Question

Which of the following procedures would be the most useful in determining the effectiveness of a company's internal controls regarding the existence or occurrence of payroll transactions?

a) observe the segregation of duties concerning personnel responsibilities and payroll disbursement
b) inspect evidence of accounting for prenumbered payroll checks
c) recompute the payroll deductions for employee fringe benefits
d) verify the preparation of the monthly payroll account bank reconciliation

Answer 1

Observing the segregation of duties concerning personnel responsibilities and payroll disbursement is the most useful procedure for evaluating the existence or occurrence of payroll transactions in a company's internal controls. Option a) is the correct answer.

Step-by-step explanation:

The most useful procedure in determining the effectiveness of a company's internal controls regarding the existence or occurrence of payroll transactions would be to observe the segregation of duties concerning personnel responsibilities and payroll disbursement. This involves ensuring that different individuals are responsible for handling different aspects of payroll, such as recording time worked, approving hours, and processing payments. By observing this segregation of duties, a company can help prevent errors or fraudulent activities related to payroll.

The other options provided may also be useful in assessing internal controls, but they are not specifically focused on evaluating the existence or occurrence of payroll transactions:

• Inspecting evidence of accounting for prenumbered payroll checks is more relevant for assessing the completeness of payroll transactions, as it helps ensure that all paychecks issued are properly accounted for.
• Recomputing the payroll deductions for employee fringe benefits would be more relevant for assessing the accuracy of payroll transactions, as it focuses on verifying the calculations for deductions.
• Verifying the preparation of the monthly payroll account bank reconciliation would be more relevant for assessing the reconciliation and accuracy of the overall payroll account.