Fundamental Payroll Certification Fundamental Payroll Audits and Record Retention 5 — Questions and Answers
Question 1: A company stores payroll records in a cloud-based system and then deletes them after the required retention period. What additional step should be documented during an audit?
- Proof that the cloud provider is IRS-approved
- A certified destruction record or deletion log confirming records were properly disposed of after the retention period (Correct answer)
- Evidence that paper copies were printed before deletion
- A waiver from the Department of Labor authorizing electronic disposal
Correct answer: A certified destruction record or deletion log confirming records were properly disposed of after the retention period
Maintaining a destruction log documents that records were retained for the required period and then disposed of appropriately.
Question 2: Which audit procedure would BEST detect errors in the calculation of employee net pay?
- Interviewing the payroll manager about departmental controls
- Recalculating gross-to-net pay independently using payroll inputs and tax tables (Correct answer)
- Confirming bank account numbers with each employee
- Reviewing the organization chart for segregation of duties
Correct answer: Recalculating gross-to-net pay independently using payroll inputs and tax tables
Independent recalculation of gross-to-net pay is the most direct way to detect computational errors in payroll processing.
Question 3: What is the primary purpose of segregation of duties in the payroll function?
- To ensure all employees are paid on the same schedule
- To reduce errors and prevent fraud by dividing payroll tasks among multiple individuals (Correct answer)
- To speed up payroll processing by assigning specialists to each step
- To comply with IRS requirements for payroll department staffing
Correct answer: To reduce errors and prevent fraud by dividing payroll tasks among multiple individuals
Segregation of duties prevents any single individual from controlling all aspects of a payroll transaction, reducing fraud and error risk.
Question 4: An employer discovers that state income tax was withheld at the wrong rate for employees working in multiple states. Which corrective step is most critical?
- Issue corrected W-2c forms and file amended state returns, then repay or collect the difference (Correct answer)
- Simply correct the rate going forward and take no retroactive action
- Notify the IRS and wait for instructions before taking any action
- Terminate the responsible payroll administrator
Correct answer: Issue corrected W-2c forms and file amended state returns, then repay or collect the difference
Errors in state withholding require corrected W-2c forms, amended state filings, and adjusting under- or over-withheld amounts.
Question 5: Under which circumstance is an employer required to withhold federal income tax at a flat 22% supplemental rate?
- When paying an employee's regular biweekly wages
- When paying bonuses or other supplemental wages up to $1 million, if paid separately from regular wages (Correct answer)
- When an employee has not filed a W-4
- When an employee's annual wages exceed $200,000
Correct answer: When paying bonuses or other supplemental wages up to $1 million, if paid separately from regular wages
Supplemental wages such as bonuses paid separately may be withheld at the flat 22% optional rate instead of using the aggregate method.
Question 6: A payroll auditor reviews Forms 941 filed for the year and compares totals to W-2 amounts reported on Form W-3. What is this procedure testing?
- Whether the employer deposited payroll taxes on time
- Whether quarterly tax filings reconcile with annual wage reporting (Correct answer)
- Whether employees received accurate pay stubs
- Whether the employer's unemployment tax rate is correct
Correct answer: Whether quarterly tax filings reconcile with annual wage reporting
Reconciling Forms 941 to Form W-3 ensures that the wages and taxes reported quarterly match what was reported annually on W-2s.
Question 7: Which of the following is a red flag that an internal payroll audit should investigate further?
- Payroll processed on the same day each pay period
- Multiple employees with direct deposits to the same bank account (Correct answer)
- An employee's W-4 updated after a life event
- Year-end W-2s mailed within the IRS deadline
Correct answer: Multiple employees with direct deposits to the same bank account
Multiple employees sharing one bank account is a strong indicator of ghost employee fraud or wage diversion.
Fundamental Payroll Certification Fundamental Payroll Audits and Record Retention 5
A company stores payroll records in a cloud-based system and then deletes them after the required retention period.
What additional step should be documented during an audit?