Chapter 6
The Expenditure Cycle
Part II: Payroll Processing
and
Fixed Asset Procedures
Objectives for Chapter 6
• Fundamental tasks of the payroll and fixed asset
processes
• Functional departments of payroll and fixed asset
activities and the flow of transactions through the
organization
• Documents, journals, and accounts that provide
audit trails, promote the maintenance of records,
and support decision making and financial reporting
• Exposures associated with payroll and fixed asset
activities and the controls that reduce these risks
• Operational features and the control implications of
technology used in payroll and fixed asset systems
DFD of Payroll Procedures
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
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
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
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
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
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.
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
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
CR
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
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
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
Payroll Controls
• Accounting Records - audit trail
includes:
– time cards
– job tickets
– disbursement vouchers
– labor distribution summary
– payroll register
– subsidiary ledger accounts
– general ledger accounts
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
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
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.
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
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
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
Reengineering Payroll
• 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.
Reengineering Payroll--Before
Reengineering Payroll--After
The Fixed Asset System (FAS)
• Fixed Assets - property, plant, and
equipment used in the operation of a
business
Life of a Fixed Asset
1. Acquisition
of asset.
2. Depreciation.
3. Subsequent
expenditures.
4. Disposal
of asset.
Asset
cost $
Cost
Salvage
value
Time (useful life)
DFD of Fixed Asset System
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
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 pre-specified limit.
• The fixed asset department performs the
record-keeping function.
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.
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.
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
Computer-Based Fixed Asset
System--Maintenance
• Computerized FAS will automatically:
– calculate current period’s 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
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
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
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)