Solution with answer applied auditing by cabrera chapter05

CHAPTER

5

AUDIT OF THE EXPENDITURE CYCLE:
TESTS OF CONTROLS AND SUBSTANTIVE TESTS
OF TRANSACTIONS - II

5-1.

The following duties must be separated in the preparation of payroll: hiring,
reporting and approval of time, paycheck preparation, check signing, and
paycheck distribution.

5-2.

Payroll checks should be prenumbered and accounted for in a bank reconciliation.

5-3.

Auditors’ substantive tests of payroll balances are primarily analytical procedures.

5-4.

Procedure

Possible Error

Scan the payroll register, general
ledger, and payroll earnings records for
entries that appear unusual, such as

very large paychecks or employees not
assigned to departments.

Fictitious employees may be paid, or
significant overpayments may be made
to genuine employees.

Compare average pay per employee for
the current year to average pay for prior
year (taking into consideration pay
raises).

Payroll expense may be overstated or
understated.

Compare direct labor as a percentage of
cost of sales with the previous year’s
percentage.

Payroll expense may be overstated or
understated.

Compare the ratio of commission
expense to sales with previous year’s
percentage.

Commission
expense
overstated or understated.

Compare payroll tax expense as a
percentage of cost of goods sold with
percentage of previous years.

Payroll tax expense may be overstated
or understated.

a.
b.
c.
d.

may

be

A production order provides a record of authorization to production personnel
to produce products.
A bill of materials is a list that indicates components to be used in producing
a product.
A materials requisition is a recorded authorization to issue materials to
production.
A cost accumulation report is a record prepared by operating personnel of
costs incurred as goods are transferred through production.


5-2

Solutions Manual to Accompany Applied Auditing, 2006 Edition
e.

f.
g.
h.

5-5.

A materials requisition summary is a record of materials used for a period,
such as a day.
A labor ticket is a record of the time a production employee works on a job.
A labor ticket summary provides a record of labor used in production for a
period, such as a day.
A completed production report provides a basis for inventory valuation.

Auditors perform three procedures that provide evidence that all production
transactions that occur are recorded. First, auditors observe that prenumbered
production orders are accounted for to determine that all materials issued are
recorded. An auditor might also account for a sequence of production orders.
A second procedure is to observe that the client accounts for prenumbered
materials requisitions to reduce inventory and to assign costs to production. An
auditor might also account for a sequence of materials requisitions.
Finally, an auditor might observe that a clerk reconciles completed and charged
time tickets with the total hours for which production workers are paid.

5-6.

1) c

2) b

5-7.

1) d

2) d

5-8.

1) d

2) c

5-9.

1) a

2) a

5-10.

1) d
2) b

3) d
4) d

5-11.

1.

a.

b.
c.
d.

Existence or occurrence
Payroll may include fictitious or former employees.
Examine approval signatures.
For selected entries, examine signed authorizations for hiring and
compare signature on paid check to signature on job application.

2.

a.
b.
c.
d.

Rights and obligations
Employees may be paid for more hours than they work.
Examine signature on cards.
Reconcile time charged to jobs to total hours worked.

3.

a.
b.
c.
d.

Rights and obligations

Employees may be paid for more hours than they work.
Examine signature on cards.
Reconcile time charged on cards to total charged to jobs.

3) b

4) b

5) c
6) c


Audit of the Expenditure Cycle: Tests of Controls and Substantive Tests of Transactions – II

5-3

4.

a.
b.
c.
d.

Existence or occurrence
Payroll may include fictitious or former employees.
Observe separation of duties.
For selected entries, examine signed authorizations for hiring, pay rates,
and deductions, and compare signature on paid check to signature on
application, or distribute paychecks in a surprise payoff.

5.

a.
b.
c.

Completeness
Paychecks may be issued but not recorded.
Observe whether paychecks are prenumbered and determine whether a
bank reconciliation is prepared by a person independent of the payroll
function.
Test or prepare a bank reconciliation.

d.
6.

a.
b.
c.
d.

Completeness
Paychecks may be issued but not recorded.
Observe whether a bank reconciliation is prepared by a person
independent of the payroll function.
Test or prepare a bank reconciliation.

5-12.

Match objectives and procedures:

1. d
2. c
3. a

5-13.

1.

a.
b.
c.

2.

a.
b.
c.

3.

a.
b.
c.

4.

a.

Production planning should sign a production order authorizing
personnel to undertake work.

Examine signature on production orders.
Rights and obligations.
Materials requisitions should be prenumbered and accounted for by a
clerk in accounting.
Observe procedure and account for a sequence of materials requisitions.
Completeness
Chart of accounts should adequately describe accounts to be used, and
account coding should be assigned by one person and checked by
another.
Examine chart of accounts and signature of employee performing check
on the account coding.
Presentation and disclosure
Chart of accounts should adequately describe accounts to be used, and
account coding should be assigned by one person and checked by
another.


5-4

Solutions Manual to Accompany Applied Auditing, 2006 Edition
b.
c.
5.

a.
b.
c.

6.

a.
b.
c.

5-14.

1.

a.
b.
c.

2.

a.
b.
c.

3.

a.
b.
c.

4.

a.
b.
c.

5.

a.
b.
c.

Examine chart of accounts and signature of employee performing check
on the account coding.
Presentation and disclosure.
Production orders should be prenumbered and accounted for to determine
that all production is recorded.
Observe procedure and account for a numerical sequence of production
orders.
Completeness
Time charged on job tickets should be reconciled to time-clock cards
from which employees are paid.
Observe procedure.
Completeness
An inventory storage clerk should sign a copy of the prenumbered
receiving report after counting goods transferred to the storage area.
Observe procedure and examine signature on receiving reports.
Rights and obligations
Receiving reports and requisitions should be prenumbered and accounted
for by a clerk in accounting.
Observe procedure and account for a numerical sequence of receiving
reports to determine that they all have been recorded.
Completeness
Provision for inventory obsolescence should be reviewed by officials and
adjusted as necessary.
Inquire about review for obsolescence.

Valuation
Access to inventory storage should be limited to personnel responsible
for its custody.
Observe procedures.
Completeness of inventory or completeness of issuances
A production employee should sign a copy of the purchase requisition
after counting goods transferred to production.
Observe procedure and examine signature on requisition.
Rights and obligations