Final answer:
The assertion that tests of controls and tests of details of balances are the most important means for auditors to verify account balances in the payroll and personnel cycle is true. They are essential to evaluate the effectiveness of internal controls and the accuracy of payroll transactions and balances.
Step-by-step explanation:
The statement about tests of controls and tests of details of balances being the auditor's most important means of verifying account balances in the payroll and personnel cycle is generally True. This assertion is based on auditing standards which highlight the need for auditors to gain an understanding of the internal control environment, including the implementation of specific controls over payroll and personnel transactions, to determine the nature, timing, and extent of further audit procedures.
Tests of controls involve the auditor assessing the operational effectiveness of the internal controls in place. For instance, auditing if appropriate approvals are obtained for overtime payments. If the controls are deemed effective, the auditor may decide to reduce the extent of substantive testing. Conversely, if controls are determined to be weak, more emphasis will be placed on tests of details of balances, which involve directly verifying the details of payroll transactions and balances, such as confirming the accuracy of payroll expenses and related liabilities.
Understanding the purpose of and difference between tests of controls and tests of details of balances is crucial for an auditor, as it informs their audit strategy and helps ensure the reliability of the financial statements. It allows auditors to plan their work to provide reasonable assurance that the payroll and personnel cycle is free from material misstatement, whether due to fraud or error.