a ne* client. Boung is a pri'ately o*ned chain o$ retail stores that sells a 'ariety o$ computer so$t*are and 'ideo products. Boung uses an in-house payroll department at its corporate head.uarters to compute payroll data and to prepare and distri&ute payroll chec+s to its %33 salaried employees. 5ro*nstein is preparing an internal control .uestionnaire to assist in o&taining an understanding o$ Boung;s internal control and in setting control ris+. Prepare a CPayrollC segment o$ 5ro*nstein;s internal control .uestionnaire that *ould assist in o&taining an understanding o$ Boung;s internal control and $or setting the client;s control ris+. 6o not prepare .uestions relating to cash payroll0 -T applications0 or payments &ased on hourly rates0 piece*or+0 commissions0 employee &ene$its Dpensions0 health care0 'acations0 and so onA0 or payroll tax accruals other than *ithholdings. 8se the $ollo*ing $ormat7

(/. Eenerally0 is the inherent ris+ le'el $or the human resource management process set at lo*0 moderate or high4 or *hat area o$ the process might the appropriate le'el di$$er $rom the pre'ious ans*er4 "hy4

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Chapter 12 - Auditing the Human Resource Management Process

(1. Ei'e an example o$ a test o$ controls that could &e used &y an auditor to test $or the $ollo*ing assertions7 =ccurrence0 Accuracy0 and Cuto$$.

)3. -denti$y *hether the $ollo*ing tests are su&stanti'e analytical procedures0 tests o$ details o$ transactions0 or tests o$ details o$ account &alances. 1A Trace a sample o$ payroll chec+s to the master employee list to 'eri$y occurrence. 2A Recalculate the mathematical accuracy o$ a sample o$ payroll chec+s. %A Test a sample o$ &an+ reconciliations $or the payroll &an+ account. #A !stimate sales commissions &y applying commission $ormulas to recorded sales totals. (A Compare amounts accrued to supporting documentation0 such as payroll tax returns. )A Compare payroll costs as a percentage o$ sales to industry data.

)1. or each o$ the $ollo*ing tests0 identi$y the assertion to *hich the test applies. 1A Trace a sample o$ payroll chec+s to the master employee list to 'eri$y occurrence. 2A Recalculate the mathematical accuracy o$ a sample o$ payroll chec+s. %A Test a sample o$ &an+ reconciliations $or the payroll &an+ account. #A !stimate sales commissions &y applying commission $ormulas to recorded sales totals. (A Compare amounts accrued to supporting documentation0 such as payroll tax returns. )A Compare payroll costs as a percentage o$ sales to industry data.

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Chapter 12 - Auditing the Human Resource Management Process

)2. The Hamster :top has F1%0)(3 in the Accrued Payroll account. Hamster;s *ee+ly payroll is F1()0333 and the accrual represents payroll $or % days. -$ controls are strong0 determine *hether additional audit *or+ should &e per$ormed on this account.

)%. "hen an auditor sets control ris+ lo*0 su$$icient e'idence can &e o&tained $or most payroll accounts through an understanding o$ internal controls0 su&stanti'e analytical procedures0 and tests o$ details o$ transactions. Ho*e'er0 there are se'eral accounts in the payroll cycle that may re.uire more attention. <ame the accounts and explain *hy the additional testing is necessary.

)#. A:5 A:C Topic ,1( re.uires speci$ic disclosures regarding human resources0 *hich o$ course must &e 'eri$ied and audited &y the CPA. "hat are those disclosures4

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Chapter 12 - Auditing the Human Resource Management Process

Chapter 12 Auditing the Human Resource Management Process Ans*er ?ey

True / False Questions

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

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

2. !mployees must complete a "-# $orm to authorize insurance deductions $rom his or her pay. FA S!

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'/ 0no, and describe t)e ty(es of documents and records used in t)e (ayroll (rocess* +o(ic: +y(es of Documents and Records

%. The human resource $unction is responsi&le $or managing the personnel needs o$ the organization. TR"!

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* +o(ic: +)e .a#or Functions

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Chapter 12 - Auditing the Human Resource Management Process

#. The payroll-processing $unction is responsi&le $or paying employees $or ser'ices and &ene$its. FA S!

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* +o(ic: +)e .a#or Functions

(. Proper segregation o$ duties is critical $or the human resource management process. TR"!

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'3 0no, t)e a((ro(riate se!re!ation of duties for t)e )uman resource mana!ement (rocess* +o(ic: +)e 0ey Se!re!ation of Duties

). There are $e* inherent ris+ $actors that directly a$$ect the human resource management process and its related accounts $or non-o$$icers. TR"!

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'4 0no, and e$aluate in)erent risks rele$ant to t)e )uman resource mana!ement (rocess* +o(ic: In)erent Risk Assessment

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Chapter 12 - Auditing the Human Resource Management Process

,. -nherent ris+ associated *ith o$$icer compensation is $re.uently set high &ecause o$$icers ha'e moti'e and opportunity to ta+e ad'antage o$ their high-ran+ing o$$ices in the $orm o$ excessi'e compensation. TR"!

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'4 0no, and e$aluate in)erent risks rele$ant to t)e )uman resource mana!ement (rocess* +o(ic: In)erent Risk Assessment

/. -$ the results o$ the control tests do not support the planned le'el o$ control ris+0 the detection ris+ *ill ha'e to &e set higher. FA S!

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'6 2nderstand )o, to relate t)e assessment of control risk to substanti$e (rocedures* +o(ic: Relatin! t)e Assessed e$el of Control Risk to Substanti$e Procedures

1. Tests o$ details o$ transactions are o$ten conducted in con2unction *ith tests o$ controls. TR"!

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

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Chapter 12 - Auditing the Human Resource Management Process

Multiple Choice Questions

13. "hich o$ the $ollo*ing departments most li+ely *ould appro'e changes in pay rates and deductions $rom employee salaries4 A# Human resource. 5. Treasurer. C. Controller. 6. Payroll.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e .a#or Functions

11. Possi&le misstatements related to the occurrence assertion $or payroll transactions include all o$ the $ollo*ing except7 A. Payments to $ictitious employees. 5. Payments to terminated employees. C. Payments to 'alid employees *ho ha'e not *or+ed. $# Payments to 'alid employees at a rate in excess o$ the authorized amount.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision .akin! Blooms: Analy5e Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

12-21

Chapter 12 - Auditing the Human Resource Management Process

12. The proper use o$ prenum&ered termination notice $orms &y the Payroll 6epartment should pro'ide assurance that all A. 8ncashed payroll chec+s *ere issued to employees *ho ha'e not &een terminated. 5. Personnel $iles are +ept up to date. C. !mployees *ho ha'e not &een terminated recei'e their payroll chec+s. $# Terminated employees are remo'ed $rom the payroll.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'/ 0no, and describe t)e ty(es of documents and records used in t)e (ayroll (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +y(es of Documents and Records

1%. "hen examining payroll transactions0 an auditor is primarily concerned *ith the possi&ility o$ A. 8nderpayments and properly authorized payments. %# Posting o$ gross payroll amounts to incorrect salary expense accounts. C. Mis$ootings o$ employee time records. 6. !xcess *ithholding o$ amounts re.uired to &e *ithheld.

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

12-22

Chapter 12 - Auditing the Human Resource Management Process

1#. An auditor 'ouched data $or a sample o$ employees in a payroll register to appro'ed cloc+ card9time sheet data to pro'ide assurance that A. Payments to employees are computed at authorized rates. %# !mployees *or+ed the num&er o$ hours $or *hich they are paid. C. :egregation o$ duties exist &et*een the preparation and distri&ution o$ the payroll. 6. -nternal controls relating to unclaimed payroll chec+s are operating e$$ecti'ely.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'/ 0no, and describe t)e ty(es of documents and records used in t)e (ayroll (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: +y(es of Documents and Records

1(. "hich o$ the $ollo*ing internal control o&2ecti'es is li+ely to &e a larger concern in the audit o$ the payroll cycle4 A. Payroll transactions are properly disclosed. %# Recorded payroll transactions are 'alid. C. Payroll transactions are recorded in the appropriate time period. 6. All payroll transactions ha'e &een recorded.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls

12-2%

Chapter 12 - Auditing the Human Resource Management Process

1). "hich o$ the $ollo*ing circumstances most li+ely *ould cause an auditor to suspect an employee payroll $raud scheme4 A# There are signi$icant unexplained 'ariances &et*een standard and actual la&or cost. 5. Payroll chec+s are dis&ursed &y the same employee each payday. C. !mployee time cards are appro'ed &y indi'idual departmental super'isors. 6. A separate payroll &an+ account is maintained on an imprest &asis.

AACSB: Communication AICPA BB: Critical +)inkin! AICPA FN: Risk Analysis Blooms: A((ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls

1,. "hich o$ the $ollo*ing could test the assertion o$ cuto$$ $or payroll-related lia&ilities4 A. Compare items in accrued payroll taxes to the supporting payroll tax return. 5. :earch $or unrecorded lia&ilities. C# !xamine payroll tax returns to determine that the expense *as recorded in the proper period. 6. Re'ie* payroll lia&ilities $or proper classi$ication as short-or long-term.

AACSB: Communication AICPA BB: Critical +)inkin! AICPA FN: .easurement Blooms: A((ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

12-2#

Chapter 12 - Auditing the Human Resource Management Process

1/. "hich o$ the $ollo*ing could test the assertion o$ classi$ication $or payroll-related lia&ilities4 A. Compare items in accrued payroll taxes to the supporting payroll tax return. 5. :earch $or unrecorded lia&ilities. C. !xamine payroll tax returns to determine that the expense *as recorded in the proper period. $# Re'ie* payroll lia&ilities $or proper reporting as short- or long-term.

AACSB: Communication AICPA BB: Critical +)inkin! AICPA FN: .easurement Blooms: A((ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

12-2(

Chapter 12 - Auditing the Human Resource Management Process

11. All o$ the $ollo*ing are incorporated into 'aluation models except7 A. The exercise price o$ the option. 5. The term o$ the option. C. !xpected di'idends. $# Current tax rates.

AACSB: Analytic AICPA BB: Industry AICPA FN: .easurement Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1% 2nderstand )o, to e$aluate t)e audit findin!s and reac) a final conclusion on (ayroll e7(ense and (ayroll& related accrued e7(enses* +o(ic: E$aluatin! t)e Audit Findin!s

23. A surprise o&ser'ation &y an auditor o$ a client;s regular distri&ution o$ paychec+s is primarily designed to satis$y the auditor that A. All unclaimed payroll chec+s are properly returned to the cashier. 5. The paymaster is not in'ol'ed in the distri&ution o$ payroll chec+s. C. All employees ha'e in their possession proper employee identi$ication. $# <ames on the company payroll are those o$ &ona $ide employees presently on the 2o&.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e .a#or Functions

12-2)

Chapter 12 - Auditing the Human Resource Management Process

21. "hich o$ the $ollo*ing is the &est reason *hy an auditor should consider o&ser'ing a client;s distri&ution o$ regular payroll chec+s4 A# To ensure that names on the company payroll are those o$ &ona $ide employees presently on the 2o&. 5. Total payroll costs are a signi$icant part o$ total operating costs. C. The auditor did not o&ser'e the distri&ution o$ the entire regular payroll during the audit in the prior year. 6. !mployee turno'er is excessi'e.

AACSB: Communication AICPA BB: Critical +)inkin! AICPA FN: Decision .akin! Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

22. The purpose o$ segregating the duties o$ distri&uting payroll chec+s and hiring personnel is to separate the A. 6uties *ithin the accounting $unction. 5. Custody o$ assets $rom the accounting $or those assets. C# Authorization o$ transactions $rom the custody o$ related assets. 6. =perational responsi&ility $rom record +eeping responsi&ility.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: 2nderstand Difficulty: % .edium earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'3 0no, t)e a((ro(riate se!re!ation of duties for t)e )uman resource mana!ement (rocess* +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e 0ey Se!re!ation of Duties

12-2,

Chapter 12 - Auditing the Human Resource Management Process

2%. The purpose o$ segregating the duties o$ hiring personnel and distri&uting payroll chec+s is to separate the A. Administrati'e controls $rom the internal accounting controls. 5. Human resources $unction $rom the controllership $unction. C. =perational responsi&ility $rom the record-+eeping responsi&ility. $# Authorization o$ transactions $rom the custody o$ related assets.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: 2nderstand Difficulty: % .edium earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'3 0no, t)e a((ro(riate se!re!ation of duties for t)e )uman resource mana!ement (rocess* +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e 0ey Se!re!ation of Duties

2#. "hich o$ the $ollo*ing is an e$$ecti'e internal control used to pro'e that production department employees are properly 'alidating payroll timecards at a time-recording station4 A. Timecards should &e care$ully inspected &y those persons *ho distri&ute pay en'elopes to the employees. 5. =ne person should &e responsi&le $or maintaining records o$ employee time $or *hich salary payment is not to &e made. C# 6aily reports sho*ing time charged to 2o&s should &e appro'ed &y the $oreman and compared to the total hours *or+ed on the employee timecards. 6. -nternal auditors should ma+e o&ser'ations o$ distri&ution o$ paychec+s on a surprise &asis.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

12-2/

Chapter 12 - Auditing the Human Resource Management Process

2(. A large retail enterprise has esta&lished a policy that re.uires that the paymaster deli'er all unclaimed payroll chec+s to the -nternal Auditing 6epartment at the end o$ each payroll distri&ution day. This policy *as most li+ely adopted in order to A. Assure that employees *ho *ere a&sent on a payroll distri&ution day are not paid $or that day. 5. Pre'ent the paymaster $rom cashing chec+s that are unclaimed $or se'eral *ee+s. C. Pre'ent a &ona $ide employee;s chec+ $rom &eing claimed &y another employee. $# 6etect any $ictitious employee *ho may ha'e &een placed on the payroll.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: % .edium earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

2). -n the *ee+ly computer run to prepare payroll chec+s0 a chec+ *as printed $or an employee *ho had &een terminated the pre'ious *ee+. "hich o$ the $ollo*ing controls0 i$ properly utilized0 *ould ha'e &een most e$$ecti'e in pre'enting the error or ensuring its prompt detection4 A# A control total $or hours *or+ed0 prepared $rom time cards collected &y the Time+eeping 6epartment. 5. Re.uiring the treasurer;s o$$ice to account $or the num&ers o$ the prenum&ered chec+s issued to the !6P department $or the processing o$ the payroll. C. 8se o$ a chec+ digit $or employee num&ers. 6. 8se o$ a header la&el $or the payroll input sheet.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

12-21

Chapter 12 - Auditing the Human Resource Management Process

2,. "hich o$ the $ollo*ing is the &est *ay $or an auditor to determine that e'ery name on a company;s payroll is that o$ a &ona $ide employee presently on the 2o&4 A. !xamine personnel records $or accuracy and completeness. 5. !xamine employees; names listed on payroll accounting records. C# Ma+e a surprise o&ser'ation o$ the company;s regular distri&ution o$ paychec+s. 6. >isit the *or+ing areas and con$irm *ith employees their &adge or identi$ication num&ers.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

2/. Transactions processed through the payroll process include all o$ the $ollo*ing except7 A. Payments to employees $or ser'ices rendered. %# Payments to independent contractors $or ser'ices rendered. C. Accrual o$ social security taxes. 6. Payment o$ unemployment taxes.

AACSB: Communication AICPA BB: Industry AICPA FN: .easurement Blooms: Remember Difficulty: % .edium earnin! "b#ecti$e: 1%&'% Be familiar ,it) t)e ty(es of transactions in t)e )uman resource mana!ement (rocess and t)e financial statement accounts affected* +o(ic: +y(es of +ransactions and Financial Statements Accounts Affected

12-%3

Chapter 12 - Auditing the Human Resource Management Process

21. >ouching selected items $rom the payroll register to employee time cards that ha'e &een appro'ed &y super'isory personnel pro'ides e'idence that A. -nternal controls relating to payroll dis&ursements *ere operating e$$ecti'ely. 5. Payroll chec+s *ere signed &y an appropriate o$$icer independent o$ the payroll preparation process. C. =nly &ona $ide employees *or+ed and their pay *as properly computed. $# !mployees *or+ed the num&er o$ hours $or *hich their pay *as computed.

AACSB: Analytic AICPA BB: Industry AICPA FN: .easurement Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&'% Be familiar ,it) t)e ty(es of transactions in t)e )uman resource mana!ement (rocess and t)e financial statement accounts affected* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: +y(es of +ransactions and Financial Statements Accounts Affected

%3. "hich o$ the $ollo*ing acti'ities most li+ely *ould detect *hether payroll data are accurately processed4 A. Monitor authorized distri&ution o$ data control sheets. %# 8se test data to 'eri$y the accurate per$ormance o$ payroll processing. C. !xamine source documents $or appro'al &y super'isors. 6. :egregate duties &et*een appro'al o$ hard*are and so$t*are speci$ications.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls

12-%1

Chapter 12 - Auditing the Human Resource Management Process

%1. "hen control ris+ is assessed as lo* $or assertions related to payroll0 su&stanti'e tests o$ payroll &alances most li+ely *ould &e limited to applying su&stanti'e analytical procedures and A. =&ser'ing the distri&ution o$ paychec+s. 5. ooting and cross$ooting the payroll register. C. -nspecting payroll tax returns. $# Recalculating payroll accruals.

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: % .edium earnin! "b#ecti$e: 1%&'6 2nderstand )o, to relate t)e assessment of control risk to substanti$e (rocedures* earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: Relatin! t)e Assessed e$el of Control Risk to Substanti$e Procedures +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

%2. "hich o$ the $ollo*ing procedures *ould normally &e per$ormed &y the auditor *hen conducting tests o$ payroll transactions4 A. -nter'ie* employees selected in a statistical sample o$ payroll transactions. %# >ouch num&er o$ hours *or+ed as sho*n on payroll to time cards and time reports signed &y the $oreman. C. Con$irm amounts *ithheld $rom employees; salaries *ith proper go'ernmental authorities. 6. !xamine signatures on paid salary chec+s.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

12-%2

Chapter 12 - Auditing the Human Resource Management Process

%%. A su&stanti'e test o$ transactions to test the completeness assertion includes A# Tracing a sample o$ time cards to the payroll register. 5. Testing a sample o$ payroll chec+s $or the presence o$ an authorized time card. C. Testing postings to the payroll register $or a sample o$ payroll chec+s. 6. Recomputing the accuracy o$ a sample o$ payroll chec+s.

AACSB: Communication AICPA BB: Industry AICPA FN: .easurement Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

%#. Comparing selected items $rom the payroll register to employee time records that ha'e &een appro'ed &y super'isory personnel tests *hich o$ the $ollo*ing assertions $or payroll expense4 A# =ccurrence. 5. Completeness. C. Authorization. 6. Cuto$$.

AACSB: Analytic AICPA BB: Industry AICPA FN: .easurement Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

%(. An auditor most li+ely *ould extend su&stanti'e tests o$ payroll *hen A. Payroll is extensi'ely audited &y the state go'ernment. 5. Payroll expense is su&stantially higher than in the prior year due to company gro*th. C# ='erpayments are disco'ered in per$orming tests o$ details. 6. !mployees complain to management a&out too much o'ertime.

AACSB: Communication AICPA BB: Critical +)inkin! AICPA FN: Decision .akin! Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

12-%%

Chapter 12 - Auditing the Human Resource Management Process

%). "hich o$ the $ollo*ing could test the occurrence assertion $or payroll-related lia&ilities4 A# Compare items in accrued payroll taxes to the supporting payroll tax return. 5. :earch $or unrecorded lia&ilities. C. !xamine payroll tax returns to determine that the expense *as recorded in the proper period. 6. Re'ie* payroll lia&ilities $or proper classi$ication as short-or long-term.

AACSB: Communication AICPA BB: Industry AICPA FN: .easurement Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

%,. "hich o$ the $ollo*ing is re.uired o$ an auditor *ho is testing the $air 'alue o$ options in share-&ased compensation4 A. 8sing a specialist. %# Testing the inputs used in the 'aluation model. C. 5ecoming an expert in option-pricing. 6. 8sing the *or+ o$ internal auditors.

AACSB: Communication AICPA BB: e!al AICPA FN: .easurement Blooms: A((ly Difficulty: % .edium earnin! "b#ecti$e: 1%&1% 2nderstand )o, to e$aluate t)e audit findin!s and reac) a final conclusion on (ayroll e7(ense and (ayroll& related accrued e7(enses* +o(ic: E$aluatin! t)e Audit Findin!s

%/. -n an -T payroll system en'ironment0 an auditor *ould &e least li+ely to use test data to test controls related to A. Missing employee num&ers. 5. Proper appro'al o$ o'ertime &y super'isors. C. Time cards *ith in'alid 2o& num&ers. $# Agreement o$ hours per cloc+ cards *ith hours on time cards.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: 2nderstand Difficulty: / -ard earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls

12-%#

Chapter 12 - Auditing the Human Resource Management Process

%1. !$$ecti'e internal control o'er unclaimed payroll chec+s that are +ept &y the Treasury 6epartment *ould include Accounting 6epartment procedures that re.uire A. !$$ecti'e cancellation and stop payment orders $or chec+s representing unclaimed *ages. 5. Redepositing unclaimed *ages a$ter a period o$ % months. C. Accounting $or all unclaimed *ages in a current lia&ility account. $# Periodic accounting $or the actual chec+s representing unclaimed *ages.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: 2nderstand Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e .a#or Functions

#3. !$$ecti'e internal control o'er the payroll $unction *ould include *hich o$ the $ollo*ing4 A. Total time recorded on time-cloc+ punch cards should &e reconciled to 2o& reports &y employees responsi&le $or those speci$ic 2o&s. 5. Payroll 6epartment employees should &e super'ised &y the management o$ the Human Resource 6epartment. C. Payroll 6epartment employees should &e responsi&le $or maintaining employee personnel records. $# Total time spent on 2o&s should &e compared *ith total time indicated on timecloc+ punch cards.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: 2nderstand Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e .a#or Functions

12-%(

Chapter 12 - Auditing the Human Resource Management Process

#1. A CPA re'ie*s a client;s payroll procedures. The CPA *ould consider internal control to &e less than e$$ecti'e i$ a payroll department super'isor *as assigned the responsi&ility $or A# 6istri&uting payroll chec+s to employees. 5. Re'ie*ing and appro'ing time reports $or su&ordinate employees. C. Hiring su&ordinate employees. 6. -nitiating re.uests $or salary ad2ustments $or su&ordinate employees.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: 2nderstand Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'3 0no, t)e a((ro(riate se!re!ation of duties for t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e 0ey Se!re!ation of Duties

#2. An auditor *ould consider internal control o'er a client;s payroll procedures to &e ine$$ecti'e i$ the payroll department super'isor is responsi&le $or A. Hiring su&ordinate payroll department employees. %# Ha'ing custody o'er unclaimed paychec+s. C. 8pdating employee earnings records. 6. Applying pay rates to time tic+ets.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: 2nderstand Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'3 0no, t)e a((ro(riate se!re!ation of duties for t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e 0ey Se!re!ation of Duties

12-%)

Chapter 12 - Auditing the Human Resource Management Process

#%. "hich o$ the $ollo*ing is a control acti'ity that most li+ely could help pre'ent employee payroll $raud4 A# The Human Resource department promptly sends employee termination notices to the payroll super'isor. 5. !mployees *ho distri&ute payroll chec+s $or*ard unclaimed payroll chec+s to the a&sent employees; super'isors. C. :alary rates resulting $rom ne* hires are appro'ed &y the payroll super'isor. 6. Total hours used $or determination o$ gross pay are calculated &y the payroll super'isor.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e .a#or Functions

##. An e$$ecti'e system o$ internal control o'er the payroll $unction *ould include A# >eri$ication o$ agreement o$ 2o& time tic+ets *ith employee cloc+ card hours &y a payroll department employee. 5. Reconciliation o$ totals on 2o& time tic+ets *ith 2o& reports &y employees responsi&le $or those speci$ic 2o&s. C. Custody o$ rate authorization records &y the super'isor o$ the payroll department. 6. Preparation o$ payroll transaction 2ournal entries &y an employee *ho reports to the super'isor o$ the human resource department.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e .a#or Functions

12-%,

Chapter 12 - Auditing the Human Resource Management Process

#(. ?ey segregations o$ duties in the human resource management process include all o$ the $ollo*ing except7 A. The super'ision $unction should &e separate $rom the payroll-processing $unction. 5. The dis&ursement $unction should &e separate $rom the super'ision $unction. C# The human resource $unction should &e separate $rom setting salaries. 6. The payroll-processing $unction should &e separate $rom the general ledger $unction.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'3 0no, t)e a((ro(riate se!re!ation of duties for t)e )uman resource mana!ement (rocess* +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +)e 0ey Se!re!ation of Duties

#). -n testing the payroll o$ a large company0 the auditor *ants to esta&lish that the indi'iduals included in a sample actually *ere employees o$ the company during the period under re'ie*. "hat *ill &e the &est source to determine this4 A. Telephone contacts *ith the employees. 5. Tracing $rom the payroll register to the employee;s earnings records. C. Con$irmation *ith the union or other independent organization. $# !xamination o$ Human Resource 6epartment records.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision .akin! Blooms: A((ly Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

12-%/

Chapter 12 - Auditing the Human Resource Management Process

#,. 6uring the current year &eing audited0 Hitech0 -nc. changed $rom a con'entional payroll punch cloc+ to a computerized payroll time system. actory employees no* record time in and out *ith magnetic cards and the -T system automatically updates all payroll records. 5ecause o$ this change A. The auditor must audit through the computer. 5. -nternal control has impro'ed. C# "ithout paper cloc+ cards0 part o$ the audit trail has &een altered. 6. The potential $or payroll related $raud has &een diminished.

AACSB: +ec)nolo!y AICPA BB: e$era!in! +ec)nolo!y AICPA FN: e$era!in! +ec)nolo!y Blooms: A((ly Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

#/. "hich o$ the $ollo*ing internal control acti'ities could &est pre'ent direct la&or $rom &eing charged to manu$acturing o'erhead4 A. Reconciliation o$ *or+ in process in'entory *ith cost records. %# Comparison o$ daily 2ournal entries *ith the $actory la&or summary. C. Comparison o$ period costs &udgets and time cards. 6. Reconciliation o$ the un$inished 2o& summary and production cost records.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

12-%1

Chapter 12 - Auditing the Human Resource Management Process

#1. "hich o$ the $ollo*ing internal control acti'ities most li+ely *ould pre'ent direct la&or hours $rom &eing charged to manu$acturing o'erhead4 A. Periodic independent counts o$ *or+-in-process $or comparison to recorded amounts. 5. Comparison o$ daily 2ournal entries *ith appro'ed production orders. C# 8se o$ time tic+ets to record actual la&or *or+ed on production orders. 6. Reconciliation o$ *or+-in-process in'entory *ith periodic cost &udgets.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process

(3. An auditor most li+ely *ould assess control ris+ at the maximum i$ the payroll department super'isor is responsi&le $or A. !xamining authorization $orms $or ne* employees. 5. Comparing payroll registers *ith original &atch transmittal data. C# Authorizing payroll rate changes $or all employees. 6. Hiring all su&ordinate payroll department employees.

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'3 0no, t)e a((ro(riate se!re!ation of duties for t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&': Assess control risk for a )uman resource mana!ement (rocess* +o(ic: Control Risk Assessment +o(ic: +)e 0ey Se!re!ation of Duties +o(ic: +)e .a#or Functions

12-#3

Chapter 12 - Auditing the Human Resource Management Process

(1. -n determining the e$$ecti'eness o$ an entity;s policies and procedures relating to the existence or occurrence assertion $or payroll transactions0 an auditor most li+ely *ould in.uire a&out and A# =&ser'e the segregation o$ duties concerning human resource responsi&ilities and payroll dis&ursement. 5. -nspect e'idence that all prenum&ered payroll chec+s are accounted $or. C. Recompute the payroll deductions $or employee $ringe &ene$its. 6. >eri$y the preparation o$ the monthly payroll account &an+ reconciliation.

AACSB: Communication AICPA BB: Industry AICPA FN: .easurement Blooms: Analy5e Difficulty: / -ard earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: Control Acti$ities and +ests of Controls +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

(2. -n the su&stanti'e audit procedures $or payroll *here the control ris+ is set at lo*0 an auditor most li+ely *ould A. >eri$y that chec+s representing unclaimed *ages are mailed. 5. Trace indi'idual employee deductions to entity 2ournal entries. C. =&ser'e entity employees during a payroll distri&ution. $# Compare payroll costs *ith entity standards or &udgets.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: / -ard earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

12-#1

Chapter 12 - Auditing the Human Resource Management Process

(%. Tracing a sample o$ time cards &e$ore and a$ter period end to the *ee+ly payroll report and tracing the *ee+ly payroll report to the general ledger to 'eri$y that payroll transactions are recorded in the proper period *ould pro'ide e'idence primarily $or *hich assertion4 A. Classi$ication. 5. =ccurrence. C# Cuto$$. 6. >aluation.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: / -ard earnin! "b#ecti$e: 1%&'6 2nderstand )o, to relate t)e assessment of control risk to substanti$e (rocedures* +o(ic: Relatin! t)e Assessed e$el of Control Risk to Substanti$e Procedures

(#. Comparing amounts selected $rom the payroll account analysis $or payroll accruals to supporting documentation *ould pro'ide e'idence primarily $or *hich assertion4 A. Completeness. %# !xistence. C. Classi$ication. 6. Presentation and disclosure.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: / -ard earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

12-#2

Chapter 12 - Auditing the Human Resource Management Process

Short Answer Questions

((. !xplain ho* the human resource management process can a$$ect the $inancial statements. The main human resource transaction that a$$ects the $inancial statements is the payroll process. This process a$$ects accounts such as cash0 in'entory0 and 'arious expense accounts and accruals. -$ there are *ea+ controls in the human resource department0 these accounts could &e materially misstated. Auditors should &ecome $amiliar *ith the payroll process in order to test these accounts.

AACSB: Communication AICPA BB: Industry AICPA FN: Decision .akin! Blooms: 2nderstand Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 De$elo( an understandin! of t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'% Be familiar ,it) t)e ty(es of transactions in t)e )uman resource mana!ement (rocess and t)e financial statement accounts affected* +o(ic: "$er$ie, of t)e -uman Resource .ana!ement Process +o(ic: +y(es of +ransactions and Financial Statements Accounts Affected

(). @isted &elo* are descriptions o$ 'arious types o$ documents used in the payroll process. -denti$y the document &eing descri&ed $or each o$ the $ollo*ing 1A The document used to record hours *or+ed &y an employee. 2A The document that summarizes all payroll payments issued to employees. %A The document that contains in$ormation on an employee;s *or+ history. #A The $orm used to authorize deductions $rom an employee;s pay. (A The computer $ile that contains all the entity;s records related to payroll. 1A Time card9time sheet. 2A Payroll Register. %A Personnel record. #A "-#. (A Payroll Master ile.

AACSB: Communication AICPA BB: Industry AICPA FN: .easurement Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'/ 0no, and describe t)e ty(es of documents and records used in t)e (ayroll (rocess* +o(ic: +y(es of Documents and Records

12-#%

Chapter 12 - Auditing the Human Resource Management Process

(,. 5ro*nstein0 CPA0 has &een engaged to audit the $inancial statements o$ Boung Computer =utlets0 -nc.0 a ne* client. Boung is a pri'ately o*ned chain o$ retail stores that sells a 'ariety o$ computer so$t*are and 'ideo products. Boung uses an in-house payroll department at its corporate head.uarters to compute payroll data and to prepare and distri&ute payroll chec+s to its %33 salaried employees. 5ro*nstein is preparing an internal control .uestionnaire to assist in o&taining an understanding o$ Boung;s internal control and in setting control ris+. Prepare a CPayrollC segment o$ 5ro*nstein;s internal control .uestionnaire that *ould assist in o&taining an understanding o$ Boung;s internal control and $or setting the client;s control ris+. 6o not prepare .uestions relating to cash payroll0 -T applications0 or payments &ased on hourly rates0 piece*or+0 commissions0 employee &ene$its Dpensions0 health care0 'acations0 and so onA0 or payroll tax accruals other than *ithholdings. 8se the $ollo*ing $ormat7

12-##

Chapter 12 - Auditing the Human Resource Management Process

12-#(

Chapter 12 - Auditing the Human Resource Management Process

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A((ly Difficulty: / -ard earnin! "b#ecti$e: 1%&'1 2nderstand t)e functions in t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'3 0no, t)e a((ro(riate se!re!ation of duties for t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls +o(ic: +)e 0ey Se!re!ation of Duties +o(ic: +)e .a#or Functions

12-#)

Chapter 12 - Auditing the Human Resource Management Process

(/. Eenerally0 is the inherent ris+ le'el $or the human resource management process set at lo*0 moderate or high4 or *hat area o$ the process might the appropriate le'el di$$er $rom the pre'ious ans*er4 "hy4 -nherent ris+ is normally set lo* $or the human resource management process0 due to the small num&er o$ inherent ris+ $actors that a$$ect the process and its related accounts. Ho*e'er0 this is only true $or non-o$$icers. -nherent ris+ $or o$$icer compensation may &e set higher0 due to the opportunity and moti'e o$ o$$icers to ta+e ad'antage o$ their higher ran+ing o$$ices in the $orm o$ excessi'e compensation.

AACSB: Communication AICPA BB: Critical +)inkin! AICPA FN: Risk Analysis Blooms: 2nderstand Difficulty: % .edium earnin! "b#ecti$e: 1%&'4 0no, and e$aluate in)erent risks rele$ant to t)e )uman resource mana!ement (rocess* +o(ic: In)erent Risk Assessment

12-#,

Chapter 12 - Auditing the Human Resource Management Process

(1. Ei'e an example o$ a test o$ controls that could &e used &y an auditor to test $or the $ollo*ing assertions7 =ccurrence0 Accuracy0 and Cuto$$. Possi&le answers7 =ccurrence-The auditor *ill *ant to test $or payments made that *ere not earned. This can &e tested &y o&ser'ing and e'aluating proper segregation o$ duties and employees; use o$ the time cloc+0 re'ie*ing and testing personnel $iles0 re'ie*ing and testing the client;s procedures $or changing employees; records and entering and remo'ing employee num&ers $rom the payroll master $ile0 and inspecting the time cards $or appro'al &y the super'isor. Accuracy-This assertion states that all transactions are recorded at the proper amount. To test it0 the auditor could re'ie* and test the client;s 'eri$ication procedures0 re'ie* the payroll register $or unusual amounts0 re'ie* the client;s &udgeting procedures and the reconciliation o$ the payroll master $ile to the general ledger payroll accounts0 examine the reconciliation o$ C&e$ore and a$terC reports to the payroll master $ile0 and re'ie* and test the client;s procedures $or changing employees; records. Cuto$$-To test that all transactions *ere recorded in the proper period0 the auditor could re'ie* and test the client;s procedures $or changing employees; records0 processing time cards0 and recording payroll lia&ilities.

AACSB: Communication AICPA BB: Industry AICPA FN: .easurement Blooms: A((ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'9 0no, key internal controls and de$elo( rele$ant tests of controls for (ayroll transactions* +o(ic: Control Acti$ities and +ests of Controls

12-#/

Chapter 12 - Auditing the Human Resource Management Process

)3. -denti$y *hether the $ollo*ing tests are su&stanti'e analytical procedures0 tests o$ details o$ transactions0 or tests o$ details o$ account &alances. 1A Trace a sample o$ payroll chec+s to the master employee list to 'eri$y occurrence. 2A Recalculate the mathematical accuracy o$ a sample o$ payroll chec+s. %A Test a sample o$ &an+ reconciliations $or the payroll &an+ account. #A !stimate sales commissions &y applying commission $ormulas to recorded sales totals. (A Compare amounts accrued to supporting documentation0 such as payroll tax returns. )A Compare payroll costs as a percentage o$ sales to industry data. 1A Tests o$ details o$ transactions. 2A Tests o$ details o$ transactions. %A Tests o$ details o$ account &alances. #A :u&stanti'e analytical procedures. (A Tests o$ details o$ account &alances. )A :u&stanti'e analytical procedures.

AACSB: Communication AICPA BB: Critical +)inkin! AICPA FN: .easurement Blooms: 2nderstand Difficulty: / -ard earnin! "b#ecti$e: 1%&1' Be familiar ,it) substanti$e analytical (rocedures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: Substanti$e Analytical Procedures +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

12-#1

Chapter 12 - Auditing the Human Resource Management Process

)1. or each o$ the $ollo*ing tests0 identi$y the assertion to *hich the test applies. 1A Trace a sample o$ payroll chec+s to the master employee list to 'eri$y occurrence. 2A Recalculate the mathematical accuracy o$ a sample o$ payroll chec+s. %A Test a sample o$ &an+ reconciliations $or the payroll &an+ account. #A !stimate sales commissions &y applying commission $ormulas to recorded sales totals. (A Compare amounts accrued to supporting documentation0 such as payroll tax returns. )A Compare payroll costs as a percentage o$ sales to industry data. 1A =ccurrence. 2A Accuracy. %A Rights and =&ligations. #A =ccurrence. (A >aluation and allocation. )A Completeness.

AACSB: Communication AICPA BB: Critical +)inkin! AICPA FN: .easurement Blooms: 2nderstand Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' Be familiar ,it) substanti$e analytical (rocedures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: Substanti$e Analytical Procedures +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

)2. The Hamster :top has F1%0)(3 in the Accrued Payroll account. Hamster;s *ee+ly payroll is F1()0333 and the accrual represents payroll $or % days. -$ controls are strong0 determine *hether additional audit *or+ should &e per$ormed on this account. 5ecause the accrual is $or three days0 *e can estimate the appropriate amount &y ta+ing the total *ee+ly payroll times )3 percent GD% days9( daysA F1()0333 H .) I F1%0)33J. This calculation is close to the actual amount and0 there$ore0 no $urther *or+ should &e re.uired.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision .akin! Blooms: Analy5e Difficulty: % .edium earnin! "b#ecti$e: 1%&1' Be familiar ,it) substanti$e analytical (rocedures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: Substanti$e Analytical Procedures

12-(3

Chapter 12 - Auditing the Human Resource Management Process

)%. "hen an auditor sets control ris+ lo*0 su$$icient e'idence can &e o&tained $or most payroll accounts through an understanding o$ internal controls0 su&stanti'e analytical procedures0 and tests o$ details o$ transactions. Ho*e'er0 there are se'eral accounts in the payroll cycle that may re.uire more attention. <ame the accounts and explain *hy the additional testing is necessary. The accounts that need additional testing are those that are related to the o$$icers o$ the company. @imits on the amount o$ compensation recei'ed &y o$$icers can &e set as a part o$ lending agreements and in$ormation regarding executi'e salaries is needed $or the $ederal tax return. Also0 there is an increased ris+ o$ $raud in these accounts0 &ecause o$$icers ha'e the moti'e and opportunity to o'erride the control acti'ities and pay themsel'es more than is authorized. <ote that A:5 no* re.uires share-&ased compensation to &e 'alued at $air 'alue. 6ue to the complexity and 2udgment in'ol'ed in computing compensation expense $or share-&ased compensation0 extensi'e audit procedures may need to &e per$ormed.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy5e Difficulty: % .edium earnin! "b#ecti$e: 1%&'4 0no, and e$aluate in)erent risks rele$ant to t)e )uman resource mana!ement (rocess* earnin! "b#ecti$e: 1%&1' Be familiar ,it) substanti$e analytical (rocedures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: In)erent Risk Assessment +o(ic: Substanti$e Analytical Procedures +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

)#. A:5 A:C Topic ,1( re.uires speci$ic disclosures regarding human resources0 *hich o$ course must &e 'eri$ied and audited &y the CPA. "hat are those disclosures4 A:5 A:C Topic ,1( re.uires signi$icant disclosure regarding pension costs and postretirement &ene$its. Also0 there are re.uirements $or stoc+-&ased compensation0 pro$itsharing plans0 and de$erred compensation arrangements.

AACSB: Communication AICPA BB: e!al AICPA FN: Re(ortin! Blooms: Remember Difficulty: % .edium earnin! "b#ecti$e: 1%&11 Be familiar ,it) substanti$e tests of transactions and tests of details of account balances and disclosures used to audit (ayroll e7(ense and (ayroll&related accrued e7(enses* +o(ic: +ests of Details of Classes of +ransactions8 Account Balances8 and Disclosures

12-(1