Payroll Controls and Current Events

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Chapter 6 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives

Recognize the fundamental tasks that constitute the payroll and fixed asset processes.

Be able to identify the functional departments involved in payroll and fixed asset activities, and trace the flow of these transactions through the organization.

Be able to specify the documents, journals, and accounts that provide audit trails, promote the maintenance of historical records, and support internal decision making and financial reporting.

Understand the risks associated with payroll and fixed asset activities and recognize the controls that reduce these risks.

Be aware of the operational features and the control implications of technology used in payroll and fixed asset systems.

The Conceptual Payroll System

Payroll processing is actually a special-case purchases system in which the organization purchases labor rather than raw materials or finished goods for resale.

The nature of payroll processing, however, creates the need for specialized procedures for the following reasons:

A firm can design general purchasing and disbursement procedures that apply to all vendors and inventory items.

General expenditure activities constitute a relatively steady stream of purchasing and disbursing transactions.

Writing checks to employees requires special controls.

PAYROLL SYSTEM GENERAL TASKS

Personnel Department

Personnel action forms is a document identifying employees authorized to receive a paycheck; the form is used to reflect changes in pay rates, payroll deductions, and job classification.

Production Department

Job tickets are mechanisms to capture the time that individual workers spend on each production job.

Time cards are a tool to capture the time the employee is at work.

Update WIP Account

A labor distribution summary is a summarization of labor costs in work-in-process accounts.

Data Flow Diagram of Payroll Procedures

Personnel Action Form

Job Ticket

Time Card

PAYROLL SYSTEM GENERAL TASKS (continued)

Prepare Payroll

Employee payroll records is the system an employer uses to calculate, track, and report employee pay.

Paychecks are a bank check given as salary or wages.

The payroll register is a document showing gross pay, deductions, overtime pay, and net pay.

Distribute Paycheck

Prepare Accounts Payable

Prepare Cash Disbursement

The payroll imprest account is an account into which a single check for the entire amount of the payroll is deposited.

Payroll Register

Employee Payroll Record

Employee Paycheck

UPDATE GENERAL LEDGER

The general ledger function receives the labor distribution summary from cost accounting, the disbursement voucher from accounts payable, and the journal voucher from cash disbursements.

The debits and credits from these entries must be equal.

When the equality has been verified, the clerk files the voucher and labor distribution summary.

The Physical Payroll System

Review of the operational features and control issues pertinent to a basic technology system.

Features and controls of an integrated system that uses advanced technologies.

BASIC TECHNOLOGY PAYROLL SYSTEM

Key tasks of a basic technology system:

Personnel action and time and attendance information from the personnel and production departments, respectively, initiate the payroll process.

The payroll department reconciles this information, calculates the payroll, and sends the paychecks to the paymaster for distribution to employees.

Cost accounting receives information regarding the time spent on each job from production

Accounts payable receives payroll summary information (payroll register) from the payroll department and authorizes the cash disbursements department to deposit a single check, in the amount of the total payroll, in a bank imprest account on which the payroll is drawn.

The general ledger department reconciles summary information from cost accounting and accounts payable.

ADVANCED TECHNOLOGY PAYROLL SYSTEM

The human resource management (HRM) system captures and processes a wide range of personnel related data, including employee benefits, labor resource planning, employee relations, employee skills, and personnel actions (pay rates, deductions, and so on), as well as payroll. HRM systems need to provide real-time access to personnel files for purposes of direct inquiries and recording changes in employee status as they occur.

Human Resources

Cost Accounting

The labor usage file is a file in which the cost accounting department enters job cost data (real time or daily).

ADVANCED TECHNOLOGY PAYROLL SYSTEM (continued)

Employee Timekeeping

The time and attendance file is generated by employees directly entering timekeeping data in real time.

Biometric time clocks verify employees’ identities by using fingerprint or hand-vein scan technology.

Magnetic swipe ID cards work like a credit card. Each employee is issued an ID card that has a magnetic strip containing employee information. The employee swipes the card through the time clock to record start and end time on the job.

Proximity cards are similar to swipe cards but don’t require the user to slide the card through a reader.

ADVANCED TECHNOLOGY PAYROLL SYSTEM (continued)

Employee Timekeeping (continued)

Mobile remote devices allow employees to clock in using handheld devices (PDA or cell phone) or web browsers from laptop computers. This option is popular among businesses with employees in the field who travel between clients and with companies engaged in global business with foreign-based employees.

Data Processing

The employee records file comprises the additions of new employees, deletions of terminated employees, changes in work dependents, changes in withholdings, and changes in job status such as job title and pay rate. Human resources clerks enter data into the employee records file in real time from terminals.

Basic Technology Payroll System

Basic Technology Payroll System (continued)

Integrated Payroll and HRM System

PAYROLL SYSTEM RISKS AND INTERNAL CONTROLS

Risk of Inaccurately Recording Transactions

Physical Controls

ACCOUNTING RECORDS

INDEPENDENT VERIFICATION

IT Controls

DATA INPUT EDITS

ERROR MESSAGES

FILE BACKUP

AUTOMATED POSTING TO ACCOUNTS

PAYROLL SYSTEM RISKS AND INTERNAL CONTROLS (continued)

Risk of Misappropriation of Cash through Payroll Fraud

Physical Controls

TRANSACTION AUTHORIZATION

SEGREGATION OF DUTIES

SUPERVISION

ACCESS CONTROL

IT Controls

Limit tests to detect excessive hours reported per period.

Biometric scanners, swipe cards, and PINs reduce the risk of payroll fraud by ensuring that individuals clocking into the system are valid employees.

Automated tests to validate employee time cards against a valid and up-to-date employee file.

Paycheck direct deposit options for employees.

PAYROLL SYSTEM RISKS AND INTERNAL CONTROLS (continued)

Risk of Unauthorized Access to Payroll Records and Confidential Employee Data

Payroll information is at risk to unauthorized access from outsiders as well as employees of the organization.

IT Controls

PASSWORDS

MULTILEVEL SECURITY

Outsourcing the Payroll Function

Advantages and Risks Associated with Payroll Outsourcing

Summary of Payroll System Risks and Controls

The Conceptual Fixed Asset System

Fixed assets are the property, plant, and equipment used in the operation of a business.

The specific objectives of the fixed asset system are to:

Process the acquisition of fixed assets as needed and in accordance with formal management approval and procedures.

Maintain adequate accounting records of asset acquisition, cost, description, and physical location in the organization.

Maintain accurate depreciation records for depreciable assets in accordance with acceptable methods.

Provide management with information to help plan for future fixed asset investments.

Properly record the retirement and disposal of fixed assets.

THE LOGIC OF A FIXED ASSET SYSTEM

Asset Acquisition

Asset acquisition is obtaining a new asset or replacing an existing one.

Asset Maintenance

A depreciation schedule is a record used to initiate depreciation calculations.

Asset Disposal

Asset disposal is when an asset has reached the end of its useful life or when management decides to dispose of it, the asset must be removed from the fixed asset subsidiary ledger.

Data Flow Diagram for Fixed Asset System

Depreciation Schedule

THE PHYSICAL FIXED ASSET SYSTEM

Acquisition Procedures

When the fixed asset accounting clerk receives a receiving report and a cash disbursement voucher. These documents provide evidence that the firm has physically received the asset and show its cost.

Asset Maintenance

The fixed asset system uses the depreciation schedules to record end-of-period depreciation transactions automatically.

Disposal Procedures

The disposal report formally authorizes the fixed asset department to remove from the ledger an asset disposed of by the user department.

Computer-Based Fixed Asset System

Fixed Assed Record Structure

Asset Status Report

Fixed Asset Depreciation Report

FIXED ASSET SYSTEM RISKS AND CONTROLS

Authorization Controls

Fixed asset acquisitions should be formal and explicitly authorized.

Supervision Controls

Management supervision is an important element in the physical security of fixed assets.

Independent Verification Controls

Periodically, the internal auditor should review the asset acquisition and approval procedures to determine the reasonableness of factors used in such decisions.