18 Questions
What is the primary purpose of prenumbered receiving reports in the acquisition and payment cycle?
To cutoff purchases and prevent unauthorized transactions
Which of the following internal controls is designed to prevent unauthorized payments?
Authorization of payments
What is the main objective of tracing AP transactions in the acquisition and payment cycle?
To identify the origin of a payment
Which of the following analytical procedures is most relevant in the acquisition and payment cycle?
Regression analysis of accounts payable
What is the primary purpose of separating asset custody from other functions in the acquisition and payment cycle?
To prevent unauthorized access to assets
Which of the following is a key initial procedure in the acquisition and payment cycle?
Understanding the substance and importance of transactions
What is the primary objective of assessing control risk in the payroll and personnel cycle?
To identify key internal controls and determine their effectiveness
Which of the following is a key internal control for payroll and personnel cycle?
Adequate separation of duties: Payroll function should be kept independent of the human resources department
What is the primary purpose of restricting access to unsigned payroll checks and direct deposit information?
To prevent theft and misappropriation of assets
What is the role of human resources in the payroll process?
Authorizing additions and deletions to payroll
What is the purpose of adequate documentation and records in the payroll process?
To meet the specific needs of the company, such as time keeping and job cost assignment
What is the outcome of a well-controlled payroll process?
Low control risk
When designing tests of controls and substantive tests of transactions in the Payroll and Personnel Cycle, which of the following is an important consideration?
All payroll transactions are typically uniform and uncomplicated
What should the auditor review during the understanding of internal control phase of the audit?
The preparation of at least one of each type of payroll tax form
Why might the auditor extend payroll audit procedures?
If payroll affects the valuation of inventory
What is a key consideration for the auditor when testing the timely payment of payroll taxes and other withholdings?
Whether the client has fulfilled its legal obligation in submitting payments for all withholdings
What type of review should a member of management or other responsible employee perform on payroll?
A review for obvious misstatements
What is an important consideration for the auditor when designing tests of controls and substantive tests of transactions in the Payroll and Personnel Cycle?
That employees are likely to complain to management if they are underpaid
Study Notes
Payroll and Personnel Cycle
- Internal control for payroll is normally highly structured and well controlled, resulting in a low control risk assessment.
- Key controls for assessing control risk include:
- Adequate Separation of Duties: Payroll function should be independent of the human resources department.
- Proper Authorization: Human resources should authorize additions and deletions to payroll.
- Adequate Documents and Records: Depending on the company's specific needs, including time keeping, incentive arrangements, and job cost assignment.
- Physical Control over Assets and Records: Restrict access to unsigned payroll checks, direct deposit information, payment authorization system, and check signature machine.
Documents and Records
- Check: A document used to pay for an acquisition, which may be paper or an electronic funds transfer (EFT).
Assessing Planned Control Risk
- Key internal controls for the business functions in this cycle include:
- Authorization of purchases
- Separation of asset custody from other functions
- Timely recording and independent review of transactions
- Authorization of payments
Substantive Tests
- Initial Procedures:
- Understanding the substance and importance of transactions
- Analyzing the accuracy of account information
- Tracing beginning AP to prior year working papers
- Scanning journals for large or unusual transactions
- Tests of Transactions:
- Vouching/tracing transactions (Directional Testing)
- Vouching AP transactions (Credit to RR & Debit to Check)
- Tracing purchase, cash disbursement, and purchase adjustment transactions
- Cutoff tests: Purchases (Prenumbered receiving report), Purchase returns (Prenumbered shipping document), Cash disbursements (Prenumbered Check)
Design and Perform Substantive Analytical Procedures
- The use of analytical procedures is important in the acquisition and payment cycle to uncover misstatements in accounts payable.
- Independent Checks on Performance: A member of management or other responsible employee should review payroll for obvious misstatements.
Designing Tests of Controls and Substantive Tests of Transactions
- Tests of controls and substantive tests of transactions are the most important part of testing the Payroll and Personnel Cycle.
- However, they are not usually tested extensively due to:
- Employees likely to complain to management if they are underpaid
- All payroll transactions are typically uniform and uncomplicated
Additional Considerations
- Payroll Tax Forms and Payments: Review the preparation of at least one of each type of payroll tax form during the understanding of internal control phase of the audit.
- Timely Payment of Payroll Taxes and Other Withholdings: Test whether the client has fulfilled its legal obligation in submitting payments for all withholdings on a timely basis.
- Inventory and Payroll Considerations: If payroll affects the valuation of inventory, the auditor often extends payroll audit procedures.
This quiz assesses your understanding of the internal controls and auditing procedures related to the purchases and payments cycle. It covers key concepts such as authorization, separation of duties, and timely recording and review of transactions.
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