Chapter 6The Expenditure Cycle Part II Payroll Processing

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.
© 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.
2

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.
3
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.
4

Data Flow Diagram of Payroll Procedures
5
Personnel Action Form
6
Job Ticket
7
Time Card
8

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.
9
Payroll Register
10
Employee Payroll Record
11

Employee Paycheck
12
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.
13
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.
14

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.
15
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).
16
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.
17
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.
18
Basic Technology Payroll System
19
Basic Technology Payroll System
(continued)
20

Integrated Payroll and HRM System
21
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
22
(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.
23
(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
24
Summary of Payroll System Risks and Controls
25

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.
26
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.

27
Data Flow Diagram for Fixed Asset System
28
Depreciation Schedule
29
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.
30
Computer-Based Fixed Asset System
31
Fixed Assed Record Structure
32
Asset Status Report
33

Fixed Asset Depreciation Report
34
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.
35

Chapter 6The Expenditure Cycle Part II Payroll Processing

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