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10. Which of the following departments most likely would approve
changes in pay rates and deductions from employee salaries?
A. Human resource.
A
B. Treasurer.
C. Controller.
D. Payroll.
11. Possible misstatements related to the occurrence assertion for
payroll transactions include all of the following except:
A. Payments to fictitious employees. B. Payments to terminated
employees. D
C. Payments to valid employees who have not worked.
D. Payments to valid employees at a rate in excess of the autho-
rized amount.
12. The proper use of prenumbered termination notice forms by
the Payroll Department should provide assurance that all
A. Uncashed payroll checks were issued to employees who have
not been terminated.
D
B. Personnel files are kept up to date.
C. Employees who have not been terminated receive their payroll
checks.
D. Terminated employees are removed from the payroll.
13. When examining payroll transactions, an auditor is primarily
concerned with the possibility of
A. Underpayments and properly authorized payments.
B. Posting of gross payroll amounts to incorrect salary expense B
accounts.
C. Misfootings of employee time records.
D. Excess withholding of amounts required to be withheld.
14. An auditor vouched data for a sample of employees in a
payroll register to approved clock card/time sheet data to provide
assurance that
A. Payments to employees are computed at authorized rates.
B. Employees worked the number of hours for which they are paid. B
C. Segregation of duties exist between the preparation and distri-
bution of the payroll.
D. Internal controls relating to unclaimed payroll checks are oper-
ating effectively.
15. Which of the following internal control objectives is likely to be
a larger concern in the audit of the payroll cycle?
A. Payroll transactions are properly disclosed.
B. Recorded payroll transactions are valid. B
C. Payroll transactions are recorded in the appropriate time peri-
od.
D. All payroll transactions have been recorded.
16. Which of the following circumstances most likely would cause
an auditor to suspect an employee payroll fraud scheme?
A. There are significant unexplained variances between standard
and actual labor cost.
B. Payroll checks are disbursed by the same employee each
A
payday.
C. Employee time sheets are approved by individual departmental
supervisors.
D. A separate payroll bank account is maintained on an imprest
basis.
17. Which of the following could test the assertion of cutoff for
payroll-related liabilities?
A. Compare items in accrued payroll taxes to the supporting
C
payroll tax return.
B. Search for unrecorded liabilities.
C. Examine payroll tax returns to determine that the expense was
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recorded in the proper period.
D. Review payroll liabilities for proper classification as short-or
long-term.
18. Which of the following could test the assertion of classification
for payroll-related liabilities?
A. Compare items in accrued payroll taxes to the supporting
payroll tax return.
B. Search for unrecorded liabilities. D
C. Examine payroll tax returns to determine that the expense was
recorded in the proper period.
D. Review payroll liabilities for proper reporting as short- or
long-term.
19. All of the following are incorporated into valuation models
except:
A. The exercise price of the option.
D
B. The term of the option.
C. Expected dividends.
D. Current tax rates.
20. A surprise observation by an auditor of an entity's regular dis-
tribution of paychecks is primarily designed to satisfy the auditor
that
A. All unclaimed payroll checks are properly returned to the
cashier.
B. The paymaster is not involved in the distribution of payroll D
checks.
C. All employees have in their possession proper employee iden-
tification.
D. Names on the company payroll are those of bona fide employ-
ees presently on the job.
21. Which of the following is the best reason why an auditor
should consider observing an entity's distribution of regular payroll
checks?
A. To ensure that names on the company payroll are those of bona
fide employees presently on the job. A
B. Total payroll costs are a significant part of total operating costs.
C. The auditor did not observe the distribution of the entire regular
payroll during the audit in the prior year.
D. Employee turnover is excessive.
22. The purpose of segregating the duties of distributing payroll
checks and hiring personnel is to separate the
A. Duties within the accounting function.
B. Custody of assets from the accounting for those assets. C
C. Authorization of transactions from the custody of related as-
sets.
D. Operational responsibility from record keeping responsibility.
23. The purpose of segregating the duties of hiring personnel and
distributing payroll checks is to separate the
A. Administrative controls from the internal accounting controls.
B. Human resources function from the controllership function. D
C. Operational responsibility from the record-keeping responsibil-
ity.
D. Authorization of transactions from the custody of related assets.
24. Which of the following is an effective internal control used to
prove that production department employees are properly validat-
ing payroll timecards at a time-recording station?
A. Timecards should be carefully inspected by those persons who
C
distribute pay envelopes to the employees.
B. One person should be responsible for maintaining records of
employee time for which salary payment is not to be made.
C. Daily reports showing time charged to jobs should be approved
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by the foreman and compared to the total hours worked on the
employee timecards.
D. Internal auditors should make observations of distribution of
paychecks on a surprise basis.
25. A large retail enterprise has established a policy that requires
that the paymaster deliver all unclaimed payroll checks to the
Internal Auditing Department at the end of each payroll distribution
day. This policy was most likely adopted in order to
A. Assure that employees who were absent on a payroll distribu-
tion day are not paid for that day.
D
B. Prevent the paymaster from cashing checks that are unclaimed
for several weeks.
C. Prevent a bona fide employee's check from being claimed by
another employee.
D. Detect any fictitious employee who may have been placed on
the payroll.
26. In the weekly computer run to prepare payroll checks, a
check was printed for an employee who had been terminated the
previous week. Which of the following controls, if properly utilized,
would have been
most effective in preventing the error or ensuring its prompt de-
tection?
A. A control total for hours worked, prepared from time sheets A
collected by the Timekeeping Department.
B. Requiring the treasurer's office to account for the numbers of
the prenumbered checks issued to the EDP department for the
processing of the payroll.
C. Use of a check digit for employee numbers.
D. Use of a header label for the payroll input sheet.
27. Which of the following is the best way for an auditor to deter-
mine that every name on a company's payroll is that of a bona fide
employee presently on the job?
A. Examine personnel records for accuracy and completeness.
B. Examine employees' names listed on payroll accounting
C
records.
C. Make a surprise observation of the company's regular distrib-
ution of paychecks.
D. Visit the working areas and confirm with employees their badge
or identification numbers.
28. Transactions processed through the payroll process include all
of the following except:
A. Payments to employees for services rendered.
B
B. Payments to independent contractors for services rendered.
C. Accrual of social security taxes.
D. Payment of unemployment taxes.
29. Vouching selected items from the payroll register to employee
time sheets that have been approved by supervisory personnel
provides evidence that
A. Internal controls relating to payroll disbursements were oper-
ating effectively.
B. Payroll checks were signed by an appropriate officer indepen- D
dent of the payroll preparation process.
C. Only bona fide employees worked and their pay was properly
computed.
D. Employees worked the number of hours for which their pay was
computed.

30. Which of the following activities most likely would detect

whether payroll data are accurately processed?
B
A. Monitor authorized distribution of data control sheets.
B. Use test data to verify the accurate performance of payroll
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processing.
C. Examine source documents for approval by supervisors.
D. Segregate duties between approval of hardware and software
specifications.
31. When control risk is assessed as low for assertions related to
payroll, substantive tests of payroll balances most likely would be
limited to applying substantive analytical procedures and
A. Observing the distribution of paychecks. D
B. Footing and crossfooting the payroll register.
C. Inspecting payroll tax returns.
D. Recalculating payroll accruals.
32. Which of the following procedures would normally be per-
formed by the auditor when conducting tests of payroll transac-
tions?
A. Interview employees selected in a statistical sample of payroll
transactions.
B
B. Vouch number of hours worked as shown on payroll to time
sheets and time reports signed by the foreman.
C. Confirm amounts withheld from employees' salaries with proper
governmental authorities.
D. Examine signatures on paid salary checks.
33. A substantive test of transactions to test the completeness
assertion includes
A. Tracing a sample of time sheets to the payroll register.
B. Testing a sample of payroll checks for the presence of an
A
authorized time sheet.
C. Testing postings to the payroll register for a sample of payroll
checks.
D. Recomputing the accuracy of a sample of payroll checks.
34. Comparing selected items from the payroll register to employ-
ee time records that have been approved by supervisory person-
nel tests which of the following assertions for payroll expense?
A. Occurrence. A
B. Completeness.
C. Authorization.
D. Cutoff.
35. An auditor most likely would extend substantive tests of payroll
when
A. Payroll is extensively audited by the state government.
B. Payroll expense is substantially higher than in the prior year due C
to company growth.
C. Overpayments are discovered in performing tests of details.
D. Employees complain to management about too much overtime.
36. Which of the following could test the occurrence assertion for
payroll-related liabilities?
A. Compare items in accrued payroll taxes to the supporting
payroll tax return.
B. Search for unrecorded liabilities. A
C. Examine payroll tax returns to determine that the expense was
recorded in the proper period.
D. Review payroll liabilities for proper classification as short- or
long-term.
37. Which of the following is required of an auditor who is testing
the fair value of options in share-based compensation?
A. Using a specialist.
B
B. Testing the inputs used in the valuation model.
C. Becoming an expert in option-pricing.
D. Using the work of the internal audit function.

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38. In an IT payroll system environment, an auditor would be least
likely to use test data to test controls related to
A. Missing employee numbers.
D
B. Proper approval of overtime by supervisors.
C. Time sheets with invalid job numbers.
D. Agreement of hours per clock cards with hours on time sheets.
39. Effective internal control over unclaimed payroll checks that
are kept by the Treasury Department would include Accounting
Department procedures that require
A. Effective cancellation and stop payment orders for checks
representing unclaimed wages. D
B. Redepositing unclaimed wages after a period of 3 months.
C. Accounting for all unclaimed wages in a current liability account.
D. Periodic accounting for the actual checks representing un-
claimed wages.
40. Effective internal control over the payroll function would in-
clude which of the following?
A Total time recorded on time-clock punch cards should be rec-
onciled to job reports by employees responsible for those specific
jobs.
B. Payroll Department employees should be supervised by the
D
management of the Human Resource
Department.
C. Payroll Department employees should be responsible for main-
taining employee personnel records.
D. Total time spent on jobs should be compared with total time
indicated on timeclock punch cards.
41. A CPA reviews an entity's payroll procedures. The CPA would
consider internal control to be less than effective if a payroll
department supervisor was assigned the responsibility for
A. Distributing payroll checks to employees.
B. Reviewing and approving time reports for subordinate employ- A
ees.
C. Hiring subordinate employees.
D. Initiating requests for salary adjustments for subordinate em-
ployees.
42. An auditor would consider internal control over an entity's
payroll procedures to be ineffective if the payroll department su-
pervisor is responsible for
A. Hiring subordinate payroll department employees. B. Having B
custody over unclaimed paychecks.
C. Updating employee earnings records.
D. Applying pay rates to time tickets.
43. Which of the following is a control activity that most likely could
help prevent employee payroll fraud?
A. The Human Resource department promptly sends employee
termination notices to the payroll supervisor.
B. Employees who distribute payroll checks forward unclaimed
A
payroll checks to the absent employees' supervisors.
C. Salary rates resulting from new hires are approved by the
payroll supervisor.
D. Total hours used for determination of gross pay are calculated
by the payroll supervisor.

44. An effective system of internal control over the payroll function

would include
A. Verification of agreement of job time tickets with employee clock
card hours by a payroll department employee. A
B. Reconciliation of totals on job time tickets with job reports by
employees responsible for those specific jobs.
C. Custody of rate authorization records by the supervisor of the
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payroll department.
D.Preparation of payroll transaction journal entries by an em-
ployee who reports to the supervisor of the human resource
department.
45. Key segregations of duties in the human resource manage-
ment process include all of the following except:
A. The supervision function should be separate from the pay-
roll-processing function. B. The disbursement function should be
separate from the supervision function. C
C. The human resource function should be separate from setting
salaries.
D. The payroll-processing function should be separate from the
general ledger function.
46. In testing the payroll of a large company, the auditor wants to
establish that the individuals included in a sample actually were
employees of the company during the period under review. What
will be the best source to determine this?
A. Telephone contacts with the employees. D
B. Tracing from the payroll register to the employee's earnings
records.
C. Confirmation with the union or other independent organization.
D. Examination of Human Resource Department records.
47. During the current year being audited, Hitech, Inc. changed
from a conventional payroll punch clock to
a computerized payroll time system. Factory employees now
record time in and out with magnetic cards and the IT system
automatically updates all payroll records. Because of this change
C
A. The auditor must audit through the computer.
B. Internal control has improved.
C. Without paper clock cards, part of the audit trail has been
altered.
D. The potential for payroll related fraud has been diminished.
48. Which of the following internal control activities could best pre-
vent direct labor from being charged to manufacturing overhead?
A. Reconciliation of work in process inventory with cost records.
B. Comparison of daily journal entries with the factory labor sum-
B
mary.
C. Comparison of period costs budgets and time sheets.
D. Reconciliation of the unfinished job summary and production
cost records.
49. Which of the following internal control activities most likely
would prevent direct labor hours from being charged to manufac-
turing overhead?
A. Periodic independent counts of work-in-process for comparison
to recorded amounts.
B. Comparison of daily journal entries with approved production C
orders.
C. Use of time tickets to record actual labor worked on production
orders.
D. Reconciliation of work-in-process inventory with periodic cost
budgets.
50. An auditor most likely would assess control risk at high if the
payroll department supervisor is responsible for
A. Examining authorization forms for new employees.
C
B. Comparing payroll registers with original batch transmittal data.
C. Authorizing payroll rate changes for all employees.
D. Hiring all subordinate payroll department employees.
51. In determining the effectiveness of an entity's policies and
procedures relating to the existence or occurrence assertion for
payroll transactions, an auditor most likely would inquire about and
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A. Observe the segregation of duties concerning human resource
responsibilities and payroll disbursement.
B. Inspect evidence that all prenumbered payroll checks are ac-
counted for. A
C. Recompute the payroll deductions for employee fringe benefits.
D. Verify the preparation of the monthly payroll account bank
reconciliation.
52. In the substantive audit procedures for payroll where the
control risk is set at low, an auditor most likely would
A. Verify that checks representing unclaimed wages are mailed.
D
B. Trace individual employee deductions to entity journal entries.
C. Observe entity employees during a payroll distribution.
D. Compare payroll costs with entity standards or budgets.
53. Tracing a sample of time sheets before and after period end to
the weekly payroll report and tracing the weekly payroll report to
the general ledger to verify that payroll transactions are recorded
in the proper period would provide evidence primarily for which
assertion? C
A. Classification.
B. Occurrence.
C. Cutoff.
D. Valuation.
54. Comparing amounts selected from the payroll account analy-
sis for payroll accruals to supporting documentation would provide
evidence primarily for which assertion?
A. Completeness. B
B. Existence.
C. Classification.
D. Presentation and disclosure.

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1. Overstatement of financial results can involve failure to record
TRUE
a transaction.
2. Confirmation of accounts payable is a required generally ac-
FALSE
cepted auditing procedure.
3. The primary objective of the auditors' examination of accounts
payable is to determine whether payments are made on a timely FALSE
basis.
4. Auditors generally consider the evidence regarding accounts
payable in the client's possession as more reliable than that for TRUE
accounts receivable.
5. Information regarding the proper cutoff of accounts payable is
TRUE
generally obtained in conjunction with the audit of inventories.
6. Accounts payable from an officer should be classified separate-
TRUE
ly from other accounts payable.
7. It is more important to maintain effective internal control over
accounts payable as it is to maintain effective internal control over FALSE
accounts receivable.
8. For effective internal control over accounts payable. the pur-
FALSE
chasing department should approve invoices for payment.
9. Accounts payable generally present the auditors with difficult
FALSE
valuation problems.
10. The confirmation of existing accounts payable does not prove
TRUE
the completeness of recorded accounts payable.
11. Assume that the auditors are concerned about disburse-
ment transactions that have been recorded for improper amounts.
Which procedure(s) would possibly identify these transactions?

Item Trace from source

documents to journals Vouch from journal
to source documents
D
A. No No
B. No Yes
C. Yes No
D. Yes Yes

A. Option A
B. Option B
C. Option C
D. Option D
12. Which of the following best describes a voucher prepared
under good internal control?

A. A document prepared by Stores that indicates amount to be

purchased.

B. A document prepared by Receiving that indicates the quantity C

received and approves payment.

C. A document prepared by Accounts Payable authorizing a cash

disbursement.

D. A document received by Purchasing from a supplier. indicating

quantity of goods purchased and amount due.

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13. An auditor wishes to perform tests of controls on a client's
cash disbursements relating to accounts payable. If the control
procedures leave no audit trail of documentary evidence- the
auditor most likely will test the procedures by:

A. Confirmation and observation. B

B. Observation and inquiry.

C. Analytical procedures and confirmation.

D. Inquiry and analytical procedures.

14. Which of the following tests of controls most likely would help
assure an auditor that goods shipped are properly billed?

A. Scan the sales journal for sequential and unusual entries.

B
B. Examine shipping documents for matching sales invoices.

C. Compare the accounts receivable ledger to daily sales sum-

maries.

D. Inspect unused sales invoices for consecutive prenumbering.

15. Which of the following audit procedures is best for identifying
unrecorded trade accounts payable?

A. Reviewing cash disbursements recorded subsequent to the

balance sheet date to determine whether the related payable
applies to the prior period.

B. Investigating payables recorded just prior to and just subse- A

quent to the balance sheet date to determine whether they are
supported by receiving reports.

C. Examining unusual relationships between monthly accounts

payable balances and recorded cash payments.

D. Reconciling vendors' statements to the file of receiving reports

to identify items received just prior to the balance sheet date.
16. An entity's internal control requires for every check request
that there be an approved voucher.supported by a prenumbered
purchase order. and a prenumbered receiving report. To deter-
mine whether checks are being issued for unauthorized expen-
ditures- an auditor most likely would select for testing from the
population of:

B
A. Purchase orders.

B. Canceled checks.

C. Receiving reports.

D. Approved vouchers.

17. A client recorded a payable for a large purchase twice. Which

of the following controls would be most likely to detect this error in
a timely and efficient manner?

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A. Footing the purchases journal.

B. Reconciling vendors' monthly statements with subsidiary

payable ledger accounts.
B
C. Tracing totals from the purchases journal to the ledger ac-
counts.

D. Sending written quarterly confirmations to all vendors.

18. When an auditor finds a debit to accounts payable-which of
the following accounts is most likely to be credited?

A. Accounts Receivable.
C
B. Accrued liabilities.

C. Cash.

D. Cost of goods sold.

19. Which of the following is an example of an accrued liability?

A. Accounts payable.

B. Notes payable. D

C. Prepaid insurance.

D. Product warranty liability.

20. A likely analytical procedure to test the accuracy of purchase
discounts would be to compute the ratio of cash discounts earned
to:

A. Accounts payable.
C
B. Notes payable.

C. Purchases.

D. Sales discounts.
21. Auditors may choose not to confirm accounts payable be-
cause:

A. Confirmation obtains evidence identical to that obtained by

cutoff tests.

B. Other reliable external evidence to support the balances is likely B

to be available.

C. A reading of the corporate minutes reveals that confirmation is

unnecessary.

D. The balances due will have changed between the year-end and
the date of confirmation.
22. The assertion most directly addressed when performing the
search for unrecorded liabilities is:

A. Completeness.

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B. Existence.

C. Presentation. A

D. Rights.
23. Which of the following manipulations would understate ac-
counts payable on the financial statements?

A. Overstatement of purchases.
D
B. Closing the cash disbursements journal prior to year-end.

C. Leaving the cash receipts journal open after year-end.

D. Overstating purchase returns.

24. Which statement is correct with respect to accounts payable
confirmations?

A. The negative form is used in most circumstances.

B. Accounts with new suppliers are always confirmed. D

C. They are a required auditing procedure.

D. They are more frequently used in situations in which some

vendors don't send monthly statements.
25. The confirmation of accounts payable is most closely associ-
ated with:

A. Assertion risk.
B
B. Detection risk.

C. Inherent risk.

D. Relative risk.
26. Which of the following audit procedures is aimed most directly
at testing the completeness assertion for accounts payable?

A. Footing the list of accounts payable.

B. Examining underlying documentation for cash disbursements

in the period after year-end. B

C. Tracing shipping reports issued on or before year-end to related

customer purchase orders and invoices.

D. Tracing shipping reports after year-end to related customer

purchase orders and invoices.
27. Which of the following best describes the auditors' approach
to the audit of accrued liabilities?

A. Test computations.
A
B. Confirmation.

C. Observation.

D. A low planned assessed level of control risk.

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28. Which of the following statements is correct regarding ac-
counts payable and the auditor's procedures?

A. Because it is generally more difficult to discover a transaction

that has not been recorded than to discover one that has been
recorded incorrectly.. the audit objective of completeness drives
many of the substantive procedures applied to these balances.

B. A judgment whether an unrecorded payable should be recorded

before the financial statements are prepared depends entirely A
upon the source of the payable.

C. The confirmation of accounts payable selected from the

year-end trial balance of such accounts is most effective in dis-
covering unrecorded liabilities.

D. Unrecorded payables are often discovered through examining

vouchers payable entered into the voucher register prior to the
balance sheet date.
29. Which of the following assertions is of principle concern to the
auditors in the examination of accounts payable?

A. Existence.
B
B. Completeness.

C. Valuation.

D. Authorization.
30. Which of the following best describes the specific accounts
payable that are selected for confirmation?

A. Accounts with large balances.

B. Accounts with zero balances. C

C. Accounts with a large amount of activity regardless of their

balance.

D. Accounts for which vendor statements are available.

31. Most of the audit work on accounts payable is typically per-
formed:

A. Before the balance sheet date.

B. At the balance sheet date in conjunction with inventory cutoff C

tests.

C. After the balance sheet date.

D. Simultaneously with the audit of accrued liabilities.

32. When the auditors discover an understatement of liabilities..
they would most likely also expect to find an:

A. Understatement of assets.
A
B. Understatement of owners' equity.

C. Overstatement of expenses.

D. Understatement of revenues.

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33. Which of the following procedures for detecting unrecorded
transactions at the client's December 31 year-end is least likely to
result in discovery of an unrecorded year-end account payable?

A. Examination of invoices received after year-end.

C
B. Examination of vouchers payable entered in the January
voucher register.

C. Examination of January receiving reports prepared for goods

shipped FOB destination in December to the client.

D. Confirmation of year-end accounts payable.

34. For good internal control- a copy of a receiving report should
be sent to all of the following departments except:

A. Accounts payable.
D
B. Purchasing.

C. Stores.

D. Shipping.
35. Auditors should be aware that a voucher system may result in
which of the following at year-end:

A. Understatement of liabilities.
A
B. Overstatement of assets.

C. Understatement of owners' equity.

D. Overstatement of expenses.
36. Accrued liabilities generally differ from accounts payable in
that accrued liabilities:

A. Accumulate over time.

A
B. Are usually confirmed at year-end.

C. Depend upon the existence of a transaction for original record-

ing of the account.

D. Are never included in cost of goods sold.

37. The form typically used to confirm accounts payable:

A. Does not require a response from the vendor.

C
B. Confirms the balance recorded by the client at year-end.

C. Requires the vendor to indicate the amount of the payable.

D. Is the same as the form used to confirm accounts receivable.

38. Which of the following is a control procedure that is usually
applied to accounts payable?

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A. Periodic confirmation of accounts payable.

B. Mailing statements to vendors detailing their account.

D
C. Periodic aging of accounts payable.

D. Reconciliation of vendor statements with accounts payable.

39. Which of the following is the best control procedure to prevent
the payment of an invoice twice?

A. Review of supporting documentation by the person signing the

check.
A
B. Requiring dual signatures on checks.

C. Use of a check protector.

D. Reconciliation of vendor statements to accounts payable.

40. The auditors' search for unrecorded liabilities is completed:

A. During an interim period.

B. At the balance sheet date. C

C. Subsequent to the balance sheet date.

D. At any time during the examination.

41. When the auditors select a sample of items from the vouchers
payable register for the last month of the period under audit and
trace these items to underlying documents... the auditors are
gathering evidence primarily in support of the assertion that:

A. Recorded obligations were paid. C

B. Incurred obligations were recorded in the correct period.

C. Recorded obligations occurred prior to year-end.

D. Cash disbursements were recorded as incurred obligation.

42. Internal control over accounts payable is improved when:

A. Purchase orders show approved prices.

B. Informal bids are obtained.

A
C. Annual trial balance of accounts payable subsidiary ledgers is
required.

D. Payment is made upon approval of the purchasing agent.

43. With properly designed internal control.. the same employee
should not be permitted to:

A. Sign checks and cancel supporting documents.

C
B. Receive merchandise and prepare a receiving report.

C. Prepare disbursement vouchers and sign checks.

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D. Initiate a request to order merchandise and approve merchan-
dise received.
44. Unrecorded liabilities are most likely to be found during the
review of which of the following documents?

A. Unpaid bills.
A
B. Shipping records.

C. Bills of lading.

D. Unmatched sales invoices.

45. Which of the following procedures is least likely to be complet-
ed before the balance sheet date?

A. Observation of inventory.
C
B. Review of internal control over cash disbursements.

C. Search for unrecorded liabilities.

D. Confirmation of receivables.
46. Which of the following audit procedures is least likely to detect
an unrecorded liability?

A. Analysis and recomputation of interest expense.

B
B. Analysis and recomputation of depreciation expense.

C. Mailing of a cash confirmation form.

D. Reading of the minutes of meetings of the board of directors.

47. The auditor will most likely perform extensive tests for possible
understatement of:

A. Revenues.
C
B. Assets.

C. Liabilities.

D. Capital.

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Analytical procedures are often used for verification of income
statement accounts. TRUE
True False
The Miscellaneous Revenue account should only be analyzed if it
is material in amount. FALSE
True False
Internal control over payroll is enhanced when the personnel
department distributes payroll checks. FALSE
True False
The auditors have a responsibility to report on all FASB-required
supplementary information. FALSE
True False
Subsequent events that provide additional evidence as to condi-
tions that existed at the balance sheet date may result in adjusting
TRUE
journal entries.
True False
Dual dating of an audit report extends the auditors' liability for
disclosure through the later date for all areas of the financial
FALSE
statements.
True False
If management fails to list an unasserted claim in the letter of
inquiry to a lawyer, the lawyer is not required to inform the auditors
TRUE
of the omission.
True False
Normally, general risk contingencies need not be disclosed in the
financial statements. TRUE
True False
If not adjusted, a situation in which the total likely misstatement
in the financial statements exceeds a material amount is likely to
TRUE
lead to an audit report modification.
True False
Common to future purchase commitments is the fact that they
should be recorded as liabilities at discounted values as of
FALSE
year-end.
True False
Analytical procedures are required as a part of the
A. Detailed tests of balances.
B. Internal control assessment. C. Overall review at the conclusion of the audit.
C. Overall review at the conclusion of the audit.
D. Substantive testing.
The statement that best expresses the auditor's responsibility with
respect to events occurring between the balance sheet date and
the end of his audit is that:
A. The auditor has no responsibility for events occurring in
the subsequent period unless these events affect transactions
recorded on or before the balance sheet date.
B. The auditor's responsibility is to determine that a proper cutoff D. The auditor is responsible for determining that a proper cutoff
has been made and that transactions recorded on or before the has been made and performing a general review of events occur-
balance sheet date actually occurred. ring in the subsequent period.
C. The auditor is fully responsible for events occurring in the sub-
sequent period and should extend all detailed procedures through
the last day of field work.
D. The auditor is responsible for determining that a proper cutoff
has been made and performing a general review of events occur-
ring in the subsequent period.

Shortly after year-end Zero Corporation was informed of the

bankruptcy of Bingo. Zero Corporation showed a receivable of

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$10,000 due from Bingo as of year-end—none of which seems
recoverable. The receivable had been questionable for some time
as Bingo had been experiencing financial difficulties for the past
several years. Yet, Bingo's bankruptcy did not occur until after Zero
Corporation's year-end. Under these circumstances:
YES NO NO
-The Financial Statement should be adjusted: YES NO
-The Event requires Financial Statement disclosure, but no ad-
justment: YES NO
-The Auditor's report should be modified for the lack of consisten-
cy. YES NO
In auditing the balance sheet, most revenue and expense ac-
counts are also audited. Which accounts are most likely to be
audited when auditing Accounts Receivable?
A. Sales and Cost of Goods Sold. C. Sales and Bad Debt Expense.
B. Interest and Bad Debt Expense.
C. Sales and Bad Debt Expense.
D. Interest and Cost of Goods Sold.
Auditors should perform audit procedures relating to subsequent
events?
A. Through year end.
C. Through the last day of field work.
B. Through issuance of the audit report.
C. Through the last day of field work.
D. For a reasonable period after year end.
Which of the following procedures would an auditor most likely
perform while evaluating audit findings at the conclusion of an
audit?
A. Obtain assurance from the entity's attorney that all material
litigation has been disclosed in the financial statements. D. Develop an estimate of the total likely misstatement in the
B. Verify the clerical accuracy of the entity's proof of cash and its financial statements.
bank cutoff statement.
C. Determine whether reportable conditions have corrected.
D. Develop an estimate of the total likely misstatement in the
financial statements.
Which of the following ledger accounts would be least likely to be
analyzed in detail by auditors?
A. Miscellaneous revenue.
C. Travel expense.
B. Professional fees.
C. Travel expense.
D. Repairs and maintenance.
When auditing the statement of cash flows of a profitable, growing
company which combination is most likely?
Positive Negative
Cash Flows from operations: Positive Negative
Cash flows from investing: Positive Negative
The audit of which of the following balance sheet accounts does
not normally result in verification of an income statement ac-
count?
A. Cash. A. Cash
B. Accounts receivable.
C. Property, plant and equipment.
D. Intangible assets.
An example of an internal control weakness is to assign the payroll
department the responsibility for:
A. Preparing the payroll expense distribution.
C. Authorizing increases in pay.
B. Preparing the payroll checks.
C. Authorizing increases in pay.
D. Preparing journal entries for payroll expense.

An example of an internal control weakness is to assign the

personnel department responsibility for: A. Distribution of paychecks.
A. Distribution of paychecks.

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B. Hiring personnel.
C. Authorizing deductions from pay.
D. Interviewing employees for jobs.
Which of the following audit procedures is aimed at determining
whether every name on the company payroll is an employee
actually on the job?
A. A surprise observation of a paycheck distribution.
A. A surprise observation of a paycheck distribution.
B. A test of payroll extensions.
C. Analytical comparisons of budgeted to actual payroll expense.
D. Comparison of payee names on canceled payroll checks with
the payroll register.
Which of the following is not a procedure that is designed to
provide evidence about the existence of loss contingencies?
A. Obtaining a lawyers' letter.
B. Confirming accounts payable.
B. Confirming accounts payable.
C. Reviewing the minutes of board of directors' meetings.
D. Review correspondence with banks.
Which of the following types of matters do not generally require
disclosure in the financial statements?
A. General risk contingencies.
A. General risk contingencies.
B. Commitments.
C. Loss contingencies.
D. Liabilities to related parties.
Material loss contingencies should be recorded in the financial
statements if available information indicates it is probable that
a loss had been sustained prior to the balance sheet date and
the amount of such loss can be reasonably estimated. These
considerations will affect the audit report as follows:
A. If a loss has been recorded in accordance with these criteria,
the auditor may issue an unqualified opinion but is required to
point out the contingency in an explanatory paragraph of the
report.
D. If a loss is probable but the amount cannot be reasonably
B. If a loss meets these criteria but is disclosed in the financial
estimated and is disclosed in the notes to the financial statements
statement notes rather than being recorded therein, the auditor
rather than being recorded therein, the auditor may issue an
may issue an unqualified opinion, but is required to point out the
unqualified opinion.
contingency in an explanatory paragraph of the report.
C. If a loss meets these criteria but is disclosed in the financial
statement notes rather than being recorded therein, the auditor
may issue an unqualified opinion, but should consider adding an
explanatory paragraph as a means of emphasizing the disclosure.
D. If a loss is probable but the amount cannot be reasonably
estimated and is disclosed in the notes to the financial statements
rather than being recorded therein, the auditor may issue an
unqualified opinion.
A refusal by a lawyer to furnish information related to litigation
included in the letter of inquiry is likely to result in:
A. Confirmation of related lawsuits with the claimants.
B. Qualification of the audit report.
B. Qualification of the audit report.
C. An assessment that loss of the litigation is probable.
D. An adverse opinion.
If, after issuing an audit report, the auditors find that they have
failed to perform certain significant audit procedures they should
first:
A. Attempt to determine whether their report is still being relied
A. Attempt to determine whether their report is still being relied
upon by third parties.
upon by third parties.
B. Notify regulatory agencies.
C. Notify legal counsel.
D. Wait until the beginning of the next year's audit to determine
whether misstatements have occurred.

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Which of the following is not a procedure that auditors typically
perform to search for significant events during the subsequent
period?
A. Review minutes of board of directors' meeting.
D. Review changes in internal control during the period subse-
B. Review the latest available interim financial statements.
quent to the balance sheet date.
C. Inquire about any unusual adjustments made subsequent to
the balance sheet date.
D. Review changes in internal control during the period subse-
quent to the balance sheet date.
Which of the following subsequent events might require an adjust-
ment to the client's financial statements?
A. A business combination with another company.
B. Loss on the sale of a closely-held investment.
B. Loss on the sale of a closely-held investment.
C. Loss of plant and equipment due to a fire.
D. Retirement of bonds payable at a loss.
Authorization of which of the following is least likely to be found
during a review of the minutes of the board of directors?
A. Dividends.
D. Writeoff of trade accounts receivable.
B. New debt issuance.
C. New bank accounts.
D. Writeoff of trade accounts receivable.
Which of the following is not a procedure normally performed while
completing the audit?
A. Obtain a lawyer's letter.
D. Obtain confirmation of capital stockholdings from shareholders.
B. Obtain a representations letter.
C. Perform an overall review using analytical procedures.
D. Obtain confirmation of capital stockholdings from shareholders.
Auditors must communicate internal control "significant deficien-
cies" to:
A. The audit committee.
A. The audit committee.
B. The shareholders.
C. The SEC.
D. The Federal Trade Commission.
Which of the following procedures is not a procedure that is
completed near the end of the engagement?
A. Review cash transactions.
A. Review cash transactions.
B. Review to identify subsequent events.
C. Obtain the lawyer's letter.
D. Obtain the letter of representations.
Which of the following information must be reported on in the
auditors' report?
A. FASB-required supplementary information.
C. Information accompanying financial statements in auditor-sub-
B. Other information in client-prepared documents.
mitted documents.
C. Information accompanying financial statements in auditor-sub-
mitted documents.
D. GASB-required supplementary information.
In evaluating whether there is a sufficiently low probability of
material misstatement in the financial statements, the auditors
accumulate:
A. Likely misstatements in the financial statements.
C. Known, projected and other estimated misstatements in the
B. Known misstatements in the financial statements.
financial statements.
C. Known, projected and other estimated misstatements in the
financial statements.
D. Known, projected and potential misstatements in the financial
statements.

Specific misstatement in one of a client's 2,000 accounts receiv-

able is referred to as a(n):
B. Known misstatement.
A. Extrapolation difference.
B. Known misstatement.

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C. Likely misstatement.
D. Projected misstatement.
The review of audit working papers by the audit partner is normally
completed:
A. Prior to year-end.
B. Immediately as each working paper is completed. C. Near the completion of field work.
C. Near the completion of field work.
D. After issuance of the audit report, but prior to required subse-
quent event review procedures.
Management estimates the company's allowance for doubtful
accounts as $200,000, and the auditors develop an estimate
that suggests that the amount should be between $230,000 and
$250,000. The known misstatement in this situation is:
A. $0
A. $0
B. $30,000
C. $40,000
D. $50,000
Management estimates the company's allowance for doubtful
accounts as $200,000, and the auditors develop an estimate
that suggests that the amount should be between $230,000 and
$250,000. The likely misstatement in this situation is:
B. $30,000
A. $0
B. $30,000
C. $40,000
D. $50,000
An approach that quantifies the total likely misstatement as of the
current year-end based on the effects of reflecting misstatements
during the current year (and not considering any unadjusted pre-
vious year misstatements) is referred to as the:
D. Rollover approach.
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.
An approach that quantifies the total likely misstatement as of the
current year-end based on the effects of reflecting all misstate-
ments existing in the balance sheet at the end of the current year,
irrespective of whether the misstatements occurred in the current
or previous years is referred to as the: B. Iron curtain approach.
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.
A client's previous two years of financial statements understated
estimated warranty payable by $30,000 and $50,000 respectively,
immaterial amounts. This year the auditors estimate that the ac-
crual is understated by an additional $60,000. In this year's audit
$100,000 represents a material amount. Assuming that the entire
understatement is to be recorded, following SEC SAB 108 the D. $140,000
decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000
A client's previous two years financial statements understated
estimated warranty payable by $30,000 and $50,000 respectively,
immaterial amounts. This year the auditors estimate that the ac-
crual is understated by an additional $60,000. In this year's audit B. $60,000
$55,000 represents a material amount. Assuming that the entire
understatement is to be recorded, following SEC SAB 108 the
decrease in this year's income due to these understatements is:
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A. $0
B. $60,000
C. $110,000
D. $140,000
One reason why the independent auditors perform analytical pro-
cedures on the client's operations is to identify:
A. Weaknesses of a material nature in internal control.
D. Unusual transactions.
B. Non-compliance with prescribed control procedures.
C. Improper separation of accounting and other financial duties.
D. Unusual transactions.
Which of the following is an analytical procedure that should be
applied to the income statement?
A. Select sales and expense items and trace amounts to related
supporting documents.
B. Ascertain that the net income amount in the statement of cash
D. Compare the actual revenues and expenses with the corre-
flows agrees with the net income amount in the income statement.
sponding figures of the previous year and investigate significant
C. Obtain from the proper client representatives, the beginning
differences.
and ending inventory amounts that were used to determine costs
of sales.
D. Compare the actual revenues and expenses with the corre-
sponding figures of the previous year and investigate significant
differences.
It would be appropriate for the payroll accounting department to
be responsible for which of the following functions?
A. Approval of employee time records.
B. Maintenance of records of employment, discharges, and pay C. Preparation of periodic governmental reports as to employees'
increases. earnings and withholding taxes.
C. Preparation of periodic governmental reports as to employees'
earnings and withholding taxes.
D. Distribution of paychecks to employees.
Which of the following is the best reason why the auditors
should consider observing a client's distribution of regular payroll
checks?
A. Separation of payroll duties is less than adequate for effective
A. Separation of payroll duties is less than adequate for effective
internal control.
internal control.
B. Total payroll costs are a significant part of total operating costs.
C. The auditors did not observe the distribution of the entire regular
payroll during the audit in the prior year.
D. Employee turnover is excessive.
To minimize the opportunities for fraud, unclaimed cash payroll
should be:
A. Deposited in a safe deposit box.
C. Deposited in a special bank account.
B. Held by the payroll custodian.
C. Deposited in a special bank account.
D. Held by the controller.
The purpose of segregating the duties of distributing payroll
checks and hiring personnel is to:
A. Separate the custody of assets from the accounting for those
assets. D. Separate the authorization of transactions from the custody of
B. Establish clear lines of authority and responsibility. related assets.
C. Separate duties within the accounting function.
D. Separate the authorization of transactions from the custody of
related assets.
A CPA reviews a client's payroll procedures. The CPA would
consider internal control to be less than effective if a payroll
department supervisor was assigned the responsibility for:
A. Reviewing and approving time reports for subordinate employ- B. Distributing payroll checks to employees.
ees.
B. Distributing payroll checks to employees.
C. Hiring subordinate employees.
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D. Initiating requests for salary adjustments for subordinate em-
ployees.
A common audit procedure in the audit of payroll transactions in-
volves tracing selected items from the payroll journal to employee
time cards that have been approved by supervisory personnel.
This procedure is designed to provide evidence in support of the
audit proposition that:
A. Only bona fide employees worked and their pay was properly
D. Employees worked the number of hours for which their pay was
computed.
computed.
B. Jobs on which employees worked were charged with the ap-
propriate labor cost.
C. Internal control relating to payroll disbursements are operating
effectively.
D. Employees worked the number of hours for which their pay was
computed.
Which of the following material events occurring subsequent to the
balance sheet date would require an adjustment to the financial
statements before they could be issued?
A. Sale of long-term debt or capital stock.
D. Settlement of litigation in excess of the recorded liability.
B. Loss of a plant as a result of a flood.
C. Major purchase of a business which is expected to double the
sales volume.
D. Settlement of litigation in excess of the recorded liability.
With respect to issuance of an audit report which is dual dated for
a subsequent event occurring after the completion of field work but
before issuance of the auditors' report, the auditors' responsibility
for events occurring subsequent to the completion of field work is:
A. Extended to include all events occurring until the date of the last
subsequent event referred to. B. Limited to the specific event referred to.
B. Limited to the specific event referred to.
C. Limited to all events occurring through the date of issuance of
the report.
D. Extended to include all events occurring through the date of
submission of the report to the client.
An auditor's decision concerning whether or not to "dual date" the
audit report is based upon the auditor's willingness to:
A. Extend auditing procedures.
B. Accept responsibility for year-end adjusting entries.
A. Extend auditing procedures.
C. Permit inclusion of a note captioned: event (unaudited) subse-
quent to the date of the auditor's report.
D. Assume responsibility for resolving all events subsequent to the
issuance of the auditor's report.
Auditors often request that the audit client send a letter of inquiry
to those attorneys who have been consulted with respect to litiga-
tion, claims, or assessments. The primary reason for this request
is to provide the auditors with:
A. An estimate of the dollar amount of the probable loss. D. Corroborative audit evidence.
B. An expert opinion as to whether a loss is possible, probable or
remote.
C. Information concerning the progress of cases to date.
D. Corroborative audit evidence.
The auditors' primary means of obtaining corroboration of man-
agement's information concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of
the legal documentation. A. Letter of audit inquiry to the client's lawyer.
C. Confirmation of claims and assessments from the other parties
to the litigation.
D. Confirmation of claims and assessments from an officer of the
court presiding over the litigation.

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Which of the following auditing procedures is ordinarily performed
last?
A. Reading of the minutes of the directors' meetings.
C. Obtaining a management representation letter.
B. Confirming accounts payable.
C. Obtaining a management representation letter.
D. Testing of the purchasing function.
Which of the following is not correct relating to representation
letters?
A. They are ordinarily dated as of the date of the audit report.
D. They often serve as a substitute for the application of other
B. They are signed by members of top management.
procedures.
C. They must be obtained for audits.
D. They often serve as a substitute for the application of other
procedures.
The date the auditor grants the client permission to use the audit
report in connection with the financial statements is the:
A. Last day of significant field work.
C. Report release date.
B. Report cutoff date.
C. Report release date.
D. Representation date.
Which of the following statements ordinarily is not included among
the written client representations made by the chief executive
officer and the chief financial officer?
A. "Sufficient audit evidence has been made available to the
auditor to permit the issuance of an unqualified opinion."
B. "There are no unasserted claims or assessments that our
A. "Sufficient audit evidence has been made available to the
lawyer has advised us are probable of assertion and must be
auditor to permit the issuance of an unqualified opinion."
disclosed."
C. "We have no plans or intentions that may materially affect the
carrying value or classification of assets and liabilities."
D. "No events have occurred subsequent to the balance sheet date
that would require adjustment to, or disclosure in, the financial
statements."
To which of the following matters would materiality limits not apply
when obtaining written client representations?
A. Violations of state labor regulations.
D. Instances of fraud involving management.
B. Disclosure of line-of-credit arrangements.
C. Information about related party transactions.
D. Instances of fraud involving management.
The auditors' best course of action with respect to "other financial
information" included in a client prepared annual report containing
the auditors' report is to:
A. Indicate in the auditors' report, that the "other financial informa-
tion" is unaudited.
D. Read and consider the manner of presentation of the "other
B. Consider whether the "other financial information" is accurate
financial information."
by performing a limited review.
C. Obtain written representations from managements as to the
material accuracy of the "other financial information."
D. Read and consider the manner of presentation of the "other
financial information."

In the course of the audit of financial statements for the purpose of

expressing an opinion thereon, the auditors will normally prepare
a schedule of unadjusted differences for which the auditors did
not propose adjustment when they were identified. What is the
primary purpose served by this schedule? C. To identify the potential financial statement effects of misstate-
A. To point out to the responsible client officials the errors made ment or disputed items that were considered immaterial when
by various company personnel. discovered.
B. To summarize the adjustments that must be made before the
company can prepare and submit its federal tax return.
C. To identify the potential financial statement effects of misstate-
ment or disputed items that were considered immaterial when
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discovered.
D. To summarize the misstatements made by the company so that
corrections can be made after the audited financial statements are
released.
An auditor will ordinarily examine invoices from lawyers primarily
in order to:
A. Substantiate accruals.
B. Assess the legal ramifications of litigation in progress. D. Identify possible unasserted litigation, claims and assessments.
C. Estimate the dollar amount of contingent liabilities.
D. Identify possible unasserted litigation, claims and assess-
ments.
The auditor's primary means of obtaining corroboration of man-
agement's information concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of
the legal documentation. A. Letter of audit inquiry to the client's lawyer.
C. Confirmation of claims and assessments from the other parties
to the litigation.
D. Confirmation of claims and assessments from an officer of the
court presiding over the litigation.
a. The two types of subsequent events are:
Type 1--events that provide additional evidence about conditions
that existed at the balance sheet date and affect the estimates
included in the statements.
Auditors must be concerned with events that occur subsequent Type 2--events that provide evidence about conditions that arose
to the balance sheet date, because the events may need to be subsequent to the balance sheet date and require disclosure in
reflected in the financial statements. the financial statements.
a. Describe the two general types of subsequent events. b. Auditors have a responsibility to search for material subsequent
b. What is the auditors' responsibility with respect to detecting events to the last day of field work (the date of the auditors' report).
subsequent events? c. Procedures that are used to search for subsequent events
c. List three audit procedures that are used by the auditors to include (only three required):
search for subsequent events. • Review interim financial statements.
• Review minutes of directors' and stockholders' meetings.
• Make inquiries of officers.
• Obtain a letter from the client's attorney.
• Obtain a letter of representations from management.
a. The auditors wish to obtain the following information about
litigation:
Auditors are concerned with the existence of loss contingencies 1. A description of the litigation situation and the accounting period
that may affect the client's financial statements. One way that to which it relates,
the auditors obtain evidence about existing loss contingencies is 2. The estimated amount of loss, and
through the lawyer's letter. 3. The probability of occurrence of the loss.
a. Describe the information that the auditors wish to obtain about b. Other procedures used by auditors to detect loss contingencies
the litigation being handled by a lawyer. include (only three required):
b. Describe three other procedures that are used by auditors to • Review the minutes of directors' meetings.
discover existing loss contingencies. • Review correspondence with financial institutions.
• Obtain a representations letter from the client.
• Review prior tax returns.
a. The auditors have a responsibility to perform a review of
The auditors' responsibility for information that accompanies au-
FASB-required supplementary information, and include an indica-
dited financial statements varies with the nature of the information
tion in their report when they are unable to perform the procedures
and the nature of the document.
or when they have reservations about the information.
a. Describe the auditors' responsibility regarding FASB-required
b. The auditors have a responsibility to read other information for
supplementary information.
inconsistency with information contained in the financial state-
b. Describe the auditors' responsibility regarding other information
ments and obvious misstatements. Reservations with respect to
in client-prepared documents.
the information may be expressed in the auditors' report.
c. Describe the auditors' responsibility regarding information ac-
c. The auditors have a responsibility to report on all information ac-
companying financial statements in auditor-prepared documents.
companying financial statements in auditor-prepared documents.

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Audit Ch 18
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The classes of transactions in the acquisition and payment cycle
include acquisition of:
a. goods.
b. goods and services. d
c. goods and services, and cash disbursements.
d. goods and services, cash disbursements, and purchase returns
and allowances.
The overall objective in the audit of the acquisition and payment
cycle is:
a. to ensure the reliability of the affected accounts.
b. to ensure the accuracy of the affected accounts. c
c. to evaluate whether the affected accounts are fairly stated in
accordance with GAAP.
d. to evaluate whether fraudulent payments were made.
The audit of the acquisition and payment cycle often takes ____
time to audit than other cycles.
a. less
c
b. about the same
c. more
d. no less
What typically initiates the acquisitions and payment cycle?
a. Issuance of a purchase requisition or request for purchase of
goods/services.
a
b. Issuance of payment to vendor.
c. Approval of a new vendor.
d. Purchase requisition.
What typically ends the acquisitions and payment cycle?
a. Issuance of a purchase requisition or request for purchase of
goods/services.
b
b. Issuance of a payment to a vendor.
c. Approval of a new vendor.
d. Purchase requisition.
The receipt of goods and services in the normal course of busi-
ness represents the date clients normally recognize:
a. income.
b
b. the liability.
c. warranty assets.
d. expenses.
Which of the following accounts is not included in the acquisitions
class of transactions?
a. Inventory.
c
b. Prepaid expenses.
c. Purchase discounts.
d. Accounts payable.
A document indicating a reduction in the amount owed to a vendor
because of returned goods is:
a. a debit memo.
a
b. a credit memo.
c. a receiving room report.
d. a shipping room report.
A document used by organizations to establish a formal means
of recording and controlling acquisitions which usually contains a
package of documents about the acquisition is the:
a. voucher. a
b. purchase order.
c. receiving report.
d. purchase requisition.
The accounts payable account includes obligations for the acqui-
sition of:
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a. raw materials.
b. equipment.
d
c. utilities.
d. all three of the above.
Comparing expenses to prior years is an effective analytical pro-
cedure for accounts payable because expenses from year to year
are:
a. erratic. d
b. variable.
c. dynamic.
d. relatively stable.
The overall objective in the audit of accounts payable is to deter-
mine whether accounts payable:
a. is fairly stated and properly disclosed.
a
b. is overstated.
c. is understated.
d. is accurately stated.
At what point do most companies recognize liabilities in the ac-
quisition and payment cycle?
a. The issuance of a purchase order.
c
b. Receipt of acknowledgement of order by vendor.
c. Receipt of goods or services.
d. The receipt of a vendor statement.
The computer-generated file which records acquisitions, dis-
bursements and allowances for each vendor is the
a. Accounts payable master file
a
b. Cash disbursements file.
c. Acquisitions transaction file.
d. Purchase approval file.
The is a computer-generated file that includes all acquisition
transactions during a given period is the
a. Accounts payable file
c
b. Cash disbursements file.
c. Acquisitions transaction file.
d. Purchase approval file.
The major balance sheet account in the acquisition and payment
cycle is:
a. Notes payable.
c
b. Accruals payable.
c. Accounts payable.
d. Accrued liabilities.
Which of the following business functions is not considered to be
part of the acquisitions class of transactions?
a. Processing purchase orders.
d
b. Recognizing liabilities.
c. Receiving goods and services.
d. Processing cash disbursements.
It usually takes more time to audit the acquisition and payment
cycle than other cycles because:
a. there is a greater possibility of fraud in these transactions.
b. internal controls in this area are usually the weakest. C
c. of the large number of accounts affected.
d. there is a greater likelihood of lawsuits against the CPA relating
to these accounts.
A written purchase order is a legal document that is:
a. an offer to buy.
b. not enforceable if it is not in writing. a
c. a binding agreement between purchaser and vendor.
d. an acceptance of a vendor's catalog offer to sell.

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For good internal control, the purchasing department should not
be responsible for:
a. finding the lowest cost vendor.
b. reviewing vendors' catalog descriptions and prices for stan- d
dardized items.
c. designing the purchase order form.
d. authorizing the acquisition of goods.
The accounts payable department usually has responsibility for
verifying the propriety of acquisitions by comparing the details on
the:
a. vendor's invoice and the receiving report. c
b. vendor's invoice and the purchase requisition.
c. purchase order, receiving report, and vendor's invoice.
d. purchase requisition, purchase order, and receiving report.
Tests of controls for the acquisition and payment cycle are usually
divided into:
a. tests of acquisitions and classification.
d
b. tests of authorization and acquisition.
c. tests of authorization and disbursement.
d. tests of acquisitions and disbursements.
Many companies do not maintain an accounts payable master file
by vendor. These companies pay on the basis of:
a. vendors' monthly statements.
b
b. individual vendors' invoices.
c. the accounts payable account in the general ledger.
d. dunning letters.
An important control in the accounts payable and IT departments
is to ensure that those personnel who record acquisitions do not
have access to:
a. vendors' price lists. d
b. the accounts payable master file.
c. lists of vendors' names and addresses.
d. cash, marketable securities, and other easily convertible assets.
Which of the following is not a key control in the acquisition and
payment cycle?
a. Authorization of purchases.
b
b. Authorization of credit.
c. Timely recording and independent review of transactions.
d. Authorization of payments.
Proper authorization for acquisition is essential because it:
a. ensures that goods/services are used efficiently by company
employees.
b. ensures that goods/services were purchased from approved
vendors. c
c. ensures that goods/services are for authorized company pur-
poses.
d. ensures that goods/services were purchased at the lowest
possible price.
Which department should initiate a report when goods arrive from
a vendor?
a. Manufacturing
b
b. Receiving
c. Accounting
d. Treasury

After a purchase requisition is approved, a _________ must be

initiated to purchase the goods or services.
a
a. purchase order
b. vendor order

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c. call order
d. vendor invoice
When a client uses perpetual inventory records, the tests of de-
tails of balances for inventory can be significantly reduced if the
auditor believes the records are accurate. The controls over the
acquisitions included in the records are normally tested as a part
of the: b
a. tests of controls.
b. tests of controls and tests of transactions.
c. tests of details of balances.
d. analytical procedures and tests of controls.
Which of the following acquisition transactions is likely to be
covered by a general authorization by company policy?

Purchase of office equipment maintenance services Purchase of

office buildings for company use c
a. Yes Yes
b. No No
c. Yes No
d. No Yes
The auditor's internal control objective to determine that "recorded
acquisitions are for goods and services received" satisfies the
audit objective of:
a. accuracy. b
b. occurrence.
c. authorization.
d. completeness.
Failure to record the acquisition of goods is a violation of which
audit objective?
a. Accuracy
d
b. Occurrence
c. Authorization
d. Completeness
Once the auditor has decided on the specific procedures, the
acquisitions tests and the cash disbursements tests are typically
performed:
a. concurrently. a
b. sequentially.
c. independently.
d. separately.
The internal control that requires that "checks are prenumbered
and accounted for" satisfies the objective of:
a. accuracy.
c
b. existence.
c. completeness.
d. posting and summarization.
The most important controls over cash disbursements include all
but which of the following?
a. Signing of checks by an authorized employee.
b. Random examination of the supporting documents by the au-
b
thorized check signer before signing checks.
c. Separation of responsibilities for signing the checks and per-
forming the accounts payable function.
d. Prenumbering of checks and investigations of missing checks.

Because of the importance of tests of controls and substantive

tests of transactions for acquisitions and cash disbursements, it is
common in this audit area to use: c
a. block sampling.
b. variables sampling.

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c. attributes sampling.
d. probability proportional to size sampling.
Because many of the types of errors and irregularities that may be
found in the acquisition and payment cycle represent a misstate-
ment of earnings and are of significant concern to the auditor, the
tolerable exception rate selected by the auditor will be:
a
a. low.
b. high.
c. average.
d. very high.
The main focus taken by the auditor in verifying liability balances
is on the discovery of:
a. understated liabilities.
c
b. overstated liabilities.
c. understated or omitted liabilities.
d. overstated or extraneous liabilities.
Which of the following tests of controls is least useful in assessing
the transaction-related audit objective related to occurrence?
a. Examine documents in voucher package for occurrence.
c
b. Examine supporting documents for indication of approval.
c. Account for sequence of vouchers.
d. Attempt to input transactions with valid and invalid vendors.
The test of details of balances procedure to "trace from account
payable list to vendors' invoices and statements" satisfies the
objective of:
a. occurrence. a
b. completeness.
c. classification.
d. detail tie-in.
By tracing receiving reports issued at and before year-end to
vendors' invoices and making sure they are included in accounts
payable, the auditor is testing for:
a. theft of merchandise by employees. b
b. unrecorded obligations.
c. lapping.
d. kiting.
The extent of a search for unrecorded liabilities largely depends
on:
a. materiality and inherent risk.
b
b. materiality and control risk.
c. materiality only.
d. inherent risk only.
A failure to record acquisitions of goods most likely will affect all
but which of the following?
a. Accounts payable.
d
b. Net income.
c. Retained earnings.
d. Cash.
When the client's physical inventory occurs before the last day of
the year, it is still necessary to perform an accounts payable cutoff
at the time of the count. In addition, the auditor must verify whether
all acquisitions taking place between the count and the end of the
year were added to: d
a. the physical inventory.
b. Accounts Payable.
c. Accounts Payable and Cost of Goods Sold.
d. the physical inventory and Accounts Payable.
When the auditor uses sampling to examine transactions in the
acquisition and payment cycle, the tolerable exception rate is
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typically set at a(n) _______ level.
a. low.
b. medium. a
c. high.
d. indeterminate.
Which of the following is most reliable for verifying the correct
balance of accounts payable?
a. Vendors' invoices.
c
b. Vendors' statements.
c. Confirmations.
d. Bills of lading.
Vendors' statements and vendors' invoices are both relatively
reliable evidence because they:
a. come directly to the auditor without being in client's possession.
b
b. originate from a third party.
c. validate the effectiveness of the control system.
d. are compared to and reconciled with sales invoices.
For effective internal control, the accounts payable department
should compare the information on each vendor's invoice with the:
a. receiving report and the voucher.
c
b. vendor's packing slip and the voucher.
c. receiving report and the purchase order.
d. vendor's packing slip and the purchase order.
Which of the following is the most effective control procedure to
detect vouchers that were prepared for the payment of goods that
were not received?
a. Count goods upon receipt in storeroom.
b. Match purchase order, receiving report, and vendor's invoice for
b
each voucher in accounts payable department.
c. Compare goods received with goods requisitioned in receiving
department.
d. Verify vouchers for accuracy and approval in internal audit
department.
Cutoff information for inventory acquisitions should be obtained
during:
a. the interim period prior to year-end.
b. the interim period immediately following year-end. c
c. the physical observation of inventory.
d. either the interim period prior to or immediately following
year-end..
Assume that during cutoff testing you determined that the last
receiving report number for inventory was 24986. Which of the
following receiving report numbers would you not expect to be
included in inventory and accounts payable at year-end?
d
a. 24980
b. 19773
c. 23019
d. 24990
Auditor confirmation of accounts payable balances at the balance
sheet date may be unnecessary because:
a. this is a duplication of cutoff tests.
b. there is likely to be other reliable external evidence available to
support the balances. b
c. accounts payable balances at the balance sheet date may not
be paid before the audit is completed.
d. correspondence with the audit client's attorney will reveal all
legal action by vendors for nonpayment.

Under which of the following circumstances would it be advisable

for the auditor to confirm accounts payable with creditors?

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a. Internal accounting control over accounts payable is adequate,
and there is sufficient evidence on hand to minimize the risk of a
material misstatement.
b. Confirmation response is expected to be favorable, and ac-
counts payable balances are of immaterial amounts. c
c. Creditor statements are not available and internal control over
payables is unsatisfactory.
d. The majority of accounts payable balances are with associated
companies.
Internal control is strengthened when the quantity of merchandise
ordered is omitted from the copy of the purchase order sent to the:
a. department that initiated the requisition.
b
b. receiving department.
c. purchasing agent.
d. accounts payable department.
Which of the following should sign checks under conditions of
effective internal control?
a. Treasurer.
a
b. Purchasing agent.
c. Accounts payable clerk.
d. Person preparing the checks.
Which of the following is an effective internal accounting control
over cash payments?
a. Signed checks should be mailed under the supervision of the
check signer.
b. Spoiled checks that have been voided should be disposed of a
immediately.
c. Checks should be prepared only by persons responsible for
cash receipts and disbursements.
d. A check-signing machine with two signatures should be used.
When assets are being verified, auditors focus much of their
attention on making sure that the accounts are not overstated.
Alternatively, auditors focus their efforts on understatement when
auditing liabilities. What is the primary reason for this difference in
focus? a
a. Auditors' legal liability.
b. GAAP.
c. GAAS requirements.
d. All of the above.
Internal controls that are likely to prevent the client from including
as a business expense those transactions that primarily benefit
management or other employees rather than the entity being
audited satisfy the control objective that:
d
a. acquisitions are correctly valued.
b. existing acquisitions are recorded.
c. acquisitions are correctly classified.
d. recorded acquisitions are for goods and services received.
A company failed to record an acquisition of merchandise and
its related liability, but the merchandise was included in ending
inventory. The effect on the financial statements was to:
a. understate both assets and liabilities.
d
b. understate net income and owners' equity.
c. understate assets and owners' equity.
d. understate liabilities, and overstate both net income and own-
ers' equity.
The test of transactions which requires one to "reconcile recorded
cash disbursements with the cash disbursements on the bank
statement" satisfies the objective of: b
a. occurrence.
b. completeness.
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c. accuracy.
d. posting and summarization.
Which of the following statements is false?
a. The ownership objective is an important part of verifying assets
but not liabilities.
b. In auditing liabilities, the emphasis is on the search for under-
statements rather than overstatements.
c. Because of the emphasis on understatements in liability ac- d
counts, out-of-period liability tests are important for accounts
payable.
d. The success of the auditor's search for unrecorded liabilities is
not dependent upon the materiality of the potential balance in the
account.
The purpose of the audit procedure to "examine underlying doc-
umentation for subsequent cash disbursements" is to:
a. uncover liabilities on the balance sheet which should not have
been recorded until a subsequent period.
b. find the documentation relating to a cash disbursement. c
c. uncover payments made in a subsequent accounting period for
liabilities that existed at the balance sheet date.
d. uncover cash disbursements recorded in a subsequent ac-
counting period which should be recorded in this period.
To test for cutoff errors which overstate liabilities, the auditor
should trace, to vendors' invoices, the receiving reports issued:
a. after year-end.
a
b. before year-end.
c. the last day of the fiscal year.
d. both before and after year-end.
In determining that the accounts payable cutoff is correct, it is
essential that the cutoff tests be coordinated with the:
a. confirmation of payables.
c
b. tests on long-term liabilities.
c. observation of inventory.
d. cash count.
An inventory acquisition is received late in the afternoon of De-
cember 31 after the physical inventory is completed. If the acquisi-
tion is included in accounts payable and purchases, but excluded
from inventory, the result:
a
a. is an understatement of net earnings.
b. is an overstatement of net earnings.
c. is an overstatement of working capital.
d. is an overstatement of owner's equity.
When an acquisition is on an FOB origin basis, the inventory and
related accounts payable must be recorded in the current period
if the goods were:
a. received prior to the balance sheet date. b
b. shipped prior to the balance sheet date.
c. both shipped and received prior to the balance sheet date.
d. paid for in advance.
The auditor gets highly reliable evidence about individual trans-
actions by examining:
a. vendors' invoices.
a
b. vendors' statements.
c. confirmations of accounts payable balances.
d. detailed inventory counting instructions.

Which of the following documents is best for verifying the correct

balance in accounts payable?
d
a. Bills of lading.
b. Confirmations.

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c. Vendors' invoices.
d. Vendors' statements.
When goods are received, the receiving clerk should match the
goods with the:
a. purchase order and the requisition form.
c
b. vendor's invoice and the receiving report.
c. vendor's shipping document and the purchase order.
d. receiving report and the vendor's shipping document.
For effective internal control purposes, the vouchers payable de-
partment generally should:
a. obliterate the quantity ordered on the receiving department copy
of the purchase order.
b. stamp, perforate, or otherwise cancel supporting documentation
c
after payment is mailed.
c. establish the agreement of the vendor's invoice with the receiv-
ing report and purchase order.
d. ascertain that each requisition is approved as to price, quantity,
and quality by an authorized employee.
An auditor performs a test to determine whether all merchandise
for which the client was billed was received. The population for this
test consists of all:
a. merchandise received. b
b. vendors' invoices.
c. canceled checks.
d. receiving reports.
Matching the supplier's invoice, the purchase order, and the re-
ceiving report normally should be the responsibility of the:
a. warehouse receiving function.
c
b. purchasing function.
c. general accounting function.
d. treasury function.
A CPA learns that his client has paid a vendor twice for the same
shipment, once based upon the original invoice and once based
upon the monthly statement. A control procedure that should have
prevented this duplicate payment is:
a
a. attachment of the receiving report to the disbursement report.
b. prenumbering of disbursement vouchers.
c. use of a limit or reasonableness test.
d. prenumbering of receiving reports.
With respect to a small company's system of purchasing supplies,
an auditor's primary concern should be to obtain satisfaction that
supplies ordered and paid for have been:
a. requested by and approved by authorized individuals who have
no incompatible duties.
b. used in the course of business and solely for business purposes c
during the year under audit.
c. received, counted, and checked to quantities and amounts on
purchase orders and invoices.
d. properly recorded as assets and systematically amortized over
the estimated useful life of the supplies.

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The payroll cycle consists of how many classes of transactions?
a. one
b. two a
c. three
d. four
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
b
significant than related transactions.
c. Internal controls over payroll are effective for most companies.
d. Small companies usually have effective controls over payroll.
Which of the following is not correct regarding controls over the
processing of payroll?
a. The person authorized to sign paychecks should not be other-
wise involved in the preparation of the payroll.
b. A check-signing machine should not be used to replace a
b
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 re-
deposit.
Which of the following types of audit procedures is ordinarily
emphasized the least when auditing payroll?
a. Tests of controls
d
b. Tests of transactions
c. Analytical procedures
d. Tests of details of balances
A form issued for each employee summarizing the earnings and
income tax deductions for the calendar year is the:
a. rate authorization form.
d
b. summary payroll report.
c. payroll master file.
d. W-2 form.
The payroll and personnel cycle begins with which of the following
events?
a. Interviewing job candidates.
b. Hiring a new employee. b
c. Existing employees submitting requests for payment for work
performed.
d. Issuance of paychecks.
Most systems of internal control for payroll are:
a. loosely structured but well controlled.
b. loosely structured and loosely controlled. c
c. highly structured and well controlled.
d. highly structured but loosely controlled.
The payroll and personnel cycle ends with which of the following
events?
a. Interviewing job candidates.
b. Hiring a new employee. d
c. Existing employees submitting requests for payment for work
performed.
d. Issuance of paychecks.
The retirement savings deductions, number of exemptions for
withholding allowances, union dues deductions, and other deduc-
tions are found on what form?
a. Time cards b
b. Deduction authorization form
c. Rate authorization form
d. Job time ticket

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A ____________ includes all payroll transactions processed by
the accounting system for a given period of time.
a. payroll journal
b
b. payroll transaction file
c. time report
d. payroll summary
An imprest payroll account ordinarily carries a balance that is:
a. larger than the other company bank accounts.
b. larger than the amount of the periodic payroll disbursement. c
c. small.
d. below zero.
Records that include data such as employment date, performance
ratings and pay rates are the:
a. personnel records.
a
b. employee screening forms.
c. summary payroll reports.
d. employee folders.
To minimize the opportunity for fraud, unclaimed salary checks
should be:
a. deposited in a special bank account.
a
b. kept in the payroll department.
c. left with the employee's supervisor.
d. held for the employee in the personnel department.
Which of the following type of employee typically does not com-
plete time cards?
a. Hourly employees.
b. Salaried employees. b
c. All employees must complete time cards.
d. Time cards are typically completed by salaried employees, but
may also be completed by hourly employees.
When examining payroll transactions, an auditor is primarily con-
cerned with the possibility of:
a. incorrect summaries of employee time records.
b. overpayments and unauthorized payments. b
c. under withholding of amounts required to be withheld.
d. posting of gross payroll amounts to incorrect salary expense
accounts.
For which of the following functions is the use of prenumbered
documents least important?
a) Use of prenumbered time cards in the payroll function.
b) Use of prenumbered sales invoices in the sales function. a
c) Use of prenumbered receiving reports in the acquisitions func-
tion.
d) Use of prenumbered deposit slips in the cash receipts function.
Which of the following statements about payroll checks is correct?
a. After a payroll check is cashed and returned to the employee it
is referred to as a depository check.
b. As soon as a payroll check is signed by an authorized employee,
it becomes an asset. b
c. Payroll checks are written for the amount of gross pay due
employees.
d. It is rare that payroll checks are direct-deposited into employees'
bank accounts.
Which of the following is not an advantage of using an imprest
payroll account?
a. It limits the company's exposure to payroll fraud.
c
b. It allows the delegation of payroll check-signing duties.
c. Companies have fewer banking transactions.
d. It facilitates cash management.

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No individual with access to time cards, payroll records, or checks
should also be permitted access to:
a. the computer.
c
b. job time tickets.
c. personnel records.
d. the canceled check file.
The file for recording each payroll transaction for each employee
and maintaining total employee wages paid for the year to date is
the:
a. payroll master file. a
b. summary payroll report.
c. payroll journal.
d. job time ticket.
Many companies use outside payroll services to process payroll.
Auditors _____ rely on the internal controls of these outside
payroll services.
a. must d
b. cannot
c. rarely
d. can often
The total of the individual employee earnings in the payroll master
file equals the total:
a. balance of gross payroll in general ledger accounts.
b. of the checks drawn to employees for payroll. a
c. gross payroll plus the total contributed by the employer for
payroll taxes.
d. gross pay for the current week's payroll.
If auditors rely on the internal controls of an outside payroll service
provider, they will receive a(n) _____ report.
a. reliance
b
b. SAS 70
c. outsourcer's
d. quality assurance
Most companies use an imprest account to pay the payroll. Which
of the following is not an advantage of such an account?
a. It facilitates cash management.
b. It limits the company's exposure to payroll fraud. d
c. It allows the delegation of payroll check-signing duties.
d. It eliminates the requirement of keeping a minimum balance in
a checking account.
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 b
be filed.
c. independent verification of computer output by a competent
individual.
d. a Gaant chart.
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 c
b. Tests of details of balances
c. Tests of controls
d. Each of the above is emphasized.

The most important means of verifying account balances in the

payroll and personnel cycle are: a
a. tests of controls and tests of transactions.

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b. analytical procedures and tests of controls.
c. analytical procedures and tests of transactions.
d. test of controls and tests of details of balances.
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.
a
b. Examine procedures manual and observe the recording of
transactions.
c. Examine payroll records for indication of pay rate approval.
d. Reconcile the payroll bank account.
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 c
disbursements on the payroll bank statement.
d. Examine printouts of transactions rejected by the computer as
having invalid employee IDs.
As a part of the auditor's responsibility for ____________, the
auditor should review the preparation of at least one of each type
of payroll tax form the client is responsible for filing.
a. doing tests of controls. d
b. doing tests of balances.
c. doing tests of transactions.
d. understanding the client's internal controls.
Which of the following is not an assertion related to the classes of
transactions underlying the payroll cycle?
a. Classification
c
b. Accuracy
c. Existence
d. Occurrence
Which of the following circumstances would not cause an auditor
to extend payroll procedures considerably?
a. Payroll significantly affects inventory valuation.
b. There is a possibility of material fraudulent payroll transactions. d
c. There is a weak internal control structure.
d. There is a lack of independent third-party evidence, such as
confirmations.
When labor is a material factor in inventory valuation, the auditor
should place special emphasis on testing the internal controls
concerning:
a. fictitious employees. c
b. authorization of wage rates.
c. proper valuation and allocation of balances.
d. completeness of recorded transactions.
Which of the following is not a procedure that can be performed
on canceled checks in an effort to detect defalcations?
a. Compare the endorsements on checks with authorized signa-
tures.
b. Scan endorsements for unusual or recurring second endorse- d
ments.
c. Examine voided checks to be sure they haven't been used.
d. Examine the payroll records in subsequent periods to determine
that terminated employees are no longer being paid.

The primary concern in testing payroll-related liabilities is to make

sure that:
c
a. accruals are properly valued.
b. transactions are recorded in the proper period.

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c. there are no understated or omitted accruals.
d. the accruals are not overstated.
Which department should be authorized to add and delete em-
ployees from the payroll or change pay rates and deductions?
a. The supervising department.
c
b. The accounting department.
c. The human resources department.
d. The treasurer's department.
Verification of the legitimacy of year-end unpaid bonuses to of-
ficers and employees can be accomplished by comparing the
recorded accrual to the amount:
a. in the expense account. c
b. used in the prior period.
c. authorized in the minutes of the board.
d. paid in the subsequent period.
Which of the following errors gives the auditor the least concern
in auditing payroll transactions?
a. An error that indicates possible fraud.
b. Computational errors in formulas when a computerized system
d
is used.
c. Classification errors in charging labor to inventory and job cost
accounts.
d. Each of the above gives the auditor significant concern.
To check the accuracy of hours worked, an auditor would ordinarily
compare clock cards with:
a. personnel records.
b
b. job time tickets.
c. labor variance reports.
d. time recorded in the payroll register.
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
c. testing for nonexistent employees.
d. identifying employees who have not submitted proper W-2
forms..
Which of the following is the best way for an auditor to determine
that every name on a company's payroll is that of a bona fide
employee presently on the job?
a. Examine personnel records for accuracy and completeness.
b. Examine employees' names listed on payroll tax returns for
c
agreement with payroll accounting records.
c. Make a surprise observation of the company's regular distribu-
tion of paychecks.
d. Visit the working areas and confirm with employees their badge
or identification numbers.
Inherent risk is typically _____ for balance-related audit objectives
as they relate to payroll.
a. not considered
b
b. low
c. moderate
d. high
It would be appropriate for the payroll department to be respon-
sible for which of the following functions?
a. Approval of employee time records.
b. Maintain records of employment, firings, and raises. d
c. Temporary retention of unclaimed employee paychecks.
d. Preparation of governmental reports as to employees' earnings
and withholding taxes.

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What are the two major balance-related audit objectives in testing
payroll liabilities?
a. Accuracy and detail tie-in
d
b. Completeness and valuation
c. Completeness and rights and obligations
d. Accuracy and cutoff
Which of the following best describes proper internal control over
payroll?
a. The preparation of the payroll must be under the control of the
personnel department.
b. The confidentiality of employee payroll data should be carefully
c
protected to prevent fraud.
c. The duties of hiring, payroll computation, and payment to em-
ployees should be segregated.
d. The payment of cash to employees should be replaced with
payment by checks.
The periodic payment from the general cash account to the payroll
account for net payroll should be tested for at least one payroll
period. The primary audit procedure is a(n):
a. analytical review procedure that net pay is reasonable.
b. test of controls that an imprest account is being used for payroll. d
c. substantive test that the correct amount was transferred for this
test period.
d. test of transactions that the check is prepared for the proper
amount and deposited before payroll checks are handed out.
Once the auditor determines that the company's policy for ac-
cruing wages is consistent with prior years, the appropriate audit
procedure to test for accuracy and cutoff is:
a. recalculating the client's accrual. a
b. performing extensive tests of controls.
c. performing extensive tests of details.
d. none of the above.
In auditing payroll, which of the following procedures will ordinarily
require the least amount of auditor time under normal circum-
stances?
a. Tests of controls. d
b. Substantive tests of transactions.
c. Analytical procedures.
d. Tests of details of balances.
A weak internal control system allows a department supervisor
to "clock in" for a fictitious employee and then approve the em-
ployee'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. a
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.
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 preced-
ing periods. d
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.

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Effective internal accounting control over unclaimed payroll
checks that are kept by the company would include accounting
department procedures that require:
a. effective cancellation and stop payment orders for checks rep-
resenting unclaimed wages. d
b. preparation of a list of unclaimed wages on a periodic basis.
c. accounting for all unclaimed wages in a current liability account.
d. periodic accounting for the actual checks representing un-
claimed wages.
Which of the following internal controls in the payroll and person-
nel cycle is generally least important to an auditor?
a. Formal methods of informing payroll personnel of new employ-
ees.
b. Reconciliation of total payroll expense in the general ledger with b
the payroll tax returns and the W-2 forms.
c. Authorization of changes in pay rates.
d. Notice of the termination date of employees no longer working
for the company.
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
d
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.
Which of the following is an effective internal accounting control
used to prove that production department employees are properly
validating payroll time cards at a time-recording station?
a. Internal auditors should make observations of distribution of
paychecks on a surprise basis.
b. Time cards should be carefully inspected by those persons who
d
distribute pay envelopes to the employees.
c. One person should be responsible for maintaining records of
employee time for which salary payment is not to be made.
d. Daily reports showing time charged to jobs should be approved
by the supervisor and compared to the total hours worked on the
employee time cards.
Once the auditor has determined the company's policy for accru-
ing wages and knows it is consistent with that of previous years,
the appropriate audit procedure to test for cutoff and accuracy is
to:
a. recalculate the client's accruals. a
b. compare the ledger balance with the journal and the tax form.
c. confirm the amount with employees.
d. compare the recorded accrued wages with the amount ap-
proved in the minutes of the Board.
Payroll checks do not need to be distributed by someone inde-
pendent of the payroll and timekeeping functions.
b
a) . True
b) . False
Hiring personnel initiates the payroll and personnel cycle.
a. True a
b. False

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Firing personnel terminates the payroll and personnel cycle.
a. True
b. False
Paying employees for their services ends the payroll and person-
nel cycle.
a
a. True
b. False
Auditors seldom expect to find misstatements when testing payroll
transactions.
a
a. True
b. False
Most companies, with the exception of small ones, have effective
controls over the payroll cycle.
b
a. True
b. False
The nature, extent, and timing of substantive tests of payroll
transactions vary depending, in part, on assessed control risk.
a
a. True
b. False
Inherent risk for payroll-related liabilities is normally higher than
for accounts receivable.
b
a. True
b. False
While most cycles include at least two classes of transactions, the
payroll and personnel cycle includes only one class of transac-
tions. a
a. True
b. False
"Physical control over assets" is not a type of control that is
applicable to the payroll cycle.
b
a. True
b. False
The deduction authorization form authorizes the rate of pay and
the deductions for taxes, dues, etc.
b
a. True
b. False
When auditing the payroll and personnel cycle, tests of controls
are routinely performed.
a
a. True
b. False
When labor is a material part of inventory, auditors should em-
phasize tests of details of balances.
b
a. True
b. False
A signed payroll check that has not been cashed is considered an
asset to the company that issued the check.
a
a. True
b. False
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. a
a. True
b. False
The job time ticket indicates the starting and stopping times of
work during the pay period.
b
a. True
b. False

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The use of an imprest payroll account prevents losses from pay-
ment of unauthorized payroll to no more than the balance in the
imprest account. a
a. True
b. False
Imprest accounts usually carry a significant balance.
a. True b
b. False
There is very little opportunity for confirmation from third parties
of balance sheet accounts related to the payroll and personnel
cycle. a
a. True
b. False
When a client uses an outside payroll service for processing
payroll, professional auditing standards permit the auditor to rely
on the internal controls of the service organization if the service
organization's auditor has issued a favorable report on the internal a
controls of the service organization.
a. True.
b . False.
When a client uses an outside payroll service for processing
payroll, professional auditing standards require the auditor to rely
on the internal controls of the service organization if the service
organization's auditor has issued a favorable report on internal b
controls.
a. True.
b. False.
For good internal control, the payroll function should be indepen-
dent of the personnel department.
a
a. True.
b. False.
If an audit client is a public company, the understanding of internal
control must be sufficient to identify opportunities to increase audit
effectiveness. b
a. True
b. False
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. b
a. True
b. False
Because of the cycle's pervasive nature, audit tests of the payroll
cycle are usually extensive.
b
a. True
b. False
The primary purpose of a surprise payroll payoff is to detect em-
ployees who have reported more time than was actually worked
(fraudulent hours). b
a. True
b. False
The two major balance-related audit objectives in testing payroll
liabilities are accuracy and cutoff.
a
a. True
b. False

Because of confidentiality requirements and potential losses of

payroll funds, outside service center systems are rarely used by b
companies for payroll-related functions.

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a. True
b. False
Internal control over payroll is normally highly structured and well
controlled.
a
a. True
b. False
Supervisory personnel in the functional department responsible
for evaluating employees should be responsible for authorizing the
addition and deletion of employees from the payroll. b
a. True
b. False
Despite the large dollar amounts involved in the payroll and per-
sonnel cycle, auditors typically spend less time auditing this cycle
than others. a
a. True
b. False
It is generally more difficult for the auditor to detect payment of
fraudulent hours than payment of fictitious employees.
a
a. True
b. False
One common substantive test of payroll transactions for the ex-
istence objective is to compare canceled payroll checks with per-
sonnel records. a
a. True
b. False
The audit procedure "Recompute hours worked from time cards"
is normally performed when testing the completeness objective
for payroll. b
a. True
b. False
In most audits, payroll tax expense is not tested because the audit
risk does not justify the time required to perform the tests.
a
a. True
b. False

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

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

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

D)
There are three classes of transactions within
the payroll cycle —
salaried employees,
hourly employees, and commissioned
employees. Transactions are
more significant
than related
balance sheet
accounts. Internal controls
over payroll are
effective for almost
all companies, even
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small ones.
No Yes No
Which of the following departments is most likely responsible for
pay rate changes and changes in deductible amounts for employ-
ees?
A) General Accounting b
B) Human Resources
C) Treasury
D) Controller
The payroll and personnel cycle ends with which of the following
events?
A) Interviewing job candidates
B) Hiring a new employee d
C) Existing employees submitting requests for payment for work
performed
D) Issuance of paychecks
Which of the following includes all payroll transactions processed
by the accounting system for a given period of time?
A) Payroll journal
b
B) Payroll transaction file
C) Time report
D) Payroll summary
An imprest payroll account that has a significant balance may
indicate the presence of:
A) employees have not yet deposited or cashed payroll checks.
a
B) fraudulent transfer of funds by the company.
C) lack of controls over payroll distribution.
D) the company is overpaying its employees.
Records that include data about employees such as employment
date, performance ratings and pay rates are the:
A) human resource records.
a
B) employee screening forms.
C) summary payroll reports.
D) employee folders.
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
B) payroll master file.
C) payroll bank account reconciliation.
D) payroll tax returns.
Which of the following is not one of the business functions for the
payroll and personnel cycle?
A) Payment of payroll
c
B) Timekeeping and payroll preparation
C) Reconciliation of payroll account
D) Human resources and employment
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. a
C) gross payroll plus the total contributed by the employer for
payroll taxes.
D) gross pay for the current week's payroll.

Which department should be authorized to add and delete em-

ployees from the payroll or change pay rates and deductions?
c
A) The supervising department
B) The accounting department

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C) The human resources department
D) The treasurer's department
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
b
significant than related transactions.
C) Internal controls over payroll are effective for most companies.
D) Small companies usually have effective controls over payroll.
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 other-
wise involved in the preparation of the payroll.
B) A check-signing machine should not be used to replace a
b
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 re-
deposit.
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.
a
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.
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
B) accuracy.
C) classification.
D) timing.
Which of the following best describes the systems of internal
control for payroll for large companies?
A) Loosely structured but well controlled
c
B) Loosely structured and loosely controlled
C) Highly structured and well controlled
D) Highly structured but loosely controlled
Which of the following internal control objectives is likely to be the
most important in the audit of the payroll cycle?
A) Payroll transactions are properly disclosed and presented in
the notes to the financial statements.
B) Payroll transactions are processed by an outside service c
provider.
C) Recorded transactions represent valid payments.
D) Recorded transactions are recorded in the proper accounting
period.
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
a
B)
Increase inventory asset valuations. Decrease inventory asset
valuations.
No No

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

D)
Increase inventory asset valuations. Decrease inventory asset
valuations.
No Yes
To minimize the opportunity for fraud, unclaimed salary checks
should be:
A) redeposited.
a
B) kept in the payroll department.
C) left with the employee's supervisor.
D) held for the employee in the personnel department
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.
c
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.
When examining payroll transactions, an auditor is primarily con-
cerned with the possibility of:
A) incorrect summaries of employee time records.
B) overpayments and unauthorized payments. b
C) under withholding of amounts required to be withheld.
D) posting of gross payroll amounts to incorrect salary expense
accounts.
The ________ has the responsibility for approving the number of
hours worked for each employee.
A) employee's supervisor
a
B) human resources department
C) chief financial officer
D) budgeting supervisor
Which of the following audit procedures would be the most effec-
tive in testing for nonexistent employees?
A) Trace transactions recorded in the payroll journal to the human
resources department to determine employment status.
a
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.
No individual with access to time cards, payroll records, or checks
should also be permitted access to:
A) the computer.
c
B) job time tickets.
C) personnel records.
D) the canceled check file.
Many companies use outside payroll services to process payroll.
Which of the following regarding the auditor's responsibilities is
most correct regarding their reliance on the internal controls of
these outside payroll services?
d
A) Must
B) Cannot
C) Rarely
D) Can often

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Many audits have a ________ risk of misstatement for the payroll
cycle.
A) high
b
B) minimal
C) moderate
D) zero
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 b
be filed.
C) independent verification of computer output by a competent
individual.
D) the use of an outside payroll service.
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 c
B) Tests of details of balances
C) Tests of controls
D) Each of the above is emphasized.
The most important means of verifying account balances in the
payroll and personnel cycle are:
A) tests of controls and substantive tests of transactions.
a
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.

Audit tests of payroll are usually not extensive because:

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

Yes Yes Yes

B)
employees will
likely complain
if underpaid. a
payroll
transactions are typically
uniform and
uncomplicated. payroll transactions are subject to audit by federal
and state governments.

No Yes No

C)
employees will
likely complain
if underpaid.
payroll
transactions are typically
uniform and
uncomplicated. payroll transactions are subject to audit by federal
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and state governments.

No No Yes

D)
employees will
likely complain
if underpaid.
payroll
transactions are typically
uniform and
uncomplicated. payroll transactions are subject to audit by federal
and state governments.

Yes No No
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.
a
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.
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 c
disbursements on the payroll bank statement.
D) Examine printouts of transactions rejected by the computer as
having invalid employee IDs.
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 d
B) doing tests of balances
C) doing tests of transactions
D) understanding the client's internal controls
Verifying that an adequate chart of accounts is used is a key
internal control for the transaction-related objective of:
A) classification.
a
B) accuracy.
C) existence.
D) occurrence.
When labor is a material factor in inventory valuation, the auditor
should place special emphasis on testing the internal controls
concerning:
A) fictitious employees. c
B) authorization of wage rates.
C) proper classification of payroll transactions.
D) completeness of recorded transactions.
There is inherent risk of payroll fraud because most transactions
involve:
A) expense accounts.
d
B) accrued liabilities.
C) estimates.
D) cash.
What potential problems may arise when an auditor considers the
relationship between payroll and inventory valuation?
A)
Improper
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account
classification. Improper
allocation to jobs
or processes. The overpayment or underpayment of factory em-
ployees
Yes Yes Yes

B)
Improper
account
classification. Improper
allocation to jobs
or processes. The overpayment or underpayment of factory em-
ployees
No Yes No

C) d
Improper
account
classification. Improper
allocation to jobs
or processes. The overpayment or underpayment of factory em-
ployees
No No Yes

D)
Improper
account
classification. Improper
allocation to jobs
or processes. The overpayment or underpayment of factory em-
ployees
Yes Yes No
Which of the following errors gives the auditor the least concern
in auditing payroll transactions?
A) An error that indicates possible fraud
B) Computational errors in formulas when a computerized system
d
is used
C) Classification errors in charging labor to inventory and job cost
accounts
D) Each of the above gives the auditor significant concern.
Auditors may extend their tests of payroll in which of the following
circumstances?
A)
Payroll materially affects the valuation of inventory.
The auditor is concerned there may be nonexistent employees on
the payroll.
Yes Yes

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

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

D)
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Payroll materially affects the valuation of inventory.
The auditor is concerned there may be nonexistent employees on
the payroll.
No Yes
________ is not a transaction-related audit objective for the class-
es of transactions underlying the payroll cycle.
A) Classification
b
B) Existence
C) Timing
D) Completeness
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
C) testing for nonexistent employees.
D) identifying employees who have not submitted proper W-2
forms.
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
c
agreement with payroll accounting records.
C) Make a surprise observation of the company's regular distrib-
ution of paychecks.
D) Visit the working areas and confirm with employees their badge
or identification numbers.
Which of the following best describes inherent risk for balance-re-
lated audit objectives as they relate to payroll?
A) Not considered
b
B) Low
C) Moderate
D) High
It would be appropriate for the payroll department to be respon-
sible for which of the following functions?
A) Approval of employee time records
B) Maintain records of employment, firings, and raises d
C) Temporary retention of unclaimed employee paychecks
D) Preparation of governmental reports as to employees' earnings
and withholding taxes
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
c
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.
Which of the following is an accurate statement regarding nonex-
istent 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
d
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.
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Actg 135 ch 20
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In auditing payroll, which of the following procedures will normally
require the least amount of auditor time under normal circum-
stances?
A) Tests of controls d
B) Substantive tests of transactions
C) Analytical procedures
D) Tests of details of balances
A weak internal control system allows a department supervisor
to "clock in" for a fictitious employee and then approve the em-
ployee'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. a
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.
Which of the following is not a correct statement regarding fraud-
ulent 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. d
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.
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
d
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.
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
c
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.
The auditor, in auditing payroll, wants to determine that the indi-
viduals included in her sample were employees of the company
for the period under review. What is the auditor's best source of
evidence?
a
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
Which of the following types of audit procedures is ordinarily
emphasized the least when auditing payroll? d
A) Tests of controls
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B) Tests of transactions
C) Analytical procedures
D) Tests of details of balances
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
b
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.
The primary concern in testing payroll-related liabilities is to make
sure that:
A) accruals are properly valued.
c
B) transactions are recorded in the proper period.
C) there are no understated or omitted accruals.
D) the accruals are not overstated.
Verification of the legitimacy of year-end unpaid bonuses to of-
ficers and employees can be accomplished by comparing the
recorded accrual to the amount:
A) in the expense account. c
B) used in the prior period.
C) authorized in the minutes of the board.
D) paid in the subsequent period.
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.
a
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
What are the two major balance-related audit objectives in testing
payroll liabilities?
A) Accuracy and detail tie-in
d
B) Completeness and valuation
C) Completeness and rights and obligations
D) Accuracy and cutoff
Once the auditor determines that the company's policy for ac-
cruing wages is consistent with prior years, the appropriate audit
procedure to test for accuracy and cutoff is:
A) recalculating the client's accrual. a
B) performing extensive tests of controls.
C) performing extensive tests of details.
D) none of the above.
The most important consideration in evaluating the fairness of the
amounts accrued for vacation pay, sick pay, and other benefits is
the: a
A) consistent accrual of these liabilities relative to those of pre-
ceding periods.
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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.
When performing the tests of details of balances for expense
accounts, ________ is (are) generally not necessary.
A) extensive additional testing
a
B) analytical procedures
C) tests of controls
D) substantive tests of transactions
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? c
A) Completeness
B) Existence
C) Cut-off
D) Accuracy

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Which of the following about payroll and personnel cycle is cor-
rect?
A) NNY
C
B) YNY
C) NYY
D) NYN
Which of the following departments is most likely responsible for
pay rate changes and changes in deductible amounts for employ-
ees?
A) General Accounting B
B) Human Resources
C) Treasury
D) Controller
The payroll and personnel cycle ends with which of the following
events?
A) Interviewing job candidates
B) Hiring a new employee
D
C) Existing employees submitting requests for payment for work
performed
D) Issuance of paychecks
Answer: D
Which of the following includes all payroll transactions processed
by the accounting system for a given period of time?
A) Payroll journal
B
B) Payroll transaction file
C) Time report
D) Payroll summary
An imprest payroll account that has a significant balance may
indicate the presence of:
A) employees have not yet deposited or cashed payroll checks.
A
B) fraudulent transfer of funds by the company.
C) lack of controls over payroll distribution.
D) the company is overpaying its employees
Records that include data about employees such as employment
date, performance ratings and pay rates are the:
A) human resource records.
A
B) employee screening forms.
C) summary payroll reports.
D) employee folders
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
B) payroll master file.
C) payroll bank account reconciliation.
D) payroll tax returns
Which of the following is NOT one of the business functions for the
payroll and personnel cycle?
A) Payment of payroll
C
B) Timekeeping and payroll preparation
C) Reconciliation of payroll account
D) Human resources and employment
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. A
C) gross payroll plus the total contributed by the employer for
payroll taxes.
D) gross pay for the current week's payroll

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Which department should be authorized to add and delete em-
ployees from the payroll or change pay rates and deductions?
A) The supervising department
C
B) The accounting department
C) The human resources department
D) The treasurer's department
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
B
significant than related transactions.
C) Internal controls over payroll are effective for most companies.
D) Small companies usually have effective controls over payroll
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 other-
wise involved in the preparation of the payroll.
B) A check-signing machine should not be used to replace a
B
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 re-
deposit
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.
A
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.
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
B) accuracy.
C) classification.
D) timing
Which of the following best describes the systems of internal
control for payroll for large companies?
A) Loosely structured but well controlled
C
B) Loosely structured and loosely controlled
C) Highly structured and well controlled
D) Highly structured but loosely controlled
Which of the following internal control objectives is likely to be the
most important in the audit of the payroll cycle?
A) Payroll transactions are properly disclosed and presented in
the notes to the financial statements.
B) Payroll transactions are processed by an outside service C
provider.
C) Recorded transactions represent valid payments.
D) Recorded transactions are recorded in the proper accounting
period
In audits of companies in which payroll is a significant portion of
inventory, the improper account classification of payroll can:
Increase inventory asset valuations
Decrease inventory asset valuations
A
A) YY
B) NN
C) YN
D) NY
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To minimize the opportunity for fraud, unclaimed salary checks
should be:
A) redeposited.
A
B) kept in the payroll department.
C) left with the employee's supervisor.
D) held for the employee in the personnel department
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.
C
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
When examining payroll transactions, an auditor is primarily con-
cerned with the possibility of:
A) incorrect summaries of employee time records.
B) overpayments and unauthorized payments. B
C) under withholding of amounts required to be withheld.
D) posting of gross payroll amounts to incorrect salary expense
accounts
The ________ has the responsibility for approving the number of
hours worked for each employee.
A) employee's supervisor
A
B) human resources department
C) chief financial officer
D) budgeting supervisor
Which of the following audit procedures would be the most effec-
tive in testing for nonexistent employees?
A) Trace transactions recorded in the payroll journal to the human
resources department to determine employment status.
A
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.
No individual with access to time cards, payroll records, or checks
should also be permitted access to:
A) the computer.
C
B) job time tickets.
C) personnel records.
D) the canceled check file
Many companies use outside payroll services to process payroll.
Which of the following regarding the auditor's responsibilities is
most correct regarding their reliance on the internal controls of
these outside payroll services?
D
A) Must
B) Cannot
C) Rarely
D) Can often
Many audits have a ________ risk of misstatement for the payroll
cycle.
A) high
B
B) minimal
C) moderate
D) zero

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.
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B) a well-defined set of policies that indicate when each form must
be filed.
C) independent verification of computer output by a competent B
individual.
D) the use of an outside payroll service
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 C
B) Tests of details of balances
C) Tests of controls
D) Each of the above is emphasized
The most important means of verifying account balances in the
payroll and personnel cycle are:
A) tests of controls and substantive tests of transactions.
A
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
Audit tests of payroll are usually not extensive because:
Employees complain if underpaid
Payroll transactions are typically uniform and uncomplicated
Payroll transactions are subject to audit by fed and state govs
A
A) YYY
B) NYN
C) NNY
D) YNN
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.
A
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
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 C
disbursements on the payroll bank statement.
D) Examine printouts of transactions rejected by the computer as
having invalid employee IDs
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 D
B) doing tests of balances
C) doing tests of transactions
D) understanding the client's internal controls
Verifying that an adequate chart of accounts is used is a key
internal control for the transaction-related objective of:
A) classification.
A
B) accuracy.
C) existence.
D) occurrence

When labor is a material factor in inventory valuation, the auditor

should place special emphasis on testing the internal controls
concerning: C
A) fictitious employees.
B) authorization of wage rates.

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C) proper classification of payroll transactions.
D) completeness of recorded transactions
There is inherent risk of payroll fraud because most transactions
involve:
A) expense accounts.
D
B) accrued liabilities.
C) estimates.
D) cash
What potential problems may arise when an auditor considers the
relationship between payroll and inventory valuation?
Improper acct classification
Improper allocation to jobs/proccess
Over/underpayment of factory employees D
A) YYY
B) NYN
C) NNY
D) YYN
Which of the following errors gives the auditor the least concern
in auditing payroll transactions?
A) An error that indicates possible fraud
B) Computational errors in formulas when a computerized system
D
is used
C) Classification errors in charging labor to inventory and job cost
accounts
D) Each of the above gives the auditor significant concern
Auditors may extend their tests of payroll in which of the following
circumstances?
Payroll materiality affects the valuation of inventory
The auditor is concerned there may be nonexistent employees on
payroll A
A) YY
B) NN
C) YN
D) NY
________ is not a transaction-related audit objective for the class-
es of transactions underlying the payroll cycle.
A) Classification
B
B) Existence
C) Timing
D) Completeness
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
C) testing for nonexistent employees.
D) identifying employees who have not submitted proper W-2
forms
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
C
agreement with payroll accounting records.
C) Make a surprise observation of the company's regular distrib-
ution of paychecks.
D) Visit the working areas and confirm with employees their badge
or identification numbers

Which of the following best describes inherent risk for balance-re-

lated audit objectives as they relate to payroll?

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A) Not considered
B) Low
B
C) Moderate
D) High
It would be appropriate for the payroll department to be respon-
sible for which of the following functions?
A) Approval of employee time records
B) Maintain records of employment, firings, and raises D
C) Temporary retention of unclaimed employee paychecks
D) Preparation of governmental reports as to employees' earnings
and withholding taxes
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
C
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
Which of the following is an accurate statement regarding nonex-
istent 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
D
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
In auditing payroll, which of the following procedures will normally
require the least amount of auditor time under normal circum-
stances?
A) Tests of controls D
B) Substantive tests of transactions
C) Analytical procedures
D) Tests of details of balances
A weak internal control system allows a department supervisor
to "clock in" for a fictitious employee and then approve the em-
ployee'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. A
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
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. D
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
Which of the following statements is correct?
A) The overhead charged to inventory at the balance sheet date
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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.
D
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
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
C
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
The auditor, in auditing payroll, wants to determine that the indi-
viduals included in her sample were employees of the company
for the period under review. What is the auditor's best source of
evidence?
A
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
Which of the following types of audit procedures is ordinarily
emphasized the least when auditing payroll?
A) Tests of controls
D
B) Tests of transactions
C) Analytical procedures
D) Tests of details of balances
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
B
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
The primary concern in testing payroll-related liabilities is to make
sure that:
A) accruals are properly valued.
C
B) transactions are recorded in the proper period.
C) there are no understated or omitted accruals.
D) the accruals are not overstated
Verification of the legitimacy of year-end unpaid bonuses to of-
ficers and employees can be accomplished by comparing the
recorded accrual to the amount:
A) in the expense account. C
B) used in the prior period.
C) authorized in the minutes of the board.
D) paid in the subsequent period
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
company's fed tax return
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A) YY
B) NN
C) YN
D) NY
What are the two major balance-related audit objectives in testing
payroll liabilities?
A) Accuracy and detail tie-in
D
B) Completeness and valuation
C) Completeness and rights and obligations
D) Accuracy and cutoff
Once the auditor determines that the company's policy for ac-
cruing wages is consistent with prior years, the appropriate audit
procedure to test for accuracy and cutoff is:
A) recalculating the client's accrual. A
B) performing extensive tests of controls.
C) performing extensive tests of details.
D) none of the above
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 pre-
ceding periods. A
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
When performing the tests of details of balances for expense
accounts, ________ is (are) generally not necessary.
A) extensive additional testing
A
B) analytical procedures
C) tests of controls
D) substantive tests of transactions
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? C
A) Completeness
B) Existence
C) Cut-off
D) Accuracy

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Most companies, with the exception of small ones, have effective
controls over the payroll cycle.
B
A) True
B) False
While most cycles include at least two classes of transactions, the
payroll and personnel cycle includes only one class of transac-
tions.
A
A) True
B) False
Auditors typically test details of account balances in the audit of
payroll.
B
A) True
B) False
Which of the following departments is most likely responsible for
pay rate changes and changes in deductible amounts for employ-
ees?
B
A) General Accounting
B) Human Resources
C) Treasury
D) Controller
The payroll and personnel cycle ends with which of the following
events?

A) Interviewing job candidates

D
B) Hiring a new employee
C) Existing employees submitting requests for payment for work
performed
D) Issuance of paychecks
Which of the following includes all payroll transactions processed
by the accounting system for a given period of time?

A) Payroll journal B
B) Payroll transaction file
C) Time report
D) Payroll summary
An imprest payroll account that has a significant balance may
indicate the presence of:

A) employees have not yet deposited or cashed payroll checks. A

B) fraudulent transfer of funds by the company.
C) lack of controls over payroll distribution.
D) the company is overpaying its employees.
Records that include data about employees such as employment
date, performance ratings and pay rates are the:

A) human resource records. A

B) employee screening forms.
C) summary payroll reports.
D) employee folders.

The computer file used for recording payroll transactions for each
employee and maintaining total wages paid for the year to date is
the:
B
A) payroll transaction file.
B) payroll master file.
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C) payroll bank account reconciliation.
D) payroll tax returns.
Which of the following is not one of the business functions for the
payroll and personnel cycle?

A) Payment of payroll C
B) Timekeeping and payroll preparation
C) Reconciliation of payroll account
D) Human resources and employment
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.

A
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.
Which department should be authorized to add and delete em-
ployees from the payroll or change pay rates and deductions?

A) The supervising department C

B) The accounting department
C) The human resources department
D) The treasurer's department
Hiring personnel initiates the payroll and personnel cycle.
A
A) True
B) False
Firing personnel terminates the payroll and personnel cycle.
B
A) True
B) False
Paying employees for their services ends the payroll and person-
nel cycle.
A
A) True
B) False
The deduction authorization form authorizes the rate of pay and
the deductions for taxes, dues, etc.
B
A) True
B) False
The job time ticket indicates the starting and stopping times of
work during the pay period.
B
A) True
B) False
An imprest payroll account limits the client's exposure to payroll
fraud.
A
A) True
B) False
Imprest accounts usually carry a significant balance.
B
A) True
B) False
Which of the following statements is false?

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A) The payroll cycle consists of one class of transactions.
B) Balance sheet accounts related to payroll are generally more
significant than related transactions. B
C) Internal controls over payroll are effective for most companies.
D) Small companies usually have effective controls over payroll.
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 other-

wise involved in the preparation of the payroll.
B) A check-signing machine should not be used to replace a B
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 re-
deposit.
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. A
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.
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:
B
A) occurrence.
B) accuracy.
C) classification.
D) timing.
Which of the following best describes the systems of internal
control for payroll for large companies?

A) Loosely structured but well controlled C

B) Loosely structured and loosely controlled
C) Highly structured and well controlled
D) Highly structured but loosely controlled
Which of the following internal control objectives is likely to be the
most important in the audit of the payroll cycle?

A) Payroll transactions are properly disclosed and presented in

the notes to the financial statements.
C
B) Payroll transactions are processed by an outside service
provider.
C) Recorded transactions represent valid payments.
D) Recorded transactions are recorded in the proper accounting
period.
To minimize the opportunity for fraud, unclaimed salary checks
should be:

A) redeposited. A
B) kept in the payroll department.
C) left with the employee's supervisor.
D) held for the employee in the personnel department.
Although significant client business risks affecting payroll are
unlikely for most companies, an area that would have the most
business risk would be:
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A) payment of hourly employees.

B) payment of salaried employees.
C
C) payments to employees for stock options and bonus plans.
D) payments to employees who have direct deposit of their payroll
checks.
When examining payroll transactions, an auditor is primarily con-
cerned with the possibility of:

A) incorrect summaries of employee time records.

B
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.
The ________ has the responsibility for approving the number of
hours worked for each employee.

A) employee's supervisor A
B) human resources department
C) chief financial officer
D) budgeting supervisor
Which of the following audit procedures would be the most effec-
tive in testing for nonexistent employees?

A) Trace transactions recorded in the payroll journal to the human

resources department to determine employment status. A
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.
No individual with access to time cards, payroll records, or checks
should also be permitted access to:

A) the computer. C
B) job time tickets.
C) personnel records.
D) the canceled check file.
Many companies use outside payroll services to process payroll.
Which of the following regarding the auditor's responsibilities is
most correct regarding their reliance on the internal controls of
these outside payroll services?
D
A) Must
B) Cannot
C) Rarely
D) Can often
Many audits have a ________ risk of misstatement for the payroll
cycle.

A) high B
B) minimal
C) moderate
D) zero
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:
B
A) computerized preparation of tax returns.
B) a well-defined set of policies that indicate when each form must
be filed.
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C) independent verification of computer output by a competent
individual.
D) the use of an outside payroll service.
Which of the following types of audit tests is usually emphasized
due to a lack of independent third-party evidence related to payroll
transactions?
C
A) Analytical procedures
B) Tests of details of balances
C) Tests of controls
D) Each of the above is emphasized.
The most important means of verifying account balances in the
payroll and personnel cycle are:

A) tests of controls and substantive tests of transactions. A

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.
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. A

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.
Which of the following is a substantive test of transactions?

A) Review personnel policies.

B) Account for a sequence of payroll checks.
C
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.
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.
D
A) fraud awareness
B) doing tests of balances
C) doing tests of transactions
D) understanding the client's internal controls
Verifying that an adequate chart of accounts is used is a key
internal control for the transaction-related objective of:

A) classification. A
B) accuracy.
C) existence.
D) occurrence.
When labor is a material factor in inventory valuation, the auditor
should place special emphasis on testing the internal controls
concerning:
C
A) fictitious employees.
B) authorization of wage rates.
C) proper classification of payroll transactions.
D) completeness of recorded transactions.

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There is inherent risk of payroll fraud because most transactions
involve:

A) expense accounts. D
B) accrued liabilities.
C) estimates.
D) cash.
Which of the following errors gives the auditor the least concern
in auditing payroll transactions?

A) An error that indicates possible fraud

B) Computational errors in formulas when a computerized system D
is used
C) Classification errors in charging labor to inventory and job cost
accounts
D) Each of the above gives the auditor significant concern.
________ is not a transaction-related audit objective for the class-
es of transactions underlying the payroll cycle.

A) Classification B
B) Existence
C) Timing
D) Completeness
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.

C
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.
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 C
agreement with payroll accounting records.
C) Make a surprise observation of the company's regular distrib-
ution of paychecks.
D) Visit the working areas and confirm with employees their badge
or identification numbers.
Which of the following best describes inherent risk for balance-re-
lated audit objectives as they relate to payroll?

A) Not considered B
B) Low
C) Moderate
D) High
It would be appropriate for the payroll department to be respon-
sible for which of the following functions?

A) Approval of employee time records

D
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
Which of the following best describes effective internal control
over payroll?

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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
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.
Which of the following is an accurate statement regarding nonex-
istent 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 D
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.
In auditing payroll, which of the following procedures will normally
require the least amount of auditor time under normal circum-
stances?
D
A) Tests of controls
B) Substantive tests of transactions
C) Analytical procedures
D) Tests of details of balances
A weak internal control system allows a department supervisor
to "clock in" for a fictitious employee and then approve the em-
ployee'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
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.
Which of the following is not a correct statement regarding fraud-
ulent hours?

A) Fraudulent hours occur when an employee reports more time

than was actually worked.
D
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.

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. D
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

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individual employees is improperly charged to the wrong job or
process.
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 C
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.
The auditor, in auditing payroll, wants to determine that the indi-
viduals included in her sample were employees of the company
for the period under review. What is the auditor's best source of
evidence?
A
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
Auditors should determine whether the client has fulfilled its legal
obligation in submitting payments of all payroll withholdings as
part of their payroll tests.
A
A) True
B) False
Payroll checks should be distributed by someone independent of
the payroll and timekeeping functions.
A
A) True
B) False
Auditors seldom expect to find misstatements when testing payroll
transactions.
A
A) True
B) False
The nature, extent, and timing of substantive tests of payroll
transactions vary depending, in part, on assessed control risk.
A
A) True
B) False
"Physical control over assets" is not a type of control that is
applicable to the payroll cycle.
B
A) True
B) False
When auditing the payroll and personnel cycle, tests of controls
are routinely performed.
A
A) True
B) False
When labor is a material part of inventory valuation, auditors
should emphasize testing internal controls over proper classifica-
tion of payroll transactions.
A
A) True
B) False

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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.
B
A) True
B) False
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.
A
A) True
B) False
It is usually very easy for an auditor to determine if an employee
has overstated their hours worked.
B
A) True
B) False
For most clients, the balance sheet accounts related to payroll are
normally insignificant, except for labor charged to inventory.
A
A) True
B) False
Stock-based compensation plans may increase the inherent risks
related to the accounting and disclosure requirements.
A
A) True
B) False
For good internal control, the payroll function should be indepen-
dent of the human resources department.
A
A) True
B) False
If an audit client is a public company, the understanding of internal
control must be sufficient to identify opportunities to increase audit
effectiveness.
B
A) True
B) False
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.
B
A) True
B) False
The primary purpose of a surprise payroll payoff is to detect em-
ployees who have reported more time than was actually worked
(fraudulent hours).
B
A) True
B) False
Because of confidentiality requirements and potential losses of
payroll funds, outside service center systems are rarely used by
companies for payroll-related functions.
B
A) True
B) False

Internal control over payroll is normally highly structured and well

controlled.
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A) True B
B) False
Most monetary misstatements of payroll are corrected by internal
verification controls or by the PCAOB.
B
A) True
B) False
Despite the large dollar amounts involved in the payroll and per-
sonnel cycle, auditors typically spend less time auditing this cycle
than others.
A
A) True
B) False
It is generally more difficult for the auditor to detect payment of
fraudulent hours than payment of fictitious employees.
A
A) True
B) False
Examining payroll records for an indication of authorization is part
of the timing transaction-related audit objective.
B
A) True
B) False
The audit procedure "recompute hours worked from time cards" is
normally performed when testing the completeness objective for
payroll.
B
A) True
B) False
Which of the following types of audit procedures is ordinarily
emphasized the least when auditing payroll?

A) Tests of controls D
B) Tests of transactions
C) Analytical procedures
D) Tests of details of balances
An analytical procedure to determine a possible misstatement
of commission expense is to compare commission expense to
salaries payable.
B
A) True
B) False
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 B
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
The primary concern in testing payroll-related liabilities is to make
sure that:

A) accruals are properly valued. C

B) transactions are recorded in the proper period.
C) there are no understated or omitted accruals.
D) the accruals are not overstated.

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Verification of the legitimacy of year-end unpaid bonuses to of-
ficers and employees can be accomplished by comparing the
recorded accrual to the amount:
C
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.
What are the two major balance-related audit objectives in testing
payroll liabilities?

A) Accuracy and detail tie-in D

B) Completeness and valuation
C) Completeness and rights and obligations
D) Accuracy and cutoff
Once the auditor determines that the company's policy for ac-
cruing wages is consistent with prior years, the appropriate audit
procedure to test for accuracy and cutoff is:
A
A) recalculating the client's accrual.
B) performing extensive tests of controls.
C) performing extensive tests of details.
D) none of the above.
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 pre-

A
ceding 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.
When performing the tests of details of balances for expense
accounts, ________ is (are) generally not necessary.

A) extensive additional testing A

B) analytical procedures
C) tests of controls
D) substantive tests of transactions
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?
C
A) Completeness
B) Existence
C) Cut-off
D) Accuracy
The two major balance-related audit objectives in testing payroll
liabilities are accuracy and cutoff.
A
A) True
B) False

On most audits, the calculation for payroll tax expense is costly

and is not necessary unless analytical procedures indicate a
A
problem that cannot be resolved through other procedures.

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A) True
B) False

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1) Receipt of ordered materials by the receiving department will
generate the completion of a form called the:
A) bill of lading.
b
B) receiving report.
C) materials requisition.
D) inventory acquisition summary.
2) ________ is normally characterized as a difficult and complex
account to audit.
A) Property, plant and equipment
c
B) Cash
C) Inventory
D) Prepaid insurance
3) Inventory is a complex area to audit for all but which of the
following reasons?
A) Inventory is often in different locations.
B) There are several acceptable valuation methods and some d
entities use different methods for different types of inventory.
C) Inventory is often the largest account on the balance sheet.
D) Inventory valuation includes few estimates.
4) In most manufacturing companies, the inventory and ware-
housing cycle begins with the:
A) receipt of a customer's order.
d
B) completion of production of a customer's order.
C) initiation of production of a customer's order.
D) acquisition of raw materials for production of an order.
5) ________ accumulate costs by individual jobs as material is
issued into production and labor costs are incurred.
A) Just-in-time production systems
b
B) Job order cost systems
C) Process cost systems
D) Manufacturing systems
8) The inventory and warehousing cycle can be thought of as
having two separate but closely related systems, one involving the
actual physical flow of goods, and the other the:
A) related costs. a
B) storage of the goods.
C) internal control over those goods.
D) prevention of waste, obsolescence, and theft.
• Inventory is often the largest account on the balance sheet.
• Inventory is often in different locations.
10) What are two factors affecting the complexity of the audit of • Diverse items in inventory are often difficult to value.
inventory? • Inventory valuation is difficult due to the estimates involved.
• There are several acceptable methods of valuing inventory and
some entities use different
1) The audit tests to verify that the client is using an inventory
method which is generally accepted and to verify that physical
counts were correctly summarized are performed during the audit
of the:
c
A) acquisition and payments cycle.
B) payroll and personnel cycle.
C) inventory and warehousing cycle.
D) sales and collection cycle.
2) Handling the receipt of ordered goods is a part of the ________
cycle.
A) purchasing
b
B) acquisition and payment
C) inventory
D) inventory and warehousing

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Acquisition and Payment: Acquire and record raw materials, labor,
4) The audit of the inventory and warehousing cycle will be af-
overhead
fected by the results from other business processes. Identify the
Sale and collection: Ship goods and record revenue and the
"other" business cycles and how they impact the audit of inventory.
appropriate costs
) The physical observation of the inventory and the acquisition of
raw materials are part of the inventory and warehousing cycle.
b
A) True
B) False
1) Auditor tests of the physical controls over raw materials, work
in process, and finished goods are generally limited to:
A) observation and confirmation.
b
B) observation and inquiry.
C) inquiry and reconciliation.
D) observation and reconciliation.
2) Almost all companies need physical controls over their assets
to prevent loss. Which of the following is not an example of such
a control?
A) Perpetual inventory master files
a
B) Segregated, limited-access storage areas
C) Custody of assets assigned to specific responsible individuals
D) Approved prenumbered documents for authorizing movement
of inventory
3) The reliability of perpetual inventory master files affects the
timing and ________ of the auditor's physical examination of
inventory.
A) cutoff d
B) accuracy
C) nature
D) extent
4) When auditing inventory cost accounting, the auditor is con-
cerned with all of the following except for:
A) net realizable value.
a
B) unit cost records.
C) physical controls over inventory.
D) documents and records for transferring inventory.
6) To assure proper segregation of duties, who should maintain
the perpetual inventory master files?
A) Production personnel
d
B) Inventory storeroom personnel
C) Inventory receiving personnel
D) Accounting department personnel
7) Which of the following statements is correct regarding the audit
of inventory cost accounting?
A) Cost accounting systems and controls are the same for all
manufacturing companies.
B) All companies that have work-in-process must use a perpetual
inventory system. c
C) Auditors test perpetual inventory master files by examining
documentation that supports additions and reductions of inven-
tory amounts in the master files.
D) Manufacturing companies keep their cost accounting records
separate from the production and other accounting records.

10) When auditing manufacturing overhead costs assigned to

inventory, auditors should keep in mind that:
A) GAAP has strict procedures that must be followed when as-
signing overhead to work-in-process inventory. c
B) overhead costs must be allocated to raw materials,
work-in-process, and finished goods inventory.
C) management typically allocates overhead using total direct

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labor dollars as the basis for the allocation.
D) determining the reasonableness of the allocation method is
relatively simple for work-in-process inventory.
11) A major difficulty in the verification of inventory cost records
for the purpose of inventory valuation is in determining the rea-
sonableness of the:
A) direct labor hourly rate. c
B) raw material per unit cost.
C) manufacturing overhead costs.
D) number of direct labor hours applied.
12) Auditor tests of physical controls over raw materials,
work-in-process, and finished goods are performed by:
A)
Examination Observation Inquiry
Yes No Yes

B)
Examination Observation Inquiry
No Yes No d

C)
Examination Observation Inquiry
Yes Yes No

D)
Examination Observation Inquiry
No Yes Yes
13) If the perpetual inventory master files show lower quantities of
inventory than the physical count, an explanation of the difference
might be unrecorded:
A) sales. c
B) sales discounts.
C) purchases.
D) purchase discounts.
14) Cost accounting controls are those related to the physical
inventory and the consequent costs from the point at which:
A) materials are ordered for purchase until the finished product is
sold.
B) the customer's order is received until the finished product is
c
shipped.
C) raw materials are requisitioned until the finished product is sent
to storage.
D) raw materials are requisitioned until the finished product is
completely manufactured.
15) In order to strengthen controls over cost accounting informa-
tion, a company should consider implementing:
A) perpetual inventory master files.
B) a job order cost accounting system.
a
C) an accounting system that keeps separate the records of
the accounting department from the records of the production
department.
D) an economic quantity order system.
1) Which one of the following analytical procedures would be
most useful in alerting the auditor to the possibility of obsolete
inventory?
A) Compare gross margin percentage with previous years'.
c
B) Compare unit costs of inventory with previous years'.
C) Compare inventory turnover ratio with previous years'.
D) Compare current year manufacturing costs with previous
years'.

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4) A comparison of the current year's inventory turnover ratio with
previous years' may indicate the presence of obsolete inventory.
a
A) True
B) False
1) You are auditing the inventory account and are concerned
about the possibility of an inventory overstatement. What is the
best audit procedure to detect damaged inventory?
A) Observe the condition of inventory during the client's physical
count.
a
B) Compare the condition of inventory from the previous year's
count to the current year.
C) Compare inventory turnover from the previous year's inventory
to the current year's inventory.
D) Reconcile the inventory counts to the cost accounting records.
2) When determining the sample size for the number of items the
auditor should count during the physical inventory:
A) it is easy to quantify the number of items based on a formula
developed by the AICPA.
B) one of the key determinants that must be considered is internal
control over the physical count. b
C) one of the key determinants that must be considered is the time
involved.
D) generally accepted auditing standards require that at least
80% of the dollar value of the inventory should be included in the
sample.
3) There must be a periodic physical count by the client of the
inventory items on hand:
A) only if the client uses the LIFO method.
c
B) only if the client uses a lower-of-cost-or-market method.
C) regardless of the client's inventory valuation method.
D) only if the client uses either the LIFO or FIFO method.
5) From which of the following evidence-gathering audit proce-
dures would an auditor obtain most assurance concerning the
existence of inventories?
A) Observation of physical inventory counts a
B) Written inventory representations from management
C) Confirmation of inventories in a public warehouse
D) Auditor's recomputation of inventory extensions
6) When auditors observe the client counting inventory, they
should be careful to do all of the following except:
A) inquire about items that are likely to be obsolete or damaged.
B) calculate the unit cost of the inventory items. b
C) discuss with management the reasons for excluding any ma-
terial items.
D) observe the counting of the most significant items.
8) Comparing the physical counts with the perpetual inventory
master files satisfies the balance-related audit objective of:
A) classification.
d
B) observation.
C) completeness.
D) accuracy.
9) Which of the following statements is correct regarding the
auditor's responsibility with respect to the year-end inventory pro-
cedures of an audit client?
A)
The auditor is responsible for setting up the procedures for taking
an accurate physical inventory. The auditor is responsible for tak-
ing and compiling the inventory.
The auditor is responsible for observing the physical counting of
inventory.
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Yes No No

B)
The auditor is responsible for setting up the procedures for taking
an accurate physical inventory. The auditor is responsible for tak-
ing and compiling the inventory.
The auditor is responsible for observing the physical counting of
inventory.

No No Yes

C)
The auditor is responsible for setting up the procedures for taking
an accurate physical inventory. The auditor is responsible for tak- b
ing and compiling the inventory.
The auditor is responsible for observing the physical counting of
inventory.

Yes No Yes

D)
The auditor is responsible for setting up the procedures for taking
an accurate physical inventory. The auditor is responsible for tak-
ing and compiling the inventory.
The auditor is responsible for observing the physical counting of
inventory.

No Yes No
13) The most important part of the observation of inventory is to
determine whether:
A) all counts are accurate.
B) the inventory-takers are qualified. d
C) obsolete inventory has been identified.
D) the physical count is being taken in accordance with the client's
instructions.
14) A useful starting point for becoming familiar with the client's
inventory is for the auditor to:
A) read the AICPA's Industry Audit Guide.
d
B) review accounting theory covering special inventory problems.
C) read the client's accounting manual.
D) tour the client's facility.
17) A common inventory observation procedure is to be alert
for items that are damaged, rust- or dust-covered, or located in
inappropriate places. The balance-related audit objective being
achieved by this procedure is:
c
A) classification.
B) cutoff.
C) realizable value.
D) rights.
18) The test of details of balance procedure which requires the
auditor to account for unused inventory tag numbers to make sure
none have been deleted is associated with the audit objective of:
A) accuracy. d
B) existence.
C) detail tie-in.
D) completeness.
20) The auditor's tour of the client's inventory facilities should be
led by:
c
A) a member of the audit committee.
B) the CFO.
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C) a plant supervisor.
D) the company president.
24) The audit of year-end physical inventories should include
steps to verify that the client's purchases and sales cutoffs were
adequate. The audit steps should be designed to detect whether
merchandise included in the physical count at year-end was not
recorded as a: a
A) sale in the current period.
B) sale in the subsequent period.
C) purchase in the current period.
D) purchase return in the subsequent period.
28) An auditor must inquire about consigned or customer invento-
ry included on the client's premises to satisfy the balance-related
audit objective of:
A) cutoff. c
B) classification.
C) rights.
D) completeness.
30) Boxes or other containers holding inventory should also be
opened during test counts to determine the ________ of the
inventory.
A) classification c
B) detail tie-in
C) existence
D) realizable value
Auditing standards require that auditors satisfy themselves about • Be present at the time the client counts the inventory
the effectiveness of the client's methods of counting inventory and • Observe the client's counting procedures
the reliance they can place on the client's representations about • Make inquiries of client personnel about their counting proce-
the quantities and physical condition of the inventories. To meet dures
this requirement auditors must perform four activities. List below. • Make their own independent tests of the physical count
3) You are gathering evidence for the audit objective that existing
inventory items are included in the inventory listing schedule. The
audit procedure that would provide you with the best evidence to
confirm this objective is:
A) trace from inventory tags to the inventory listing schedule and
a
make sure the inventory tag is included.
B) trace the inventory totals to the general ledger.
C) perform tests of lower-of-cost-or-market.
D) account for unused tags shown in the auditor's documentation
to make sure no tags have been added.
4) The test of details of balance procedure which requires the
auditor to perform tests of lower of cost or market, selling price,
and obsolescence is an attempt to satisfy the objective of:
A) existence. d
B) completeness.
C) accuracy.
D) realizable value.
5) A major source of cutoff information for sales and purchases of
inventory is:
A) confirmations from outside parties.
c
B) the test of details of balances.
C) physical observation.
D) the performance of analytical procedures.
11) In valuing inventory, the auditor must consider all but which of
the following factors?
A) The valuation method must be in accordance with GAAP.
d
B) The valuation method must be applied on a consistent basis.
C) The inventory must be valued at the lower of cost or market.
D) LIFO must be used for work-in-process inventory.

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1) When labor is a significant part of inventory, verifying the proper
accounting of these costs should be tested in the:
A) inventory and warehousing cycle.
b
B) payroll and personnel cycle.
C) acquisitions and payments cycle.
D) cash cycle.

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