Question

Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?

A. Separation of payroll duties is less than adequate for effective internal control.
B. Total payroll costs are a significant part of total operating costs.
C. The auditors did not observe the distribution of the entire regular payroll during the audit in the prior year.
D. Employee turnover is excessive.

Answer 1

Observing a client's payroll distribution is crucial when there is inadequate separation of payroll duties as it helps auditors ensure the legitimacy of the payroll and the strength of the internal control system.

Step-by-step explanation:

The best reason why auditors should consider observing a client's distribution of regular payroll checks is option A, separation of payroll duties is less than adequate for effective internal control. Observing payroll distribution can provide evidence on whether employees who receive the checks are the same individuals who are on the payroll records, which addresses potential concerns about ghost employees or fraud. Additionally, this observation can give insights into whether duties such as authorizing payroll, processing payroll, and distributing checks are properly segregated, which is crucial for a strong internal control system.