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5.Which of the following statements about the payroll and personnel cycle is correct?
c. Internal controls over payroll are effective for almost all companies, even small
ones.
6.Which of the following types of audit procedures is ordinarily emphasized the least
when auditing payroll?
d. Tests of details of balances
7.A form issued for each employee summarizing the earnings and income tax deductions
for the calendar year is the:
d. W-2 form.
8.The payroll and personnel cycle begins with which of the following events?
b. Hiring a new employee.
10.The payroll and personnel cycle ends with which of the following events?
d. Issuance of paychecks.
12. A ____________ includes all payroll transactions processed by the accounting system
for a given period of time.
b. payroll transaction file
14.Records that include data such as employment date, performance ratings and pay rates
are the:
a. personnel records.
16.To minimize the opportunity for fraud, unclaimed salary checks should be:
a. deposited in a special bank account.
17.Which of the following type of employee typically does not complete time cards.
b. Salaried employees.
19.For which of the following functions is the use of prenumbered documents least
important?
a. Use of prenumbered time cards in the payroll function.
22.No individual with access to time cards, payroll records, or checks should also be
permitted access to:
c. personnel records.
23.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.
24.Many companies use outside payroll services to process payroll. Auditors _____ rely
on the internal controls of these outside payroll services.
d. can often
25.The total of the individual employee earnings in the payroll master file equals the
total:
a. balance of gross payroll in general ledger accounts.
26.If auditors rely on the internal controls of an outside payroll service provider, they will
receive a(n) _____ report.
b. SAS 70
27.Most companies use an imprest account to pay the payroll. Which of the following is
not an advantage of such an account?
d. It eliminates the requirement of keeping a minimum balance in a checking
account.
28.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 well-defined set of policies that indicate when each form must be filed.
29.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. Tests of controls
30.The most important means of verifying account balances in the payroll and personnel
cycle are:
a. tests of controls and tests of transactions.
32.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.
34.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. understanding the client’s internal controls.
36.Which of the following circumstances would not cause an auditor to extend payroll
procedures considerably?
d. There is a lack of independent third-party evidence, such as confirmations.
37.When labor is a material factor in inventory valuation, the auditor should place special
emphasis on testing the internal controls concerning:
c. proper valuation and allocation of balances.
38.Which of the following is not a procedure that can be performed on canceled checks in
an effort to detect defalcations?
d. Examine the payroll records in subsequent periods to determine that terminated
employees are no longer being paid.
39.What potential problems may arise when an auditor considers the relationship between
payroll and inventory valuation?
d. All of the above are potential problems.
41.Which department should be authorized to add and delete employees from the payroll
or change pay rates and deductions?
c a. The supervising department
b. The accounting department
c. The human resources department
d. Any of the above
44. Verification of the legitimacy of year-end unpaid bonuses to officers and employees
can be accomplished by comparing the recorded accrual to the amount:
c. authorized in the minutes of the board.
45.Which of the following errors gives the auditor the least concern in auditing payroll
transactions?
d. Each of the above gives the auditor significant concern.
46. (Public)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:
d. any of the three above.
47.Auditors may extend their tests of payroll in which of the following circumstances?
d a. Payroll materially affects the valuation of inventory.
b. The auditor is concerned there may be nonexistent employees on the
payroll.
c. There is an increased risk of employees being paid for fraudulent hours.
d. All of the above.
48.To check the accuracy of hours worked, an auditor would ordinarily compare clock
cards with:
b. job time tickets.
49.A surprise payroll payoff in which employees must pick-up and sign for their pay
check is one means of:
c. testing for nonexistent employees.
50.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?
c. Make a surprise observation of the company’s regular distribution of paychecks.
51.Inherent risk is typically _____ for balance-related audit objectives as they relate to
payroll.
b. low
52.It would be appropriate for the payroll department to be responsible for which of the
following functions?
d. Preparation of governmental reports as to employees’ earnings and withholding
taxes.
53.What are the two major balance-related audit objectives in testing payroll liabilities?
d. Accuracy and cutoff
54.Which of the following best describes proper internal control over payroll?
c. The duties of hiring, payroll computation, and payment to employees should be
segregated.
55. 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):
d. test of transactions that the check is prepared for the proper amount and deposited
before payroll checks are handed out.
56.Once the auditor determines that the company’s policy for accruing wages is
consistent with prior years, the appropriate audit procedure to test for accuracy and cutoff
is:
a. recalculating the client’s accrual.
57.In auditing payroll, which of the following procedures will ordinarily require the least
amount of auditor time under normal circumstances?
d. Tests of details of balances.
58.A weak internal control system allows a department supervisor to “clock in” for a
fictitious employee and then approve the employee’s time card at the end of the pay
period. This fraud would be detected if other controls were in place, such as having an
independent party:
a. distribute paychecks.
59.The most important consideration in evaluating the fairness of the amounts accrued
for vacation pay, sick pay, and other benefits is the:
a. consistent accrual of these liabilities relative to those of preceding periods.
60.Effective internal accounting control over unclaimed payroll checks that are kept by
the company would include accounting department procedures that require:
d. periodic accounting for the actual checks representing unclaimed wages.
61.Which of the following internal controls in the payroll and personnel cycle is
generally least important to an auditor?
d. Notice of the termination date of employees no longer working for the company.
63.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?
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.
64.Once the auditor has determined the company’s policy for accruing 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.
CHAPTER 19
1.The classes of transactions in the acquisition and payment cycle include acquisition of:
d. goods and services, cash disbursements, and purchase returns and allowances.
2.The overall objective in the audit of the acquisition and payment cycle is:
c. to evaluate whether the affected accounts are fairly stated in accordance with
GAAP.
3.The audit of the acquisition and payment cycle often takes ____ time to audit than other
cycles.
c. more
6.The receipt of goods and services in the normal course of business represents the date
clients normally recognize:
b. the liability.
8.A document indicating a reduction in the amount owed to a vendor because of returned
goods is:
a. a debit memo.
10.The accounts payable account includes obligations for the acquisition of:
d a. raw materials.
b. equipment.
c. utilities.
d. all three of the above.
11.Comparing expenses to prior years is an effective analytical procedure for accounts
payable because expenses from year to year are:
d. relatively stable.
13.At what point do most companies recognize liabilities in the acquisition and payment
cycle?
c. Receipt of goods or services.
16.The major balance sheet account in the acquisition and payment cycle is:
c. Accounts payable.
18.It usually takes more time to audit the acquisition and payment cycle than other cycles
because:
c. of the large number of accounts affected.
20.For good internal control, the purchasing department should not be responsible for:
d. authorizing the acquisition of goods.
22.The accounts payable department usually has responsibility for verifying the propriety
of acquisitions by comparing the details on the:
c. purchase order, receiving report, and vendor’s invoice.
23.Tests of controls for the acquisition and payment cycle are usually divided into:
d. tests of acquisitions and disbursements.
24.Many companies do not maintain an accounts payable master file by vendor. These
companies pay on the basis of:
b. individual vendors’ invoices.
25.An important control in the accounts payable and IT departments is to ensure that
those personnel who record acquisitions do not have access to:
d. cash, marketable securities, and other easily convertible assets.
26.Which of the following is not a key control in the acquisition and payment cycle?
b. Authorization of credit.
28.Which department should initiate a report when goods arrive from a vendor?
b. Receiving
30.When a client uses perpetual inventory records, the tests of details of balances for
inventory can be significantly reduced if the auditor believes the perpetuals are accurate.
The controls over the acquisitions included in the perpetuals are normally tested as a part
of the:
b. tests of controls and tests of transactions.
32.The auditor’s internal control objective to determine that “recorded acquisitions are
for goods and services received” satisfies the audit objective of:
b. occurrence.
33. Failure to record the acquisition of goods is a violation of which audit objective?
d. Completeness
34.Once the auditor has decided on the specific procedures, the acquisitions tests and the
cash disbursements tests are typically performed:
a. concurrently.
35.The internal control that requires that “checks are prenumbered and accounted for”
satisfies the objective of:
c. completeness.
36.The most important controls over cash disbursements include all but which of the
following?
b. Random examination of the supporting documents by the authorized check signer
before signing checks.
37.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. attributes sampling.
38. Because many of the types of errors and irregularities that may be found in the
acquisition and payment cycle represent a misstatement of earnings and are of significant
concern to the auditor, the tolerable exception rate selected by the auditor will be:
a. low.
39. The main focus taken by the auditor in verifying liability balances is on the discovery
of:
c. understated or omitted liabilities.
40.Which of the following tests of controls is least useful in assessing the transaction-
related audit objective related to occurrence?
c. Account for sequence of vouchers.
41.The test of details of balances procedure to “trace from account payable list to
vendors’ invoices and statements” satisfies the objective of:
a. occurrence.
42.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:
b. unrecorded obligations.
44.A failure to record acquisitions of goods most likely will affect all but which of the
following?
d. Cash.
45.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. the physical inventory and Accounts payable.
46.When the auditor uses sampling to examine transactions in the acquisition and
payment cycle, the tolerable exception rate is typically set at a(n) _______ level.
a. low.
47.Which of the following is most reliable for verifying the correct balance of accounts
payable?
c. Confirmations.
48.Vendors’ statements and vendors’ invoices are both relatively reliable evidence
because they:
b. originate from a third party.
49.For effective internal control, the accounts payable department should compare the
information on each vendor’s invoice with the:
c. receiving report and the purchase order.
50.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?
b. Match purchase order, receiving report, and vendor’s invoice for each voucher in
accounts payable department.
52.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. 24990
53.Auditor confirmation of accounts payable balances at the balance sheet date may be
unnecessary because:
b. there is likely to be other reliable external evidence available to support the
balances.
54.Under which of the following circumstances would it be advisable for the auditor to
confirm accounts payable with creditors?
c. Creditor statements are not available and internal control over payables is
unsatisfactory.
56.Which of the following should sign checks under conditions of effective internal
control?
a. Treasurer.
57.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.
58.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. Auditors’ legal liability.
59.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. recorded acquisitions are for goods and services received.
60.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:
d. understate liabilities, and overstate both net income and owners’ equity.
61.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. completeness.
64.To test for overstatement cutoff errors in liabilities, the auditor should trace, to
vendors’ invoices, the receiving reports issued:
a. after year-end.
65.In determining that the accounts payable cutoff is correct, it is essential that the cutoff
tests be coordinated with the:
c. observation of inventory.
66.An inventory acquisition is received late in the afternoon of December 31 after the
physical inventory is completed. If the acquisition is included in accounts payable and
purchases, but excluded from inventory, the result:
a. is an understatement of net earnings.
67.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:
b. shipped prior to the balance sheet date.
68.The auditor gets highly reliable evidence about individual transactions by examining:
a. vendors’ invoices.
69.Which of the following documents is best for verifying the correct balance in accounts
payable?
d. Vendors’ statements.
70.When goods are received, the receiving clerk should match the goods with the:
c. vendor’s shipping document and the purchase order.
71.For effective internal control purposes, the vouchers payable department generally
should:
c. establish the agreement of the vendor’s invoice with the receiving report and
purchase order.
72.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:
b. vendors’ invoices.
73.Matching the supplier’s invoice, the purchase order, and the receiving report normally
should be the responsibility of the:
c. general accounting function.
74.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. attachment of the receiving report to the disbursement report.