Question

Which of the following internal control objectives is likely to be the most important in the audit of the payroll cycle?

1) Payroll transactions are properly disclosed and presented in the notes to the financial statements.
2) Payroll transactions are processed by an outside service provider.
3) Recorded transactions represent valid payments.
4) Recorded transactions are recorded in the proper accounting period.

Answer 1

The most important internal control objective in the audit of the payroll cycle is to ensure that recorded transactions represent valid payments. The correct option is 3) Recorded transactions represent valid payments.

Step-by-step explanation:

The most important internal control objective in the audit of the payroll cycle is to ensure that recorded transactions represent valid payments. This objective focuses on verifying that the payments made to employees are legitimate and accurate. It involves verifying the existence of employees, proper authorization of payments, and accurate calculation of wages.

For example, the auditor may review the payroll records to check if terminated employees have been properly removed, if overtime payments are accurately calculated, and if the payroll is accurately reconciled with attendance records. By ensuring that recorded transactions represent valid payments, the auditor can provide assurance that the financial statements accurately reflect the payroll expenses. The correct option is 3) Recorded transactions represent valid payments.