The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

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.

Manual Payroll System

Personnel Department-The personnel department prepares and submits personnel action forms to the prepare
payroll function.
Production Department - Production employees prepare two types of time records: job tickets and time cards.
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 - The payroll department receives pay rate and withholding data from the personnel department and
hours worked data from the production department.
Distribute Paycheck - A form of payroll fraud involves submitting time cards for nonexistent employees. To prevent
this, many companies use a paymaster to distribute the paychecks to employees.
Prepare Accounts Payable -The 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.
Update General Ledger- The general ledger function receives the labor distribution summary from cost accounting,
the disbursement voucher from AP, and the journal voucher from cash disbursements.
 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

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

Accounting Records - audit trail includes:

– time cards

– job tickets

– disbursement vouchers

– labor distribution summary

– payroll register

– subsidiary ledger accounts

– general ledger accounts

Access Controls - need to prevent employees from having improper access to:

– accounting records, such as time cards which can be altered

– unsigned checks

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
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 record-keeping, check-writing,
and general ledger functions.

Control Implications
The strengths and weaknesses of this system are similar to those in the batch system for general expenditures
discussed earlier. This system promotes accounting accuracy and reduces check-writing errors. Beyond this, it does
not significantly enhance operational efficiency; however, for many types of organizations, this level of technology is
adequate.

Reengineering Payroll

Human Resource Management (HRM) Systems - A re-engineered IT that captures and processes a wide range of
personnel-related data, including:

– employee benefits

– labor resource planning

– employee skills

– pay rates and deductions

– evaluations

– payroll

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

Payroll can be reengineered as a part of human resource management (HRM).

In reengineered payroll systems

– operations departments transmit transactions to data processing via terminals

– direct access files are used for data storage

– many processes are now performed in real time.

Control Implications

The real-time features of the payroll system provide many of the operational benefits discussed earlier,
including reductions in paper, clerical labor, and the lag time between event occurrence and recording
them. As mentioned before, these features carry control implications. Computer-based systems must
produce adequate records for independent verification and audit purposes. Also, controls must be
implemented to protect against unauthorized access to data files and computer programs.

Fixed Asset System

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

Life of a Fixed Asset

DFD of Fixed Asset System
Computer- Based FAS Flowchart

Objectives of FAS

 Acquire fixed assets in accordance with management approval and procedures.

 Maintain adequate accounting records of asset acquisition, cost, description, and location.
 Maintain 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.
Asset Acquisition

 Begins when a dept. manager determines that an old fixed asset needs to be replaced or that a new fixed
asset is warranted
 A purchase requisition is filled out.
 May require an authorizing signature for items over a pre-specified limit
 FAS dept. performs record-keeping functions.

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.

Asset Disposal

 At the end of an asset’s useful life (or earlier disposition), the asset must be removed from the records and
depreciation schedule
 Disposals require disposal request forms and disposal reports as source documents.

Computer-Based Fixed Asset System- Acquisition

 Receipt of assets are digitally recorded in the system, along with information such as its useful life,
depreciation methods, etc.
 Ledgers are automatically updated
 Computerized FAS automatically:
 calculate current period’s depreciation
 update accumulated depreciation and book-value fields in the subsidiary records
 post total depreciation to the affected general ledger accounts
 record depreciation transactions by adding records to the journal voucher file
 Computerized FAS automatically:
 post adjusting entries to the fixed asset control account in the general ledger
  record losses or gains associated with the disposal transaction
 prepare journal voucher records

FAS Controls

 Authorization - should be formal and explicit because of high cost of FAS:

 acquisitions
 changes in depreciation methods
 Supervision - threat of misappropriation requires constant management oversight:
 theft - secure physical locations of assets
 misuse - monitor on-the-job activities
 Independent Verification - internal auditors 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)