Final answer:
Auditors should consider observing a client's distribution of regular payroll checks primarily because separation of payroll duties is less than adequate for effective internal control. Payroll costs are a significant part of total operating costs and errors or irregularities can have a material impact on the financial statements. The auditors not observing the distribution of the entire regular payroll during the prior audit may also be a reason to consider observing it in the current audit.
Step-by-step explanation:
Auditors should consider observing a client's distribution of regular payroll checks primarily because separation of payroll duties is less than adequate for effective internal control. This means that there may be a lack of segregation of duties and potential for fraud or error in the payroll process. By observing the distribution of payroll checks, auditors can assess whether proper controls are in place and mitigate risks.
In addition, payroll costs are a significant part of total operating costs. Therefore, it is important for auditors to ensure the accuracy and validity of payroll transactions, as any errors or irregularities can have a material impact on the financial statements.
While the auditors not observing the distribution of the entire regular payroll during the prior audit may be a reason to consider observing it in the current audit, it is not the best reason. The primary focus should be on ensuring internal control effectiveness and managing risks related to payroll.
Excessive employee turnover can be an indication of potential payroll-related issues, but it alone does not directly support the need for observing the distribution of regular payroll checks.