Chapter 6

The
Expenditure
Cycle
Part 2:
Payroll
Processing
and Fixed
Asset
Procedures
Accounting Information
Systems 9e
James A. Hall
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 Objectives for Chapter 6

• Recognize fundamental tasks of the payroll and fixed asset

processes.
• Identify functional depts. of payroll and fixed asset activities
and the flow of transactions through the organization.
• Specify the documents, journals, and accounts that provide
audit trails, promote record maintenance, and support
internal decision making, and financial reporting.
• Understand risks associated with payroll and fixed asset
activities and recognize controls that reduce these risks.
• Be aware of operational features and the control implications
of technology used in payroll and fixed asset systems.

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 Conceptual Payroll System
• Personnel dept. prepares personnel action forms to:
– Activate new employees, change pay rates, deductions and job
classifications.
• Production employees fill out two forms:
– Job tickets account for the time spent on each job. Cost
accounting uses these tickets to allocate charges to WIP.
– Time cards are used to capture the total time worked each pay
period for payroll calculations.
• After cost accounting allocates labor costs to the WIP
accounts, charges are summarized in a labor distribution
summary and forwarded to GL function.

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 Conceptual Payroll System
• Payroll dept. receives pay rate and withholding data from the
personnel dept. and hours-worked from production.
– Prepares payroll register, enters information into employee
payroll records, prepares paychecks and sends them to distribute
paycheck function, files time cards, personnel action forms and
payroll register copy
• Distribute paychecks.
• Prepare accounts payable.
• Prepare cash disbursement.
– Prepares a single check for entire payroll and deposits it in the
payroll imprest account which is used only for payroll. Copy sent
to AP and journal voucher prepared and sent to the GL function.

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 Update General Ledger
• GL function receives labor distribution summary,
disbursement voucher and journal voucher. GL clerk
makes entry which must have equal debits and credits:

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Basic Technology Payroll System

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 Basic Technology Payroll System
• Personnel action and time and attendance information
initiate the payroll process.
• Payroll department reconciles information, calculates payroll
and sends paychecks to paymaster for distribution to
employees.
• Cost accounting receives information regarding time spent
on each job for posting to the WIP subsidiary ledger.
• AP receives payroll register and authorizes cash
disbursements to deposit a check into the bank imprest
account from which payroll is drawn.
• GL department reconciles summary information and updates
accounts.

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Advanced Technology Payroll System

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 Advanced Technology Payroll System
• Larger organizations often integrate payroll processing
within the human resource management (HRM) system
which captures a wide range of personnel related data.
– Human resource clerks enter data in employee records in real time.
– Cost accounting enters job cost data in real time to create the
labor usage file.
– Biometric time clocks verify employee identify.
– Magnetic swipe ID cards work like credit cards and identify time
worked.
– Proximity cards use readers to record time worked.
– Mobile remote devices allow employees to clock in using hand-
held devices or web browsers.
– Data processing is done in batches at the end of the work period.

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Advanced Technology Payroll System – Data Processing
• Labor costs distributed to WIP, overhead and expense
accounts.
• Online labor distribution file is created.
• Payroll is calculated and an online payroll register is created.
• Employee record files are updated.
• Paychecks are prepared, signed and distributed.
• Funds to cover payroll are transferred to the payroll imprest
account and the transfer is recorded.
• Digital journal vouchers are entered and system
automatically updates the GL.

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 Payroll System Risks and Internal Controls: Risk of
Inaccurately Recording Transactions
• Risks include:
– Incorrectly calculated time and attendance data, unrecorded or
incorrectly recorded Wages Payable, and inaccurate postings.
• Physical Controls - Accounting Records:
– Control objective is to maintain audit trail for payroll records.
– Time cards, job tickets and disbursement vouchers.
– Journal info from labor distribution summary and payroll register.
– Subsidiary and GL accounts.
• Physical Controls – Independent Verification:
– Supervisor verification of time cards and attendance.
– AP clerk verification of payroll register accuracy.
– GL department reconciliation of labor distribution summary and
payroll disbursement voucher.
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 Payroll System Risks and Internal Controls: Risk of
Inaccurately Recording Transactions
• IT Controls - Data Input Edits:
– Verify the integrity of transaction data.
– Include: missing data checks, numeric-alphabetic data tests, tests
for invalid data values and check digits.
• IT Controls – Error Messages and File Backup:
– Any mismatch when posting time card or personnel action data to
an employee record should produce an error message.
– Backup procedures should be in place to reduce risk of data loss.

• IT Controls – Automated Posting to Accounts:

– Record keeping functions are automated in advanced technology
systems.
– Eliminating the human element reduces potential for error and
significantly improves efficiency.
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 Payroll System Risks and Internal Controls: Risk of
Misappropriate of Cash through Payroll Fraud

• Two general forms:

– Paying nonexistent employee by submitting fictitious timecards or
the overpayment of employee.
• Physical Controls – Transaction Authorization:
– Personnel action form helps payroll keep employee records current.
• Physical Controls – Segregation of Duties:
– Timekeeping and personnel functions should be separated.
– Because payroll has both asset custody (paychecks) and record-
keeping responsibility (employee payroll records), assign AP the
responsibility of reviewing payroll register and approving payment.
– Use an independent paymaster to distribute checks to help verify
the existence of employees.
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 Payroll System Risks and Internal Controls: Risk of
Misappropriate of Cash through Payroll Fraud
• Physical Controls – Supervision:
– Supervisor should observe timekeeping and reconcile time cards
with actual attendance.
• Physical Controls – Access Control:
– Prevent improper access to accounting records.
• IT Controls – Input Controls:
– Limit tests to detect excessive hours reported per period.
– Biometric scanners, swipe cards, and PINs help ensure that
individuals clocking in are valid employees.
– Automated tests to validate timecards against up-to-date
employee files.
– Paycheck direct deposit.

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 Payroll System Risks and Internal Controls: Risk of
Unauthorized Access to Payroll Records and
Confidential Employee Data

• Motives include:
– Malicious acts such as corrupting or deleting payroll data.
– Theft of confidential information such as Social Security Numbers,
pay rates and other personal data.
– Attempts to perpetrate a payroll fraud..

• IT Controls:
– Password protected payroll files.
– Multilevel security techniques limit access to HR, accounts payable,
cash disbursements, cost accounting and general ledger.

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 The Conceptual Fixed Asset System
• Fixed assets are the property, plant and equipment used
in the operation of a business.
• Fixed asset system processes transactions pertaining to
acquisition, maintenance and disposal of assets.
• Specific objectives:
– Process fixed asset acquisition as needed and in accordance
with formal management approval and procedures.
– Maintain adequate account records of asset acquisition, cost,
description, and physical location in the organization.
– Maintain accurate depreciation records.
– Provide management with needed information.
– Record retirement and disposal of assets.

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 Asset Acquisition, Maintenance and Disposal
• Asset acquisition begins when manager determines asset
needs to be replaced or a new fixed asset is warranted.
• Asset maintenance involves adjusting FAS subsidiary
account balances as assets depreciate.
– Depreciation calculations are internal transactions that the FAS
system bases upon a depreciation schedule.
– Physical improvements must also be recorded to increase the
subsidiary account balance and depreciation schedule.
• At the end of an asset’s useful life (or earlier), asset must be
removed from FAS subsidiary ledger (asset disposal).
– Disposals require disposal request forms and disposal reports as
source documents as well as proper approval.

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 Acquisition Procedures
• Process begins when the fixed asset accounting clerk
receives a receiving report and a cash disbursement voucher.
– Clerk creates a record of the asset in the FAS ledger and the system
automatically updates the GL and prepares journal vouchers and
reports including depreciation schedules.

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 Asset Maintenance and Disposal
• Computerized FAS automatically:
– calculates current period’s depreciation.
– updates accumulated depreciation and book-value fields in the
subsidiary records.
– posts total depreciation to the affected GL accounts.
– records depreciation transactions.

• When an asset record is deleted from the FAS, the system:

– posts an adjusting entry to the fixed asset control account in the GL.
– records losses or gains associated with the disposal.
– prepares a journal voucher.

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 Fixed Asset System Risks and Controls
• Authorization controls should be formal and explicit.
– Written request and independent approval for high-value items.
• Supervision controls are an important element in the physical
security of fixed assets.
– Ensure assets are used in accordance with organizational policies and
that they are not taken home for personal use unless authorized.
• Independent verification controls should be used by internal
auditors to test for reasonableness of fixed asset acquisitions
and approvals.
– Verify location, condition, and fair value of fixed asset against the
fixed asset records in the subsidiary ledger.
– Check programming logic for automatic calculations (depreciation).

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