CPS Auditing Principles & Procedures 3 — Questions and Answers
Question 1: Which internal control best prevents a fictitious employee from being added to the payroll system?
- Requiring dual authorization for new hire additions (Correct answer)
- Conducting annual wage reviews
- Using direct deposit for all employees
- Rotating pay schedules quarterly
Correct answer: Requiring dual authorization for new hire additions
Dual authorization — requiring two separate approvals to add a new employee — is a key segregation-of-duties control that deters ghost employee fraud.
Question 2: During a payroll audit, which reconciliation most directly confirms that payroll tax deposits match amounts reported on Form 941?
- Comparing net pay to bank statements
- Comparing total 941 liabilities to EFTPS payment records (Correct answer)
- Reconciling vacation accruals to the general ledger
- Matching Form W-2 totals to employee contracts
Correct answer: Comparing total 941 liabilities to EFTPS payment records
Comparing the tax liabilities reported on all quarterly Forms 941 to EFTPS deposit records confirms that deposited amounts agree with reported obligations.
Question 3: A payroll auditor is reviewing multistate payroll. Which concept determines which state's income tax should be withheld when an employee works in multiple states?
- Nexus determination
- Reciprocity agreements and sourcing rules (Correct answer)
- FUTA credit reduction
- Constructive receipt doctrine
Correct answer: Reciprocity agreements and sourcing rules
Reciprocity agreements between states and state-specific income sourcing rules determine which state (or states) may tax wages earned by employees working across state lines.
Question 4: When auditing accrued bonuses, what is the IRS rule that determines when a cash-basis employee must include a bonus in gross income?
- Economic performance standard
- Constructive receipt doctrine (Correct answer)
- Claim of right doctrine
- Matching principle
Correct answer: Constructive receipt doctrine
Under the constructive receipt doctrine, a bonus is taxable when it is made available to the employee without restriction, even if the employee has not yet cashed the check.
Question 5: An auditor finds that a company failed to deposit payroll taxes on time. Which IRS penalty applies to late federal tax deposits?
- Failure-to-file penalty under IRC §6651
- Failure-to-deposit penalty under IRC §6656 (Correct answer)
- Trust fund recovery penalty under IRC §6672
- Accuracy-related penalty under IRC §6662
Correct answer: Failure-to-deposit penalty under IRC §6656
IRC §6656 imposes the failure-to-deposit penalty on employers who do not deposit employment taxes by the required due date, with rates escalating from 2% to 15% based on lateness.
Question 6: Which payroll audit procedure specifically tests for unauthorized rate changes?
- Recomputing net pay from gross wages
- Comparing current pay rates to authorized HR records for a sample of employees (Correct answer)
- Tracing direct deposit amounts to bank confirmations
- Reviewing 401(k) contribution elections
Correct answer: Comparing current pay rates to authorized HR records for a sample of employees
Comparing actual pay rates in the payroll system to authorized rates on file in HR records is the direct test for unauthorized pay rate changes.
Question 7: Under the FLSA, what is the statute of limitations for willful violations involving unpaid overtime?
- 1 year
- 2 years
- 3 years (Correct answer)
- 5 years
Correct answer: 3 years
For willful FLSA violations, the statute of limitations extends to three years, compared to two years for non-willful violations.
CPS Auditing Principles & Procedures 3
Which internal control best prevents a fictitious employee from being added to the payroll system?