Chapter 6

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

Fundamental tasks that constitute the payroll and fixed asset processes The functional departments involved in payroll and fixed asset activities and the flow of these transactions through the organization The documents, journals, and accounts that provide audit trails, promote the maintenance of records, and support internal decision making and financial reporting The exposures associated with payroll and fixed asset activities and the controls that reduce these risks The operational features and the control implications of technology used in payroll and fixed asset systems

Manual Payroll System

The Personnel department uses personnel action forms to:
activate new employees change the pay rate of employees change marital status and/or number of dependents terminate employees
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Manual Payroll System

The production employees fill out two forms:
job tickets - account for the time spent by the individual worker on each production job time cards - used to capture the total time worked each pay period for payroll calculations; must be signed by a supervisor
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Manual Payroll System

The Cost Accounting department:
uses the job tickets to allocate labor costs to WIP accounts summarizes these charges in a labor distribution summary which is forwarded to the General Ledger department
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Manual Payroll System

The Payroll department receives the personnel action forms and the time cards. It uses them to perform the following tasks:
prepares the payroll register enters the information into the employee payroll records prepares paychecks sends paychecks to Cash Disbursements and a copy of the payroll register to Accounts Payable 6

Manual Payroll System

Accounts Payable department:
prepares a cash disbursements voucher for the total amount of the payroll sends copies to the Cash Disbursements and General Ledger departments
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Manual Payroll System

Cash Disbursements reviews and signs the paychecks and forwards them to a paymaster for distribution to the employees. Cash Disbursements writes a check for the payroll and deposits it into the payroll imprest account.
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Manual Payroll System

General Ledger makes the following entries: FROM LABOR DISTRIBUTION SUMMARY

WIP (Direct Labor) DR Factory Overhead (Indirect Labor) DR Wages Payable

FROM DISTRIBUTION VOUCHER

CR

Wages Payable DR Cash Fed. Inc. Tax Withholding Payable State Inc. Tax Withholding Payable FICA Withholding Payable Other Withholding Payables

CR CR CR CR CR
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Manual Payroll System

Further, the General Ledger department needs to make a journal entry to transfer the cash from the operating bank account to the payroll imprest account:
Cash - Payroll Imprest Account Cash - Operating Account DR CR

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Payroll Controls
Transaction authorization - the personnel action form is important in preventing:
terminated employees from receiving checks wage rates from being improperly changed for current employees
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Payroll Controls
Segregation of Duties - timekeeping and personnel functions should be separated Supervision - need to monitor employees to ensure they are not clocking in for one another

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Payroll Controls
Accounting Records - audit trail includes:
time cards job tickets disbursement vouchers labor distribution summary payroll register subsidiary ledger accounts general ledger accounts
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Payroll Controls
Access Controls - need to prevent employees from having improper access to:
accounting records, such as time cards which can be altered unsigned checks

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Payroll Controls
Independent Verification: verification of time cards distribution of paychecks to authorized employees verification of accuracy of payroll register by accounts payable general ledger reconciles the labor distribution summary and the payroll disbursement voucher

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Computer-Based Payroll Systems

Payroll is well-suited to batch processing and sequential files, since a majority of the employees on the master file will receive a paycheck every pay period. The computer program performs the detailed recordkeeping, check-writing, and general ledger functions.

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Human Resource Management (HRM) Systems

A re-engineered IT that captures and processes a wide range of personnelrelated data, including:
employee benefits labor resource planning employee skills pay rates and deductions evaluations payroll
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Key Features of HRM Systems

Personnel - can make changes to the employee file in real time Cost Accounting - enters job cost data either daily or in real time Timekeeping - enters the attendance file daily Data Processing - still uses batch processing and prepares all reports, the checks, and updates the general ledger
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HRM Systems
differ from automated batch, sequential file systems in the following ways: operations depts. transmit transactions to data processing via terminals direct access files are used for storage many processes are performed real time real-time access to personnel files required for direct inquiries
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The Fixed Asset System (FAS)

Fixed Assets - property, plant, and equipment used in the operation of a business

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Life of a Fixed Asset

1. Acquisition of asset. Asset cost $

2. Depreciation. 3. Subsequent expenditures.

4. Disposal of asset.

Cost Time (useful life)

Salvage value

Objectives of the FAS

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 method Provide management with information to help it plan future fixed asset investments Properly record the retirement and disposal of fixed assets 22

Asset Acquisition
Generally begins with a department manager determining that an old fixed asset needs to be replaced or the need for a new fixed asset is warranted The manager fills out a purchase requisition and may require a signature for items over a prespecified limit. The fixed asset department performs the recordkeeping function.
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Asset Maintenance
Involves adjusting the fixed asset subsidiary account balances as the assets depreciate over time (or deplete with usage) Depreciation calculations are internal transactions that the fixed asset system must process based upon a depreciation schedule. Physical improvements must also be recorded to increase the subsidiary account balance and depreciation schedule.
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Asset Disposal
At the end of the useful life or an earlier disposition of the asset, the asset must be removed from the records. The disposal requires a disposal request and disposal report as source documents to remove the asset from the records and the depreciation schedules.

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Computer-Based Fixed Asset System--Acquisition

Acquisition - the receipt of the asset is recorded, along with information such as its useful life, depreciation methods, etc., and the ledgers are automatically updated
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Computer-Based Fixed Asset System--Maintenance

Computerized FAS will automatically:
Calculate current periods depreciation Update the accumulated depreciation and book-value fields in the subsidiary records Post the total amount of depreciation to the affected general ledger accounts
depreciation expense and accumulated depreciation

Record the depreciation transaction by adding a record to the journal voucher file
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Computer-Based Fixed Asset System--Disposal

Computerized FAS will automatically:
Post an adjusting entry to the fixed asset control account in the general ledger Record any loss or gain associated with the disposal transaction Prepare a journal voucher record

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Controlling the Fixed Asset System

Authorization should be formal and explicit because of high cost of PPE:
acquisitions changes in depreciation methods

Supervision - threat of misappropriation requires constant management supervision:

theft--secure the physical location of assets misuse--monitor on-the-job activities
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Controlling the Fixed Asset System

Independent Verification Controls - the internal auditor should periodically verify FAS records:
the reasonableness of factors used in decisions (useful life, discounts, budgeting model) location, condition, and fair value of the fixed asset records in the subsidiary ledger the programming logic for automatic calculations (depreciation)
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