CHAPTER 4: The Human Resources

Management and Payroll Cycle

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Learning Objectives

1. Describe the major business activities and related data

processing operations performed in the human resources
management (HRM)/payroll cycle.
2. Explain the key decisions that need to be made in the
HRM/payroll cycle, and identify the information required to
make those decisions.
3. Identify the major threats in the HRM/payroll cycle, and
evaluate the adequacy of various internal control
procedures for dealing with them.
Introduction

 The HRM/payroll cycle is a recurring set of business

activities and related data processing operations
associated with effectively managing the employee
work force.
 This chapter focuses primarily on the payroll
system.
Introduction

 Some of the more important activities include the

following tasks:
– Recruitment and hiring
– Training
– Job assignment
– Compensation (payroll)
– Performance evaluation
– Discharge of employees, due to voluntary or
involuntary termination
Introduction

The three basic functions the AIS provides in the

HRM/payroll cycle are:
1. Processing transactional data about employee
activities
2. Safeguarding the organization’s assets
3. Providing information for decision-making
Learning
Objective 1
Describe the major business
activities and related data
processing operations
performed in the human
resources management
(HRM)/payroll cycle.
Payroll Cycle Activities
 What are the basic activities performed in the payroll
cycle?
1. Update master payroll file
2. Update tax rates and deductions
3. Validate time and attendance data
4. Prepare payroll
5. Disburse payroll
6. Calculate employer-paid benefits and taxes
7. Disburse payroll taxes and other deductions
Update Master Payroll File (Activity 1)
 The first activity in the HRM/payroll cycle involves updating
the payroll master file to reflect payroll changes such as
new hires, terminations, changes in pay rates, or changes in
discretionary withholdings.
 It is important that all payroll changes are entered in a
timely manner and are properly reflected in the next pay
period.
Update Tax Rates and Deductions (Activity 2)

 The second activity in the HRM/payroll cycle

involves updating information about tax rates
and other withholdings.
 These changes happen whenever updates
about changes in tax rates and other payroll
deductions are received from various
government units and insurance companies.
Validate Time and Attendance Data (Activity 3)

 The third activity in the payroll cycle is to

validate each employee’s time and attendance data.
 This information comes in various forms, depending
on an employee’s status.
Validate Time and Attendance Data (Activity 3)

 What are some pay schemes?

– time cards for those paid on an
hourly basis
– self report for professionals
– straight commission or salary plus
commission
– incentives and bonuses
Validate Time and Attendance Data (Activity 3)

Procedures:
 The payroll department is responsible for
validating employee time records.
 For factory workers, validation involves
comparing the total time worked with the time
spent on each job.
Validate Time and Attendance Data (Activity 3)

 The payroll clerk calculates batch totals and enters them

along with the time data.
 The batch totals are recalculated by the computer after
subsequent processing steps.
 Payroll transaction data are entered through online terminals.
 Edit checks are performed on each time and attendance
record.
Validate Time and Attendance Data (Activity 3):
Opportunities for Using Information Technology

 What are some opportunities of using information

technology to validate time and attendance data
(Activity 3)?
– collecting employee time and attendance data
electronically, instead of on paper documents
– using badge readers
– using electronic time clocks
Prepare Payroll (Activity 4)

 The fourth activity in the payroll cycle involves preparing

payroll.
 Data about the hours worked are provided by the
department in which the employee works.
 Pay rate information is obtained from the payroll master file.
 The person responsible for preparing paychecks cannot add
new records to this file.
Prepare Payroll (Activity 4)

 Procedures:
 Payroll processing is performed in the computer
operations department.
 The payroll transaction file is sorted by employee
number.
 The sorted time data file is used to prepare
employee paychecks.
Prepare Payroll (Activity 4)

 All payroll deductions are summed and the total is

subtracted from gross pay to obtain net pay.
 What are types of payroll deductions?
– withholdings
– voluntary deductions
 Finally, the payroll register and employee paychecks
are printed.
Prepare Payroll (Activity 4): Opportunities for
Using Information Technology

 What are some opportunities of using information

technology to prepare payroll (Activity 4)?
– produce and distribute payroll reports electronically
rather than on paper
– online terminals
– corporate intranets
Disburse Payroll (Activity 5)

 The fifth activity is actual disbursement of paychecks

to employees.
 Most employees are paid either by check or by direct
deposit of the net pay amount into the employee’s
bank account.
Disburse Payroll (Activity 5)
 Procedures:
 Once paychecks have been prepared, the payroll register is
sent to the accounts payable department for review and
approval.
 A disbursement voucher is then prepared.
 The disbursement voucher and payroll register are then sent
to the cashier.
Disburse Payroll (Activity 5): Opportunities for
Using Information Technology

 What are some opportunities of using information

technology to disburse payroll (Activity 5)?
– direct deposit
– outsourcing to a payroll service bureau
Calculate Employer-Paid Benefits and
Taxes (Activity 6)
 Some payroll taxes and employee benefits are paid directly
by the employer.
 Employers often contribute to health, disability, and
insurance premiums.
 For example: SI: 25,5% of which Employer 17,5% and
employee 8% and so on ……
Disburse Payroll Taxes and Other
Deductions (Activity 7)
 The final activity in the payroll process involves
paying the payroll tax liability and the other
voluntary deductions of each employee.
 An organization must periodically prepare checks or
use electronic transfer to pay the various tax
liabilities incurred.
Learning
Objective 2
Identify the major threats in
the HRM/payroll cycle,
and evaluate the adequacy of
various internal control
procedures for dealing
with them.
Control: Objectives,
Threats, and Procedures
 The second function of the AIS in the
HRM/payroll cycle is to provide adequate internal
controls to ensure meeting the following
objectives:
1. Payroll transactions are properly authorized
2. Recorded payroll transactions are valid
3. Authorized payroll transactions are recorded
4. Payroll transactions are accurately recorded
Control: Objectives,
Threats, and Procedures

5. Applicable government regulations regarding

remittance of taxes and filing of payroll and HRM
reports are met
6. Assets (both cash and data) are safeguarded from
loss or theft
7. HRM/payroll cycle activities are performed efficiently
and effectively
 Control: Objectives,
Threats, and Procedures
 What are some threats?
1. Hiring of unqualified or larcenous employees
2. Violation of employment law
3. Unauthorized changes to the master payroll file
4. Inaccurate time data
5. Inaccurate processing of payroll
6. Theft or fraudulent distribution of paychecks
7. Loss or unauthorized disclosure of payroll data
8. Poor performance
Control: Objectives,
Threats, and Procedures
 What are some control procedures?
– sound hiring practices (verification of job applicant’s
skills, references, and employment history)
– thorough documentation of hiring procedures
– segregation of duties
– batch totals and other application controls
Control: Objectives,
Threats, and Procedures
– direct deposit
– paycheck distribution by someone independent of
payroll process
– investigation of all unclaimed paychecks
– separate payroll checking account
– access control
– backup procedures
– encryption
Learning
Objective 3
Explain the key decisions
that need to be made in the
HRM/payroll cycle, and
identify the information
required to make those
decisions.
Information Needs and
Procedures
 The third function of the AIS is to provide
information useful for decision making.
 The payroll system must be designed to collect and
integrate cost data with other types of information in
order to enable management to make the following
kinds of decisions:
Information Needs and
Procedures
1 Future work force staffing needs
2 Employee performance
3 Employee morale
4 Payroll processing efficiency and
effectiveness
Information Needs and
Procedures
 Some of the information has traditionally been provided by
the payroll system.
 Other information, such as data about employee skills, had
normally been provided and maintained by the HRM
system.
 Other information, such as data about employee morale,
has traditionally not been collected.
 Context Diagram of Human resources and payroll process

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 MC QUESTION 1

1. Traditionally, accountants have been most involved with which portion of the
HRM/payroll cycle?
a. hiring (Incorrect. This has traditionally been handled by the HR department.)
▶ b. payroll (Correct. The payroll system has traditionally been the part of the HRM/
payroll system used by accountants.)
c. training (Incorrect. This has traditionally been handled by the HR department.)
d. performance evaluation (Incorrect. This has traditionally been handled by
supervisors.)

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 MC QUESTION 2
 2. Which document lists the current amount and year-to-date totals of gross pay, deductions,
and net pay for one employee?
a. payroll register (Incorrect. The payroll register lists this information for all employees.)
b. time card (Incorrect. Time cards collect data about time worked during a specific pay
period.)
c. paycheck (Incorrect. The paycheck is a means of transferring funds.)
▶ d. earnings statement (Correct. The earnings statement attached to each paycheck provides the information
listed.)

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 MC QUESTION 3

 3. Which department should have responsibility for authorizing pay-rate changes?

a. timekeeping (Incorrect. Timekeeping is a recording function.)
b. payroll (Incorrect. Payroll calculates the pay for the current period and should
not also authorize changes.)
▶ c. HRM (Correct. HRM has no other role in the payroll process.)
d. accounting (Incorrect. Accounting maintains records related to payroll and
should not authorize changes in pay rates.)

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 MC QUESTION 4
 4. To maximize effectiveness of internal controls over payroll, which of the following persons should be
responsible for distributing employee paychecks?
▶ a. departmental secretary (Correct. This person has no other payroll duties so cannot conceal theft of
paychecks.)
b. payroll clerk (Incorrect. The payroll clerk prepares and records the checks and so could create checks for
nonexistent employees and cash them.)
c. controller (Incorrect. The controller is in charge of the recording function and should not have custody of
checks.)
d. departmental supervisor (Incorrect. The supervisor authorizes payment by reviewing time cards and should
not also have custody of assets.)

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 MC QUESTION 5

 5. Where should unclaimed paychecks be returned?

a. HRM department (Incorrect. Unclaimed checks should be returned to the cashier
for redeposit.)
▶ b. cashier (Correct. This permits funds to be quickly redeposited.)
c. payroll department (Incorrect. Unclaimed checks should be returned to the
cashier for redeposit.)
d. absent employee’s supervisor (Incorrect. Unclaimed checks should be returned
to the cashier for redeposit.)

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXERCISE 1
Refer to the flowchart for Problem 2.

Required
a. Describe payroll process ?
b. What risk s are associated with the
payroll procedures depicted in the
flowchart?
c. Discuss two control techniques
that will reduce or eliminate the
risks.

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXERCISE 2
Refer to the flowchart for Problem 4.

Required
a. Describe flowchart?
b. Discuss any control weaknesses found in
the flowchart for Problem 4. ?
c. Recommend any necessary changes?

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXERCISE 3

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXERCISE 3
 Required
a. Describe flowchart?
 b. Discuss the risks depicted by the payroll system flowchart for Problem 6.
 c. Describe the internal control improvements to the system that are needed to reduce these risks.

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXERCISE 4

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXERCISE 4
 Required
a. Describe flowchart?
 B. Discuss the internal control weaknesses in the expenditure cycle flowchart for Problem 7.

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 END OF CHAPTER 4

Hall, Accounting Information Systems, 7e

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.