CPS Auditing Principles & Procedures 2 — Questions and Answers
Question 1: During a payroll audit, an auditor discovers that overtime was calculated on base pay only, excluding shift differentials. Which regulation is most likely being violated?
- IRS Publication 15
- FLSA regular rate of pay rules (Correct answer)
- ERISA Section 404
- SOX Section 302
Correct answer: FLSA regular rate of pay rules
The FLSA requires that overtime be calculated on the employee's regular rate of pay, which must include shift differentials and most other remuneration.
Question 2: A payroll auditor is reviewing a company's garnishment processing. Which document must the employer retain to demonstrate legal authority to withhold wages?
- Employee's signed consent form
- Court order or IRS levy notice (Correct answer)
- HR approval memo
- Payroll manager's written authorization
Correct answer: Court order or IRS levy notice
Garnishments must be supported by a court order, IRS levy, or other legally issued withholding notice — not simply internal authorizations.
Question 3: When auditing payroll for a company with tipped employees, what is the minimum direct wage an employer may pay under FLSA's tip credit provision?
- $5.12 per hour
- $2.13 per hour (Correct answer)
- $3.00 per hour
- $4.25 per hour
Correct answer: $2.13 per hour
Under the FLSA tip credit, the minimum direct cash wage an employer may pay tipped employees is $2.13 per hour, provided tips bring total pay to at least $7.25.
Question 4: An auditor finds that a company uses a biweekly pay frequency. How many pay periods per year should the auditor expect when reconciling annual wages?
- 24
- 26 (Correct answer)
- 52
- 12
Correct answer: 26
A biweekly pay frequency results in 26 pay periods per year because employees are paid every two weeks (52 weeks ÷ 2).
Question 5: Which of the following is the primary objective of a payroll compliance audit?
- Maximizing payroll deductions
- Ensuring payroll practices conform to applicable laws and regulations (Correct answer)
- Reducing gross payroll costs
- Identifying employees eligible for promotion
Correct answer: Ensuring payroll practices conform to applicable laws and regulations
A payroll compliance audit's primary goal is to verify that payroll operations adhere to federal, state, and local laws and company policies.
Question 6: When auditing Form W-2 reporting, an auditor notices that group-term life insurance coverage exceeding $50,000 was not reported. In which box of the W-2 should this amount appear?
- Box 1 only
- Box 12 with code C, and also included in Boxes 1, 3, and 5 (Correct answer)
- Box 14 only
- Box 12 with code DD
Correct answer: Box 12 with code C, and also included in Boxes 1, 3, and 5
The cost of employer-provided group-term life insurance over $50,000 must be reported in Box 12 with code C and included in taxable wages in Boxes 1, 3, and 5.
Question 7: An auditor is testing whether independent contractors were correctly classified. Which IRS tool provides formal determination of worker status?
- Form SS-8 (Correct answer)
- Form 1099-NEC
- Form W-9
- Form 2678
Correct answer: Form SS-8
IRS Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes) allows either workers or businesses to request an official IRS ruling on worker classification.
CPS Auditing Principles & Procedures 2
During a payroll audit, an auditor discovers that overtime was calculated on base pay only, excluding shift differentials.
Which regulation is most likely being violated?