The following are various asset misappropriations involving the payroll and personnel cycle. 1. The payroll clerk submitted payroll information for a fictitious employee and had the funds directly deposited to a bank account that he controlled. 2. An employee adds 10 overtime hours that she did not work to her time record each pay period. 3. Two factory employees have an arrangement that one of them will take each Friday off, and the other employee will record their time worked so that the absent employee will be paid. 4. A supervisor does not notify human resources that an hourly employee has left the company. He continues to submit time records for the employee. The money is directly deposited in the former employee’s bank account, and he splits the amount paid with the supervisor. 5. The payroll clerk increased his salary by $100 each pay period. After a few weeks, he also increased the hourly rate for his friend who works in the shipping department. Required a. For each misappropriation, indicate the transaction-related audit objective that was not met. b. Indicate one or more controls that would be most effective in preventing or detecting the misappropriation. c. Because the controller is concerned about fictitious employees, she has recommended a surprise payroll payoff. Which misappropriations would be detected by the surprise payroll payoff? How is the payoff done if employees do not receive payroll checks because payment is directly deposited into their bank accounts?
> The Redford Corporation took out a 20-year mortgage on June 15, 2011, for $2,600,000 and pledged its only manufacturing building and the land on which the building stands as collateral. Each month subsequent to the issue of the mortgage, a payment of $20
> The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically makes the loan immediately due (the regular date is 20 years hence). List any audit steps
> The following questions concern internal controls in the inventory and warehousing cycle. Choose the best response. a. Which of the following controls will most likely justify a reduced assessed level of control risk for the occurrence assertion for purc
> The ending general ledger balance of $186,000 in notes payable for the Sterling Manufacturing Company is made up of 20 notes to eight different payees. The notes vary in duration anywhere from 30 days to 2 years, and in amounts from $1,000 to $10,000. In
> Your client, Red Horse Inc., prepared the following schedule for long term debt for the audit of financial statements for the year ended December 31, 2011: Required a. What type of evidence would you examine to support the beginning balances in the accou
> The following are frequently performed audit procedures for the verification of bonds payable issued in previous years: 1. Analyze the general ledger account for bonds payable, interest expense, and unamortized bond discount or premium. 2. Obtain a confi
> Distinguish between a vendor’s invoice and a vendor’s statement. Which document should ideally be used as evidence in auditing acquisition transactions and which for verifying accounts payable balances? Why?
> Items 1 through 6 are questions typically found in a standard internal control questionnaire used by auditors to obtain an understanding of internal control for notes payable. In using the questionnaire for a client, a "yes" response indicates a possible
> The following questions concern the audit of accounts in the capital acquisition and repayment cycle. Choose the best response. a. During an audit of a publicly held company, the auditor should obtain written confirmation regarding debenture transactions
> The following multiple choice questions concern interest-bearing liabilities. Choose the best response. a. The audit program for long-term debt should include steps that require the (1) Verification of the existence of the bondholders. (2) Examination o
> Explain the relationship between the audit of owners' equity and the calculations of earnings per share. What are the main auditing considerations in verifying the earnings per share figure?
> What should be the major emphasis in auditing the retained earnings account? Explain your answer.
> If a transfer agent disburses dividends for a client, explain how the audit of dividends declared and paid is affected. What audit procedures are necessary to verify dividends paid when a transfer agent is used?
> Assuming that the auditor properly documents receiving report numbers as a part of the physical inventory observation procedures, explain how the proper cutoff of purchases, including tests for the possibility of raw materials in transit, should be verif
> Evaluate the following statement: "The most important audit procedure to verify dividends for the year is a comparison of a random sample of cancelled dividend checks with a dividend list that has been prepared by management as of the dividend record dat
> What kinds of information can be confirmed with a transfer agent?
> Describe the duties of a stock registrar and a transfer agent. How does the use of their services affect the client's internal controls?
> How does the audit of owners' equity for a closely held corporation differ from that for a publicly held corporation? In what respects are there no significant differences?
> Explain why it is common for auditors to send confirmation requests to vendors with “zero balances” on the client’s accounts payable listing but uncommon to follow the same approach in verifying accounts receivable.
> What are the major internal controls over owners' equity?
> Evaluate the following statement: "The corporate charter and the bylaws of a company are legal documents; therefore, they should not be examined by the auditors. If the auditor wants information about these documents, an attorney should be consulted."
> What are the primary objectives in the audit of owners' equity accounts?
> List two types of restrictions long-term creditors often put on companies when granting them a loan. How can the auditor find out about these restrictions?
> Distinguish between (a) Tests of controls and substantive tests of transactions (b) Tests of details of balances for liability accounts in the capital acquisition and repayment cycle.
> Each employee for the Gedding Manufacturing Co., a firm using a job-cost inventory costing method, must reconcile his or her total hours worked with the hours worked on individual jobs using a job time sheet at the time weekly payroll time cards are prep
> What is the primary purpose of analyzing interest expense? Given this purpose, what primary considerations should the auditor keep in mind when doing the analysis?
> Why is it more important to search for unrecorded notes payable than for unrecorded notes receivable? Suggest audit procedures that the auditor can use to uncover unrecorded notes payable.
> Which analytical procedures are most important in verifying notes payable? Which types of misstatements can the auditor uncover by the use of these tests?
> The Ruswell Manufacturing Company applied manufacturing overhead to inventory at December 31, 2011, on the basis of $3.47 per direct labor hour. Explain how you will evaluate the reasonableness of total direct labor hours and manufacturing overhead in th
> Included in the December 31, 2011, inventory of the Wholeridge Supply Company are 2,600 deluxe ring binders in the amount of $5,902. An examination of the most recent acquisitions of binders showed the following costs: January 26, 2012, 2,300 at $2.42 ea
> List the major analytical procedures for testing the overall reasonableness of inventory. For each test, explain the type of misstatement that could be identified.
> Which internal controls should the auditor be most concerned about in the audit of notes payable? Explain the importance of each.
> Define what is meant by compilation tests. List several examples of audit procedures to verify compilation.
> Explain why a proper cutoff of purchases and sales is heavily dependent on the physical inventory observation. What information should be obtained during the physical count to make sure that cutoff is accurate?
> During the taking of physical inventory, the controller intention ally withheld several inventory tags from the employees responsible for the physical count. After the auditor left the client's premises at the completion of the inventory observation, the
> In the verification of the amount of the inventory, one of the auditor's concerns is that slow-moving and obsolete items be identified. List the auditing procedures that can be used to determine whether slow-moving or obsolete items have been included i
> What major audit procedures are involved in testing for the ownership of inventory during the observation of the physical counts and as a part of subsequent valuation tests?
> At the completion of an inventory observation, the controller requested the auditor to give him a copy of all recorded test counts to facilitate the correction of all discrepancies between the client's and the auditor's counts. Should the auditor comply
> Before the physical examination, the auditor obtains a copy of the client's inventory instructions and reviews them with the controller. In obtaining an understanding of inventory procedures for a small manufacturing company, these deficiencies are ident
> Explain why most auditors consider the receipt of goods and services the most important point in the acquisition and payment cycle.
> Many auditors assert that certain audit tests can be significantly reduced for clients with adequate perpetual records that include both unit and cost data. What are the most important tests of the perpetual records that the auditor must make before redu
> State what is meant by cost accounting records and explain their importance in the conduct of an audit.
> It is common practice to audit the balance in notes payable in conjunction with the audit of interest expense and interest payable. Explain the advantages of this approach.
> Explain the relationship between the acquisition and payment cycle and the inventory and warehousing cycle in the audit of a manufacturing company. List several audit procedures in the acquisition and payment cycle that support your explanation.
> Give the reasons why inventory is often the most difficult and time consuming part of many audits.
> You are assigned to the December 31, 2011, audit of Sea Gull Airframes, Inc. The company designs and manufactures aircraft superstructures and airframe components. You observed the physical inventory at December 31 and are satisfied that it was properly
> Since 1938, when auditors failed to uncover fictitious inventory recorded by the McKesson & Robbins Company, auditors have been ordinarily required to physically observe the counting of inventory. It is important to recognize that auditors are not requir
> During the first-year audit of Jones Wholesale Stationery, you observe that commission’s amount to almost 25 percent of total sales, which is somewhat higher than in previous years. Further investigation reveals that the industry typically has larger sal
> Archer Uniforms, Inc., is a distributor of professional uniforms to retail stores that sell work clothing to professionals, such as doctors, nurses, security guards, etc. Traditionally, most of the sales are to retail stores throughout the United States
> You are assessing internal control in the audit of the payroll and personnel cycle for Rogers Products Company, a manufacturing company specializing in assembling computer parts. Rogers employs approximately two hundred hourly and thirty salaried employe
> What is meant by a voucher? Explain how its use can improve an organization’s internal controls.
> In comparing total payroll tax expense with that of the preceding year, Merlin Brendin, CPA, observed a significant increase, even though the total number of employees increased only from 175 to 185. To investigate the difference, he selected a large sam
> The Securities and Exchange Commission (SEC) found that Centerpulse Ltd., a publicly traded company based in Switzerland, fraudulently misstated its 2002 third and fourth quarter financial statements filed with the SEC. Visit the SEC’s website (www.sec.g
> The following audit procedures are typical of those found in auditing the payroll and personnel cycle: 1. Scan journals for all periods for unusual transactions to determine whether they are recorded correctly. 2. Select a sample of 40 entries in the pay
> The following misstatements are included in the accounting records of Lathen Manufacturing Company: 1. Joe Block and Frank Demery take turns “punching in” for each other every few days. The absent employee comes in at noon and tells his foreman that he h
> Following are some of the tests of controls and substantive tests of transactions procedures often performed in the payroll and personnel cycle. (Each procedure is to be done on a sample basis.) 1. Reconcile the monthly payroll total for direct manufactu
> Items 1 through 8 are selected questions typically found in internal control questionnaires used by auditors to obtain an understanding of internal control in the payroll and personnel cycle. In using the questionnaire for a client, a “yes” response to a
> Explain how audit sampling can be used to test the payroll and personnel cycle.
> List several audit procedures that the auditor can use to determine whether payroll transactions are recorded at the proper amounts.
> Explain what is meant by an imprest payroll account. What is its purpose as a control over payroll?
> Explain why it is common to verify total officers’ compensation even when the tests of controls and substantive tests of transactions results in payroll are excellent. What audit procedures can be used to verify officers’ compensation?
> List five types of authorizations in the payroll and personnel cycle and state the type of misstatement that is likely to occur when each authorization is lacking.
> If an audit client does not have prenumbered checks, what type of misstatement has a greater chance of occurring? Under the circumstances, what audit procedure can the auditor use to compensate for the deficiency?
> Why are liability accounts included in the capital acquisition and repayment cycle audited differently from accounts payable?
> List the supporting documents and records the auditor will examine in a typical payroll audit in which the primary objective is to detect fraud.
> Distinguish among a payroll master file, a W-2 form, and a payroll tax return. Explain the purpose of each.
> Explain the circumstances under which an auditor should perform audit tests primarily designed to uncover fraud in the payroll and personnel cycle. List three audit procedures that are primarily for the detection of fraud and state the type of fraud the
> List several analytical procedures for the payroll and personnel cycle and explain the type of misstatement that might be indicated when there is a significant difference in the comparison of the current year with previous years’ results for each of the
> In auditing payroll withholding and payroll tax expense, explain why emphasis should normally be on evaluating the adequacy of the payroll tax return preparation procedures rather than the payroll tax liability. If the preparation procedures are inadequa
> Distinguish between the following payroll audit procedures and state the purpose of each: (1) Trace a random sample of prenumbered time cards to the related payments in the payroll register and compare the hours worked with the hours paid, (2) Trace a
> Evaluate the following comment by an auditor: “My job is to determine whether the payroll records are fairly stated in accordance with accounting standards, not to find out whether they are following proper hiring and termination procedures. When I condu
> Explain why the percentage of total audit time in the cycle devoted to performing tests of controls and substantive tests of transactions is usually far greater for the payroll and personnel cycle than for the sales and collection cycle.
> List five tests of controls that can be performed for the payroll and personnel cycle and state the purpose of each control tested.
> Explain the relationship between the payroll and personnel cycle and inventory valuation.
> List four examples of interest-bearing liability accounts commonly found in balance sheets. What characteristics do these liabilities have in common? How do they differ?
> What are the similarities and differences in the objectives of the following two procedures? (1) Select a random sample of receiving reports and trace them to related vendors’ invoices and acquisitions journal entries, comparing the vendor’s name, type
> Identify five general ledger accounts that are likely to be affected by the payroll and personnel cycle in most audits.
> Roost and Briley, CPAs, are doing the audit of Leggert Lumber Co., an international wholesale lumber broker. Because of the nature of their business, payroll and telephone expense are the two largest expenses. You are the in-charge auditor on the engagem
> Outsourcing the payroll function can provide many benefits, but there are also risks associated with outsourcing. The IRS (www.irs.gov) provides information on outsourcing payroll duties for employers who outsource the payroll function (search for “payro
> You are doing the audit of the UTE Corporation, for the year ended December 31, 2011. The following schedule for the property, plant, and equipment and related allowance for depreciation accounts has been prepared by the client. You have compared the ope
> Examine the tests of controls and substantive tests of transactions results, including the sampling application, for Ward Publishing Company. Assume that you have already reached several conclusions. 1. Your tests of details of balances for accounts paya
> While you are having lunch with a banker friend, you become involved in explaining to him how your firm conducts a typical audit. Much to your surprise, your friend is interested and is able to converse intelligently in discussing your philosophy of emph
> As part of the audit of different audit areas, auditors should be alert for the possibility of unrecorded liabilities. For each of the following audit areas or accounts, describe a liability that can be uncovered and the audit procedures that can uncover
> The following program has been prepared for the audit of accrued real estate taxes of a client that pays taxes on 25 different pieces of property, some of which have been acquired in the current year: 1. Obtain a schedule of accrued taxes from the client
> Your client, Edgartown Corporation, prepared the following schedule of land, buildings and equipment for the audit of financial statements for the year ended December 31, 2011: a. What type of evidence would you examine to support the beginning balances
> Many companies aspire to go public and have their shares traded on exchanges such as the New York Stock Exchange (NYSE) and NASDAQ. Visit the Website of the NYSE (www.nyse.com) and search for the “Guide to the NYSE Marketplace” to answer the following qu
> The following audit procedures were planned by Linda King, CPA, in the audit of the acquisition and payment cycle for Cooley Products, Inc.: 1. Review the acquisitions journal for large and unusual transactions. 2. Send letters to several vendors, includ
> List five asset accounts, three liability accounts, and five expense accounts included in the acquisition and payment cycle for a typical manufacturing company.
> The following types of internal controls are commonly used by organizations for property, plant, and equipment: 1. A fixed asset master file is maintained with a separate record for each fixed asset. 2. Written policies exist and are known by accounting
> For each of the following misstatements in property, plant, and equipment accounts, state an internal control that the client can implement to prevent the misstatement from occurring and a substantive audit procedure that the auditor can use to discover
> The following questions concern analytical procedures in the acquisition and payment cycle. Choose the best response. a. Which of the following comparisons will be most useful to an auditor in auditing an entity’s income and expense accounts? (1) Prior y
> The following questions concern internal controls in the acquisition and payment cycle. Choose the best response. a. Which of the following controls will most likely justify a reduced assessed level of control risk for the existence assertion for equipme
> List the factors that should affect the auditor’s decision whether to analyze an account balance. Considering these factors, list four expense accounts that are commonly analyzed in audits.
> How will the approach for verifying repair expense differ from that used to audit depreciation expense? Why will the approach be different?
> What is meant by the analysis of expense accounts? Explain how expense account analysis relates to the tests of controls and substantive tests of transactions that the auditor has already completed for the acquisition and payment cycle.
> List three expense accounts that are tested as part of the acquisition and payment cycle or the payroll and personnel cycle. List three expense accounts that are not directly verified as part of the cycle.
> You have been engaged for the audit of the Y Company for the year ended December 31, 2011. The Y Company is in the wholesale chemical business and makes all sales at 25% over cost. Following are portions of the client’s sales and purcha
> Explain the relationship between tests of the acquisition and payment cycle and tests of inventory. Give specific examples of how these two types of tests affect each other.
> In verifying accounts payable, it is common to restrict the audit sample to a small portion of the population items, whereas in auditing accrued property taxes, it is common to verify all transactions for the year. Explain the reason for the difference.
> Explain the relationship between accrued rent and substantive tests of transactions for the acquisition and payment cycle. Which aspects of accrued rent are not verified as part of the substantive tests of transactions?
