Fundamental Payroll Certification Fundamental Payroll Audits and Record Retention 2 — Questions and Answers
Question 1: Under the Fair Labor Standards Act (FLSA), how long must payroll records for non-exempt employees be retained?
- 1 year
- 2 years
- 3 years (Correct answer)
- 5 years
Correct answer: 3 years
FLSA requires payroll records, including time cards and wage rate tables, to be kept for at least 3 years.
Question 2: Which type of payroll audit compares total payroll register amounts to general ledger accounts to identify discrepancies?
- Compliance audit
- Reconciliation audit (Correct answer)
- Operational audit
- Tax audit
Correct answer: Reconciliation audit
A reconciliation audit matches payroll register totals against the general ledger to ensure financial accuracy.
Question 3: An employer discovers that I-9 forms for several terminated employees were destroyed after 1 year. Which statement is correct?
- This is compliant because terminated employees no longer need records
- This violates the rule requiring retention for 3 years from hire or 1 year post-termination, whichever is later (Correct answer)
- This is compliant if the employees were terminated for cause
- I-9 forms only need to be kept while the employee is active
Correct answer: This violates the rule requiring retention for 3 years from hire or 1 year post-termination, whichever is later
I-9 forms must be retained for 3 years from the date of hire or 1 year after termination, whichever is later.
Question 4: During a payroll audit, an auditor finds that a salaried exempt employee's pay was docked for a partial-day absence. What is the primary concern?
- Violation of state overtime rules
- Potential loss of the employee's FLSA exempt status (Correct answer)
- Incorrect calculation of the employee's annual bonus
- Misclassification of the employee as non-exempt
Correct answer: Potential loss of the employee's FLSA exempt status
Improper deductions from an exempt employee's salary for partial-day absences can jeopardize their FLSA-exempt status.
Question 5: Which IRS form is used by employees to claim exemption from federal income tax withholding?
- Form W-4 (Correct answer)
- Form W-2
- Form 941
- Form 8809
Correct answer: Form W-4
Employees use Form W-4 to inform employers of their withholding allowances, including claiming an exemption from withholding.
Question 6: A company retains payroll tax records for only 2 years and is then audited by the IRS. What is the likely consequence?
- No consequence if all taxes were paid correctly
- Penalties for failure to maintain records for the IRS-required 4-year period (Correct answer)
- Penalties for failure to maintain records for the IRS-required 3-year period
- The IRS will reconstruct records at no cost to the employer
Correct answer: Penalties for failure to maintain records for the IRS-required 4-year period
IRS regulations require employment tax records to be kept for at least 4 years after the tax becomes due or is paid.
Question 7: What does a payroll audit 'ghost employee' test specifically look for?
- Employees paid above the authorized salary band
- Fictitious employees added to the payroll to divert funds fraudulently (Correct answer)
- Workers classified as independent contractors who should be employees
- Employees who did not receive mandatory benefits
Correct answer: Fictitious employees added to the payroll to divert funds fraudulently
A ghost employee test identifies fictitious names on the payroll used to divert fraudulent paychecks or direct deposits.
Fundamental Payroll Certification Fundamental Payroll Audits and Record Retention 2
Under the Fair Labor Standards Act (FLSA), how long must payroll records for non-exempt employees be retained?