ICAEW ARF · Chapter 6
Controls over payroll, inventory and cash MCQs with Answers
11 multiple-choice questions on Controls over payroll, inventory and cash for ICAEW ARF Assurance and Risk Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which control best reduces the risk of fictitious ('ghost') employees being added to the payroll?
- A) Payslips are given to employees in sealed envelopes
- B) The payroll is totalled and cross-cast each month
- C) Employees clock in using a swipe card
- D) Additions to the payroll master file are authorised by the HR department, independently of the payroll staff
Show answer & explanation
Answer: D) Additions to the payroll master file are authorised by the HR department, independently of the payroll staff
A ghost employee is created by adding a fictitious person to the payroll so that their pay can be diverted. Requiring independent HR authorisation for new joiners prevents payroll staff from adding employees themselves. Sealed payslips, casting checks and clocking-in do not stop someone being added to the master file.
Question 2
Which control best reduces the risk of hourly paid staff being paid for hours they did not work?
- A) Net pay is paid directly into employees' bank accounts
- B) Payroll deductions are reconciled to amounts paid to HM Revenue & Customs
- C) Pay rates are reviewed annually by the board
- D) Clocking-in is supervised and timesheets are approved by the employee's supervisor before payroll processing
Show answer & explanation
Answer: D) Clocking-in is supervised and timesheets are approved by the employee's supervisor before payroll processing
Supervised clocking-in prevents one employee clocking in for another, and supervisor approval of timesheets confirms that the hours recorded were worked. Paying by bank transfer, reconciling deductions and reviewing rates are useful controls but do not address whether the hours claimed are genuine.
Question 3
Which control best ensures that PAYE income tax and National Insurance deducted from employees are correctly paid over to HM Revenue & Customs?
- A) New employees must provide evidence of their identity to HR
- B) The payroll department checks that pay rates agree with employment contracts
- C) A monthly reconciliation of deductions per the payroll to amounts paid to HM Revenue & Customs, reviewed by the finance manager
- D) Overtime is approved by the department manager
Show answer & explanation
Answer: C) A monthly reconciliation of deductions per the payroll to amounts paid to HM Revenue & Customs, reviewed by the finance manager
Reconciling the tax and National Insurance shown on the payroll with the amounts paid each month helps ensure the liability is paid correctly and on time, and that the year-end balance owed is accurate. The other controls relate to the validity of employees, pay rates and overtime rather than payment of deductions.
Question 4
Which of the following is a physical control over inventory?
- A) Inventory records are updated daily from goods received and despatch notes
- B) Inventory is kept in a locked store with access restricted to authorised staff
- C) Slow-moving inventory reports are reviewed by the purchasing manager
- D) Inventory count sheets are sequentially numbered
Show answer & explanation
Answer: B) Inventory is kept in a locked store with access restricted to authorised staff
Physical controls safeguard assets directly, for example locks, secure stores and restricted access. Updating records, reviewing slow-moving items and numbering count sheets are controls over recording, valuation and the count process rather than physical protection of the inventory.
Question 5
During a year-end inventory count, count sheets are sequentially numbered, issued to count teams and accounted for at the end of the count. What is the purpose of this control?
- A) To ensure that inventory is valued at the lower of cost and net realisable value
- B) To ensure that damaged inventory is identified
- C) To ensure that only goods owned by the company are counted
- D) To ensure that all count sheets are returned, so that no counted inventory is omitted
Show answer & explanation
Answer: D) To ensure that all count sheets are returned, so that no counted inventory is omitted
Accounting for the sequence of count sheets ensures that none are lost or that extra ones are added, so the final inventory listing includes everything counted. Valuation, damaged items and ownership are addressed by other procedures, such as reviewing costs, recording condition during the count and segregating goods held for third parties.
Question 6
A client uses a perpetual inventory system with continuous counting instead of a full year-end count. Which of the following would be necessary for the auditor to rely on this system?
- A) Only high-value items are counted, and only at the year end
- B) Counts are performed by the storekeeper, who maintains the inventory records
- C) All inventory lines are counted at least once a year and discrepancies with the records are investigated and corrected
- D) Differences between counts and records are left uncorrected until the following year
Show answer & explanation
Answer: C) All inventory lines are counted at least once a year and discrepancies with the records are investigated and corrected
Continuous counting can replace a year-end count if the book records are reliable. This requires all items to be counted during the year, counts to be performed by staff independent of the records and stores, and differences to be investigated and corrected. Counts by the storekeeper or leaving errors uncorrected would undermine reliance on the records.
Question 7
Which of the following controls mainly addresses the valuation of inventory, rather than its existence or completeness?
- A) Test counts from the inventory records to the physical items in the warehouse
- B) Matching goods received notes to the inventory records
- C) Regular review of inventory ageing reports, with old or slow-moving lines considered for write-down
- D) Restricting access to the warehouse to authorised staff
Show answer & explanation
Answer: C) Regular review of inventory ageing reports, with old or slow-moving lines considered for write-down
Inventory must be measured at the lower of cost and net realisable value, so slow-moving or obsolete lines may need writing down. Ageing reviews identify these items, which addresses valuation. Counts from records to the warehouse address existence, matching goods received notes addresses completeness, and access restrictions safeguard the inventory.
Question 8
What is the main purpose of a company preparing a monthly bank reconciliation that is reviewed by someone independent of the cash book?
- A) To ensure all customers pay on time
- B) To detect errors or irregularities in the cash book or on the bank statement on a timely basis
- C) To authorise payments to suppliers
- D) To prevent cash from being stolen before it is banked
Show answer & explanation
Answer: B) To detect errors or irregularities in the cash book or on the bank statement on a timely basis
A bank reconciliation compares the cash book with the bank statement and explains differences, such as timing items, so errors and unauthorised transactions can be identified and corrected. Independent review increases its effectiveness. It is a detective control and does not authorise payments or prevent theft before banking.
Question 9
Which control over cash received in the post is most effective?
- A) Post is opened by the receivables ledger clerk, who records receipts directly in the ledger
- B) Post is opened by two people together, who list all receipts on a remittance list before passing them for banking
- C) Cheques received are kept in an unlocked drawer until a full week's receipts have accumulated
- D) Remittance advices are discarded once the cheques have been banked
Show answer & explanation
Answer: B) Post is opened by two people together, who list all receipts on a remittance list before passing them for banking
Having two people open the post and immediately list receipts reduces the risk of theft and provides an independent record to agree to the banking and the cash book. Letting the ledger clerk handle receipts combines custody and recording, keeping cheques unsecured increases the risk of loss, and discarding remittances removes useful evidence.
Question 10
Which of the following describes an imprest system for petty cash?
- A) Petty cash is topped up whenever the cashier requests it, without supporting vouchers
- B) A fixed float is held, and it is topped up periodically by the total of the vouchers for amounts spent
- C) All petty cash received from sales is held in the tin until the year end
- D) Petty cash expenditure is recorded only once a year when the float is counted
Show answer & explanation
Answer: B) A fixed float is held, and it is topped up periodically by the total of the vouchers for amounts spent
Under an imprest system, cash plus vouchers should always equal the fixed float, so differences can be easily detected. The float is replenished by the value of vouchers presented, which supports the authorisation and recording of petty cash expenditure. Top-ups without vouchers or annual recording would make it impossible to control.
Question 11
Which of the following controls is most likely to detect 'teeming and lading' by a receivables clerk?
- A) Cash received is banked daily
- B) Customer statements are sent by someone independent of cash receipts and the receivables ledger, who also follows up customer queries
- C) The cash book is totalled by the cashier at the end of each day
- D) Sales invoices are sequentially numbered
Show answer & explanation
Answer: B) Customer statements are sent by someone independent of cash receipts and the receivables ledger, who also follows up customer queries
Teeming and lading involves stealing a receipt from one customer and concealing it by allocating later receipts from other customers to that account. Customers whose payments have been delayed in being allocated may query their statements, and an independent person following up queries is likely to detect the fraud. Daily banking, casting the cash book and numbering invoices do not reveal misallocations.