Accounting and Payroll and Personnel Cycles

Discussion Questions
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Discussion Questions
Response to question 1
Diane Smith, CPA, did both the tests of controls (TOC) and substantive tests of transactions (STOT) and excelled. Substantive tests of transactions basically test for fraud or errors in individual transactions. They are tests for financial errors applied to transactions in testing whether or not transaction-related audit objectives have actually been met. Test of controls have to be carried out in order to evaluate control risk below the maximum (Perry, 2011). Tests of Details of Balances (TODB) essentially test the objectives of the balance and STOT focus on objectives of the transaction. The decision by Diane Smith was appropriate because generally, if both STOT and TOC are performed well, less TODB are necessary. In essence, if STOT results are good, and if TOC results are also good, then there would be a substantial reduction in TODB (Perry, 2011). As such, it is reasonable and alright that Diane Smith decided to significantly reduce her substantive tests of details of balances at year-end.
Response to question 2
Conventionally, auditors follow a traditionalist approach whenever they select vendors for accounts payable confirmations and clients for accounts receivable confirmations. The auditor would suppose that the customer has a higher likelihood of understating accounts payable. Therefore, the auditor will focus on the vendors with whom the customer deals actively, especially if that vendor seems to be lower than normal on the accounts payable list of the customer at the date of confirmation (Dodonutt, 2011). In verifying the accounts receivable, the auditor will hold the assumption that the customer has a higher likelihood of overstating account balances. For that particular reason, the auditor will concentrate more on the higher balances and she will not be especially concerned with zero balances (Dodonutt, 2011).
Response to question 3
An auditor has to carry out audit tests mainly intended to uncover fraud within the personnel and payroll cycle when: (i) he has found out that internal controls are actually deficient, or there is an opportunity for the company’s top managers to override the internal controls, or (ii) whenever there are other reasons for suspecting fraud (Hebeler, 2013). To detect fraud within the personnel and payroll cycle, the audit procedures that are primarily performed are as follows: (1) trace selected transactions which are recorded within the payroll listing or journal to the files of the human resources department so as to discover whether or not the workers were really employed during the period. (2) Inspect the cancelled payroll checks for authorized signature, name of employee, and proper endorsement – particularly for 2nd endorsements – in order to find out the checks going to workers who do not exist. (3) Pick several terminated workers from the payroll records to discover whether or not every former member of staff received her/his termination salary according to the policy of the company. This procedure is also done to find out that the salary of the worker was stopped on the termination date (Hebeler, 2013).
Response to question 4
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