Multiple Choice
1. During the year being audited, the Matthews Corporation changed from a system of recording time worked on clock cards to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this change
a. A generalized computer audit program must be used.
b. Without paper clock cards, part of the audit trail is altered.
c. The potential for payroll- related fraud is diminished.
d. Transactions must be processed in batches.

2. Which of the following procedures would most likely be considered a weakness in an entity’s internal controls over payroll?
a. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department’s payroll summary.
b. Payroll checks are prepared by the payroll department and signed by the treasurer.
c. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
d. The personnel department sends employees’ termination notices to the payroll department.

3. In meeting the control objective of safeguarding of assets, which department should be responsible for the following? Distribution of Paychecks Custody of Unclaimed Paychecks
a. Treasurer Treasurer
b. Payroll Treasurer
c. Treasurer Payroll
d. Payroll Payroll

4. For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to
a. The treasurer’s department.
b. General accounting.
c. Payroll accounting.
d. The timekeeping department.

5. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
a. Human resource function from the controllership function.
b. Administrative controls from the internal accounting controls.
c. Authorization of transactions from the custody- related assets.
d. Operational responsibility from the record- keeping responsibility.

6. An auditor who is testing IT controls in a payroll system would most likely use test data (discussed in Advanced Module 2 in Chapter 7) that contain con-ditions such as
a. Deductions not authorized by employees.
b. Overtime not approved by supervisors.
c. Time cards with invalid job numbers.
d. Payroll checks with unauthorized signatures.

7. It would be appropriate for the payroll department to be responsible for which of the following functions?
a. Approval of employee time records.
b. Preparation of periodic governmental reports as to employees’ earnings and withholding taxes.
c. Maintenance of records of employment, discharges, and pay increases.
d. Distribution of paychecks to employees.
8. Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions?
a. Trace a sample of time sheets to the payroll register.
b. Recompute the mathematical accuracy of a sample of payroll checks.
c. Trace a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity.
d. Test a sample of time sheets for the presence of authorization.

9. Effective control activities over the payroll function may include
a. Reconciliation of totals on job time cards with job reports by employees responsible for those specific jobs.
b. Verification of agreement of job time cards with employee clock card hours by a payroll department employee.
c. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department.
d. Custody of rate authorization records by the supervisor of the payroll department.

10. An auditor is most likely to perform substantive tests of details on payroll transactions and balances when
a. Cutoff tests indicate a substantial amount of accrued payroll expense.
b. The level of control risk relative to payroll transactions is set at low.
c. Substantive analytical procedures indicate unusual fluctuations in recur-ring payroll entries.
d. Accrued payroll expense consists primarily of unpaid commissions.