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5-1. The following duties must be separated in the preparation of payroll: hiring,
reporting and approval of time, paycheck preparation, check signing, and
paycheck distribution.
5-2. Payroll checks should be prenumbered and accounted for in a bank reconciliation.
5-3. Auditors substantive tests of payroll balances are primarily analytical procedures.
Procedure Possible Error
Scan the payroll register, general Fictitious employees may be paid, or
ledger, and payroll earnings records for significant overpayments may be made
entries that appear unusual, such as to genuine employees.
very large paychecks or employees not
assigned to departments.
Compare average pay per employee for Payroll expense may be overstated or
the current year to average pay for prior understated.
year (taking into consideration pay
raises).
Compare direct labor as a percentage of Payroll expense may be overstated or
cost of sales with the previous years understated.
percentage.
Compare the ratio of commission Commission expense may be
expense to sales with previous years overstated or understated.
percentage.
Compare payroll tax expense as a Payroll tax expense may be overstated
percentage of cost of goods sold with or understated.
percentage of previous years.
5-5. Auditors perform three procedures that provide evidence that all production
transactions that occur are recorded. First, auditors observe that prenumbered
production orders are accounted for to determine that all materials issued are
recorded. An auditor might also account for a sequence of production orders.
Finally, an auditor might observe that a clerk reconciles completed and charged
time tickets with the total hours for which production workers are paid.
5-6. 1) c 2) b
5-7. 1) d 2) d 3) b 4) b
5-8. 1) d 2) c
5-9. 1) a 2) a
5-10. 1) d 3) d 5) c
2) b 4) d 6) c
5. a. Completeness
b. Paychecks may be issued but not recorded.
c. Observe whether paychecks are prenumbered and determine whether a
bank reconciliation is prepared by a person independent of the payroll
function.
d. Test or prepare a bank reconciliation.
6. a. Completeness
b. Paychecks may be issued but not recorded.
c. Observe whether a bank reconciliation is prepared by a person
independent of the payroll function.
d. Test or prepare a bank reconciliation.