(Objective 20-3) The following questions concern audit testing of the payroll and personnel cycle. Choose the best response.
a. A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that
(1) only proper employees worked and their pay was correctly computed.
(2) jobs on which employees worked were charged with the appropriate labor cost.
(3) internal controls over payroll disbursements are operating effectively.
(4) all employees worked the number of hours for which their pay was computed.
b. In performing tests concerning the granting of stock options, an auditor should
(1) confirm the transaction with the Secretary of State in the state of incorporation.
(2) verify the existence of option holders in the entity’s payroll records or stock ledgers.
(3) determine that sufficient treasury stock is available to cover any new stock issued.
(4) trace the authorization for the transaction to a vote of the board of directors.
c. An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing to
(1) verify that payroll taxes are deducted from employees’ gross pay.
(2) determine whether internal control activities are operating effectively.
(3) uncover fictitious employees who are receiving payroll checks.
(4) identify potential liabilities for unpaid payroll taxes.
Objective 20-3
Understand internal control and design and perform tests of controls and substantive tests of transactions for the payroll and personnel cycle.
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