Chapter 10
Expenditure Processes
and Controls
Payroll and Fixed Assets
Introduction to Payroll and Fixed Asset Processes
Payroll processes
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Acquiring and maintaining human
resources.
Capturing and maintaining employee
data.
Paying employees.
Recording cash and payroll liabilities and
expenses.
SO 1 An introduction to payroll and fixed asset processes
Introduction to Payroll and Fixed Asset Processes
Fixed asset processes
 Purchasing property.
 Capturing and maintaining relevant data
about assets.
 Paying for and recording the related
assets.
 Recording depreciation and other
expenses.
 Accounting for gains or losses.
SO 1 An introduction to payroll and fixed asset processes
Introduction to Payroll and Fixed Asset Processes
Various risks
 Recorded expenditures may not be valid.
 Transactions may be recorded in the wrong amount.
 Valid expenditure transactions may have been omitted.
 Transactions may have been recorded in the wrong
employee or vendor account.
 Transactions may not have been recorded in a timely
manner.
 Transactions may not have been accumulated or
transferred to the accounting records correctly.
SO 1 An introduction to payroll and fixed asset processes
Payroll and Fixed Asset Processes
Exhibit 10-1
Expenditure Processes within
the Overall System
SO 1 Payroll and fixed asset processes
Payroll Processes
Terminology
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Human resources department
Organization chart
Time sheet
Payroll register
Payroll disbursements journal
SO 2 Payroll processes
Payroll Processes
SO 2 Payroll processes
Payroll Process- Data Flow
SO 2 Payroll processes
Payroll Process System Flowchart
SO 2 Payroll processes
Risks and Controls in Payroll Processes
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Authorization of transactions
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Management carefully reviewing the payroll documents, errors and fraud
prevented.
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Departmental supervisors must be certain that all time sheets represent actual
time worked by currently active employees.
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The supervisors are expected to be familiar enough with their respective
departments that they will recognize unusual data: fraud schemes such as
overstated hours, time sheets or paychecks of former employees.
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Employee personnel files should contain evidence of proper authorization for pay
rate adjustments, hiring, promotion, and termination (authorized by management),
as well as approval for all deductions (authorized by individual employees).
SO 3 Risks and controls in payroll processes
Risks and Controls in Payroll Processes
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Segregation of duties
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Prevent the preparation and payment of a fraudulent or erroneous paycheck: payroll accounting functions
such as authorizing, timekeeping, record keeping, and custody of the paychecks should all be separated.
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Human resources department, which is responsible for authorizing new employee hiring and maintaining
personnel files, should be separate from the payroll time-reporting and record-keeping functions, performed
primarily by the payroll, cash disbursements, and general ledger departments.
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Employees in each of these departments should not have check-signing authority and should not have
access to the signed checks or cash account.
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Paymaster, should not have responsibility for any of the related payroll accounting functions and should not
have custody of cash. The paymaster should also be independent of the departmental supervision
responsibilities, so that a determination can be made that paychecks are being distributed to active
employees.
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Information systems operations and programming related to the payroll processing should be separate from
custody of payroll cash and record keeping for these processes
SO 3 Risks and controls in payroll processes
Risks and Controls in Payroll Processes
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Adequate records and documents
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Personnel files and the payroll register are the fundamental records, also numerous forms and reports that are required
to be filed at designated times throughout the year. Due to the number of inputs required for accurate payroll
processing and reporting, the care with which these records are prepared and maintained is crucial to the internal
control environment.
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Security of assets and documents
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Payroll information must be kept confidential.
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Access to personnel files and payroll records should be limited to designated persons within the human resource and payroll
departments. Electronic controls and physical controls should be in place to ensure the confidentiality of payroll information.
Independent checks and conciliations
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Number of hours reported on time sheets should be reconciled to the payroll register, and time sheets may be
reconciled with production reports.
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Payroll register should be reconciled to the general ledger on a regular basis.
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Someone separate from the payroll processing functions should reconcile the bank statement for the payroll cash
account on a monthly basis. This bank reconciliation should follow the same procedures as required for the company’s
general checking account.
SO 3 Risks and controls in payroll processes
Fixed Assets Processes
Fixed assets may include the
following:
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vehicles,
office equipment and computers,
machinery and production equipment,
furniture, and
real estate (such as land and buildings).
SO 5 Fixed asset processes
Fixed Assets Processes
Fixed Asset Acquisitions
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Initiated by user department.
Large cash outlays sometimes required.
Non-routine transactions that require specific
authorization.
Capital budget.
Fixed asset subsidiary ledger.
SO 5 Fixed asset processes
Fixed Assets Processes
Fixed Asset Continuance Involves:
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Updating cost data for improvements
Updating estimated figures as needed
Adjusting for periodic depreciation
Keeping track of physical location of
assets
Depreciation schedule
SO 5 Fixed asset processes
Fixed Assets Processes
Fixed Asset Disposals
Four Basis Steps:
 Date of disposal is noted, and depreciation
computations updated through this date.
 Disposed assets are removed from fixed
asset subsidiary ledger.
 Related depreciation accounts are
removed.
 Gains or losses are computed.
SO 5 Fixed asset processes
Fixed Assets Processes
User
Department
Management
Sales
Shipping
Billing
Fixed Asset
Accounting
General
Ledger
Exhibit 10-11
Fixed Asset Disposal Process Map
SO 5 Fixed asset processes
Risks and Controls in Fixed Assets Processes
Authorization of Transactions
Three Formal Steps:
 Investment analysis
 Comparison with the capital budget
 Review of the proposal and specific approval
Exhibit 10-13
Fixed Asset
Approval Levels
SO 6 Risks and controls in fixed asset processes
Risks and Controls in Fixed Assets Processes
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SEGREGATION OF DUTIES
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Custody of fixed assets needs to be separate from the related record keeping.
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Those with custody of fixed assets should not perform any duties in the purchasing, receiving, or fixed asset accounting
departments.
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IT functions such as programming, operations, data input, and security should be segregated from each other and from the
related accounting duties.
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ADEQUATE RECORDS AND DOCUMENTS
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Fixed asset subsidiary ledgers are used to control the physical custody, cost, and accumulated depreciation of the fixed
assets.
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P, P & E purchases should be supported by a purchase requisition, purchase order, receiving report, and vendor invoice.
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Tags may also be used to account for the numerical sequence of items acquired. In addition, management should prepare
and follow a capital budget.
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SECURITY OF ASSETS AND DOCUMENTS
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Supervisors need to make certain that the assets are being used for their intended purposes.
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Physical controls should also be in place to protect fixed assets from unauthorized use, and electronic controls are needed
to control access to automated records.
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Protect its investment in fixed assets by maintaining adequate insurance coverage and conducting regular preventative
maintenance procedures such as tune-ups for machinery and vehicles.
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INDEPENDENT CHECKS AND RECONCILIATION
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Fixed asset expenditures should be compared with the capital budget, and additional approval should be required if
budgets are exceeded.
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Periodic counts of fixed assets should be made by someone not otherwise responsible for fixed-asset-related activities.
Those physical counts should be reconciled with the accounting records.
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Performing independent verifications to match key purchasing documents and the related accounts payable reports may
uncover errors or fraud within these records.
SO 6 Risks and controls in fixed asset processes
Ethical Issues Related to Payroll and
Fixed Assets Processes
Typical sources of time sheet falsifications:
 Exaggeration of hours worked
 Falsification of overtime or holiday time
worked
 Falsification of sales in order to increase
commission payouts
 Overstatement of job-related expenses
SO 8 Ethical issues related to payroll and fixed assets processes
Ethical Issues Related to Payroll and
Fixed Assets Processes
Ghost Employee
Clues that a ghost employee may exist:
Payroll register identifies paychecks without
adequate tax withholdings.
 Personnel files contain duplicate addresses, Social
Security numbers, or bank account numbers.
 Payroll expenses are over budget.
 Paychecks not claimed when paymaster distributes
them.
 Paychecks contain dual endorsements.
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SO 8 Ethical issues related to payroll and fixed assets processes
Ethical Issues Related to Payroll and
Fixed Assets Processes
Fixed asset information is more likely to be
manipulated by management to unethically
enhance the financial statements.
Often, this occurs when management
misclassifies expenses as fixed asset
purchases.
SO 8 Ethical issues related to payroll and fixed assets processes
Corporate Governance in Payroll and
Fixed Assets Processes
In addition to the need for
 strong management oversight,
 internal controls, and
 ethical practices,
corporate managers must recognize their
responsibility to be good stewards of the
assets underlying the payroll and fixed assets
processes.
SO 9 Corporate governance in payroll and fixed assets processes