EXPENDITURE CYCLE PART 2:
THE CONCEPTUAL PAYROLL SYSTEM
Payroll processing
- special-case purchases system in which the organization purchases labor rather than raw materials or finished goods for resale.
Personnel Department
- prepares and submits personnel action forms to the prepared payroll function. These documents identify employees authorized to receive a
paycheck and are used to reflect changes in hourly pay rates, payroll deductions, and job classification
Production Department
Job tickets - time that individual workers spend on each production job.
Time cards - time the employee is at work
UPDATE WIP ACCOUNT - After cost accounting allocates labor costs to the WIP accounts, the charges are summarized in a labor distribution
summary and forwarded to the general ledger function.
PREPARE PAYROLL - Payroll department receives pay rate and withholding data from the personnel department and hours-worked data from the
production department.
Distribute Paycheck - form of payroll fraud involves submitting time cards for nonexistent employees.
Paymaster - distribute the paychecks to employees, individual is independent of the payroll process—not involved in payroll authorization or
preparation tasks.
PREPARE ACCOUNTS PAYABLE - Accounts payable (AP) clerk reviews the payroll register for correctness and prepares copies of a cash
disbursement voucher for the amount of the payroll.
PREPARE CASH DISBURSEMENT - Upon receipt of the voucher packet, the cash disbursements function prepares a single check for the entire
amount of the payroll and deposits it in the payroll imprest account.
PAYROLL CONTROLS
Transaction Authorization
- prevent payroll fraud, specifically the submission of time cards for former or nonexistent employees.
Personnel Action Form
- Identifies additions, deletions, and changes to employee records.
- Ensures the payroll department only processes time cards for current, valid employees
Supervision - prevent employees clocking in for absent or late coworkers (time theft).
Segregation of Duties
1. Separation of the Time-keeping (Production) from the Personnel (HR) function. Personnel: Authorizes pay rates based on seniority and merit.
• Time-keeping: Records actual hours worked.
• Outcome: Prevents staff from falsifying their own pay rates or inflating hours to commit fraud
2. Separation of the Payroll Records from the Asset Custody (Cash/Checks).
• Accounts Payable: Verifies the payroll register and approves payment. Cash Disbursements: Deposits a master check into an Imprest
Account.
• Outcome: Ensures individual paychecks are only valid once the total funding is independently verified and deposited.
Accounting Records - maintain a clear audit trail for every payroll transaction.
1. Source Documents: Time cards, job tickets, and disbursement vouchers.
2. Journals: Labor distribution summary and the payroll register.
3. Subsidiary Ledgers: Employee records and various expense accounts.
4. General Ledger Accounts: Payroll control, Cash, and the Payroll Clearing (Imprest) account.
Access Controls - safeguard labor and cash, prevents the misappropriation of funds and unauthorized changes to hours or financial records.
Control: Restricting access to critical records.
Only those with specific clearance may access journals, ledgers, and source documents.
Independent Verification
1. Verification of time. Before sending time cards to payroll, the supervisor must verify their accuracy and sign them.
2. Paymaster. Use of an independent paymaster to distribute checks.
3. Accounts payable. AP clerk verifies the accuracy of the payroll register before creating a disbursement voucher that transfers funds to the imprest
account.
4. General ledger. General ledger department provides verification of the overall process by reconciling the labor distribution summary and the payroll
disbursement voucher.
PHYSICAL PAYROLL SYSTEM
- a traditional, nonautomated method where payroll tasks are performed by hand.
- relies on physical documentation and human-operated tools for every stage of the payroll cycle
Risks:
Opens an opportunity to create false liability to himself.
Human Error
Theft and Fraud
Loss of Records Compliance
COMPUTER-BASED PAYROLL SYSTEMS
- digital application or cloud-based software that automates the processing of payroll.
- utilizes centralized databases and programmed algorithms to calculate earnings and deductions.
Human Resource Management System - (often called Online Transaction Processing or OLTP) updates records immediately as information is
entered into the system.
Payroll is no longer a separate record. It is part of the human Resource Management (HRM) system.
• Departments send transactions directly to Data Processing.
• Real-time data storage replaces old-school sequential filing.
• Employee status, benefits, and pay rates are updated as they happen.
Batch Payroll System - processes data in large groups (or "batches") at specific, scheduled intervals rather than as events occur.
• The department receives hard copies (personnel actions, job tickets, time cards) and converts them to digital files.
• Computer programs perform the check writing, detailed record keeping, and General Ledger updates.
• While it improves accuracy and reduces check-writing errors, it doesn't significantly boost speed because of the manual data entry lag.
THE CONCEPTUAL FIXED ASSET SYSTEM
Fixed Assets - Property, Plant and Equipment (PPE), Largest Financial Investment
Fixed Asset System (Non-routine transactions)
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• Recognizing need of new asset
• Authorization and Approval
• Selection of Supplier
• Delivery
• Record Keeping
THE PHYSICAL FIXED ASSET SYSTEM
Computer-Based fixed Asset System - real-time processing
1. Acquisition Procedures
1. Receiving
- Report
- Cash Disbursement
- Voucher
2. Recording
- Historical Cost
- Useful Life
- Salvage Value
- Depreciation Method
- Location
2. Asset Maintenance
1. Calculating Depreciation
2. Updating Accumulated Depreciation and Book Value
3. Total Depreciation
4. Recording
3. Disposal Procedures
1. Adjusting Entry
2. Gain or Loss
3. Journal Voucher
CONTROLLING THE FIXED ASSET SYSTEM:
AUTHORIZATION CONTROLS - should be formal and explicitly authorized initiated by a written request from the user or department
SUPERVISIONCONTROLS - physical security of assets in accordance with the organization's policies and business practices
TITLE INDEPENDENT VERIFICATION CONTROLS
- review asset acquisition and approval procedures to determine the reasonableness
- verify the location, condition, and fair value of fixed assets
- review automatic depreciation charges calculated by the fixed asset system for accuracy and completeness