Exercise for Part 3

1) An imprest payroll account that has a significant balance may indicate the presence of:
A) employees have not yet deposited or cashed payroll checks.
B) fraudulent transfer of funds by the company.
C) lack of controls over payroll distribution.
D) the company is overpaying its employees.

2) Which department should be authorized to add and delete employees from the payroll or change pay
rates and deductions?
A) the supervising department
B) the accounting department
C) the human resources department
D) the treasurer's department

3) The auditor, in auditing payroll, wants to determine that the individuals included in her sample were
employees of the company for the period under review. What is the auditor's best source of evidence?
A) Examination of Human Resource Records
B) Examination of the Payroll Master File
C) Examination of the Payroll Transaction File
D) Examination of the Payroll Tax Records

4) Which of the following would have the least amount of importance regarding controls over the
processing of payroll?
A) The person authorized to sign paychecks should not be otherwise involved in the preparation of the
payroll.
B) A check-signing machine should not be used to replace a manual signature.
C) Distribution of pay checks should be performed by someone who is not involved in the other payroll
functions.
D) Unclaimed paychecks should be immediately returned for redeposit.

5) Which of the following types of audit procedures is ordinarily emphasized the least when auditing
payroll?
A) Tests of controls
B) Tests of transactions
C) Analytical procedures
D) Tests of details of balances

6) An auditor is vouching a sample of hourly employees from the payroll master file to approved time
clock or time sheet data in order to provide evidence that:
A) employees work the number of hours for which they are paid.
B) payments are made at the contractual rate.
C) product cost information is accurate.
D) segregation of duties is present between the payroll function and the payment function for cash
disbursements.

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7) 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 provider.
C) Recorded transactions represent valid payments.
D) Recorded transactions are recorded in the proper accounting period.

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

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

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

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

9) To minimize the opportunity for fraud, unclaimed salary checks should be:
A) deposited in a special bank account.
B) kept in the payroll department.
C) left with the employee's supervisor.
D) held for the employee in the personnel department.

10) Which of the following audit procedures would be most useful in testing the cut-off audit objective
for payroll-related liabilities?
A) Review documentation for proper classification between long and short term liabilities.
B) Compare the clients accrual of payroll liabilities with the payroll tax return.
C) Examine payment tax returns to determine that the expense was recorded in the correct period.
D) Examine subsequent cash disbursements to determine when the liabilities for payroll were paid.

11) When examining payroll transactions, an auditor is primarily concerned with the possibility of:
A) incorrect summaries of employee time records.
B) overpayments and unauthorized payments.
C) under withholding of amounts required to be withheld.
D) posting of gross payroll amounts to incorrect salary expense accounts.

12) 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.
C) Use of prenumbered receiving reports in the acquisitions function.
D) Use of prenumbered deposit slips in the cash receipts function.
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13) Which of the following audit procedures would be the most effective in testing for nonexistent
employees?
A) Trace transactions recorded in the payroll journal to the HR department to determine employment
status.
B) Examine cancelled checks for proper endorsement.
C) Recalculate net pay .
D) Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank
statements.

14) No individual with access to time cards, payroll records, or checks should also be permitted access to:
A) the computer.
B) job time tickets.
C) personnel records.
D) the canceled check file.

15) Many companies use outside payroll services to process payroll. Which of the following regarding the
auditors responsibilities is most correct regarding their reliance on the internal controls of these outside
payroll services?
A) must
B) cannot
C) rarely
D) can often

16) You are responsible for the audit of payroll. You have assessed control risk as low for the payroll
transactions. Substantive tests of payroll would most likely be limited to analytical procedures and:
A) tracing employee time records to the payroll transaction file.
B) recomputing an entire payroll period and compare to the client's records.
C) tracing amounts in the payroll transaction file to the payroll master file.
D) recalculating payroll accruals.

17) The careful and timely preparation of all payroll tax returns is necessary to avoid penalties and
criminal charges. The most important control in the timely preparation of these returns is:
A) computerized preparation of tax returns.
B) a well-defined set of policies that indicate when each form must be filed.
C) independent verification of computer output by a competent individual.
D) a Gantt chart.

18) Which of the following types of audit tests is usually emphasized due to a lack of independent third-
party evidence related to payroll transactions?
A) Analytical procedures
B) Tests of details of balances
C) Tests of controls
D) Each of the above is emphasized.

19) The most important means of verifying account balances in the payroll and personnel cycle are:
A) tests of controls and substantive tests of transactions.
B) analytical procedures and tests of controls.
C) analytical procedures and substantive tests of transactions.
D) tests of controls and tests of details of balances.

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20) If an auditor wishes to test the completeness transaction-related audit objective in the payroll and
personnel cycle, which of the following would be a reasonable test of control?
A) Account for a sequence of payroll checks.
B) Examine procedures manual and observe the recording of transactions.
C) Examine payroll records for indication of pay rate approval.
D) Reconcile the payroll bank account.

21) Which of the following statements is correct regarding the capital acquisition and payment cycle?
A) Bonds are frequently issued by companies in small amounts.
B) There are relatively few transactions and each transaction is typically highly material.
C) A primary emphasis in auditing debt is on existence.
D) Audit procedures for Notes Payable and Interest Income are often performed simultaneously.

22) The capital acquisition and repayment cycle does not include:
A) payment of interest.
B) payment of dividends.
C) payment of vendor invoices.
D) acquisition of capital through interest-bearing debt.

23) Which of the following statements regarding the capital acquisition and repayment cycle is most
correct?
A) Relatively few transactions affect the cycle, and most are smaller amounts.
B) Large numbers of transactions affect the cycle, and most are smaller amounts.
C) Relatively few transactions affect the cycle, and most are highly material.
D) Large number of transaction affect the cycle, and most are highly material.

24) Which of the following is not an objective of the auditor's examination of notes payable?
A) To determine whether internal controls are adequate.
B) To determine whether client's financing arrangements are effective and efficient.
C) To determine whether transactions regarding the principal and interest of notes are properly
authorized.
D) To determine whether the liability for notes and related interest expense and accrued liabilities are
properly stated.

25) Responsibility for the issuance of new notes payable would normally be vested in the:
A) board of directors.
B) purchasing department.
C) accounting department.
D) accounts payable department.

26) An auditor is determining whether an issuance of notes payable for cash was correctly recorded. Her
best course of action would be to:
A) confirm with the bond trustee as to the amount of bonds issued.
B) confirm with the underwriter as to the appropriate market yield on the bonds.
C) trace the cash received from the proceeds to the accounting records.
D) verify that the amount was included in a footnote disclosure.

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27) When a company maintains its own records of stock transactions and outstanding stock, internal
controls must be adequate to ensure that:
A) actual owners are recorded in the bylaws.
B) the correct amount of dividends is paid to stockholders owning the stock on the dividend record date.
C) the correct amount of dividends is paid to stockholders owning the stock on the declaration date.
D) actual owners are recorded in the minutes.

28) Which of the following would generally not need to be approved by the board of directors?
A) Issuing capital stock
B) Repurchasing capital stock
C) Declaration of a Dividend
D) Payment of a Dividend

29) Which of the following is not an important control over notes payable?
A) proper authorization over the issuance of new notes payable
B) notes payable are issued when the business climate is favorable
C) adequate controls exist over repayment of interest and principal
D) there exists proper documents and records

30) In the audit of the transactions and amounts in the capital acquisitions and repayments cycle, the
auditor must take great care in making sure that the significant legal requirements affecting the financial
statements have been properly fulfilled and:
A) any violations are reported to the SEC.
B) are adequately disclosed in the financial statements.
C) must issue a disclaimer if they haven't been fulfilled.
D) any departures from the agreements are made with management's knowledge and consent.

31) The auditor's independent estimate of interest expense from notes payable uses average interest rates
and:
A) average notes payable outstanding.
B) year-end notes payable outstanding.
C) only notes payable above the level of materiality.
D) only notes payable to major lenders.

32) The tests of details of balances procedure which requires the auditor to trace the totals of the notes
payable list to the general ledger satisfies the audit objective of:
A) accuracy.
B) existence.
C) detail tie-in.
D) completeness.

33) The audit objective to determine that notes payable in the schedule actually exist is verified by the test
of details of balances procedure to:
A) foot the notes payable list.
B) confirm notes payable.
C) recalculate interest expense.
D) examine the balance sheet for proper disclosure of noncurrent portions.

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34) An auditor's substantive analytical procedure provides the auditor with an interest expense amount
that is significantly higher than the client's recorded interest expense. This finding would most likely lead
the auditor to conclude that:
A) client has not recorded all long-term interest bearing debt in the accounting records.
B) client has not recorded all interest expense paid or accrued.
C) client has not properly accounting for the discount of bonds payable account.
D) client has not properly recorded interest income.

35) You are auditing the long-term notes payable account for a client. Which of the following audit
procedures would you most likely employ?
A) compare interest expense recorded by the client with the notes payable account for reasonableness
B) confirm bonds payable with individual bond holders
C) perform analytical procedures on the bond discount or premium account
D) examine bond documents for the presence of hybrid securities

36) The two most important balance related audit objectives for notes payable are:
A) completeness and detail tie-in.
B) completeness and valuation.
C) accuracy and valuation.
D) accuracy and completeness.

37) Which of the following audit tests would provide evidence regarding the balance-related audit
objective of existence for an audit of notes payable?
A) Examine due dates on duplicate copies of notes.
B) Examine balance sheet for proper presentation and disclosure of notes payable.
C) Examine corporate minutes for loan approval.
D) Foot the notes payable list for notes payable and accrued interest.

38) When there are not numerous transactions involving notes payable during the year, the normal
starting point for the audit of notes payable is:
A) a schedule of notes payable and accrued interest prepared by the audit team.
B) a schedule of notes payable and accrued interest obtained from the client.
C) a schedule of only those notes with unpaid balances at the end of the year prepared by the client.
D) the notes payable account in the general ledger.

39) The audit objective that requires that existing notes payable be included in the notes payable schedule
is satisfied by performing which of the following audit procedures?
A) confirm notes payable
B) trace the total of the notes payable schedule to the general ledger
C) review the notes payable schedule to determine whether any are related parties
D) obtain confirmations from creditors who have held notes from the client in the past and are not
currently included in the notes payable schedule

40) The audit objective that requires the auditor to determine that notes payable on the notes payable
schedule are properly classified can be tested by performing the procedure to:
A) confirm notes payable.
B) examine corporate minutes for loan approval.
C) examine notes, minutes, and bank confirmations for restrictions.
D) review the notes to determine whether any are with related parties.