Chapter 15

The Human Resources Management and Payroll Cycle

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Learning Objectives
Describe the major business activities and related information processing operations performed in the human resources management (HRM)/payroll cycle.
Discuss the key decisions to be made in the HRM/payroll cycle and identify the information needed to make those decisions. Identify the major threats in the HRM/payroll cycle and evaluate the adequacy of various internal control procedures for dealing with them.

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HRM and Payroll Cycle

Managing Employees:
Recruiting and hiring new employees Training Job assignment

Compensation
Performance evaluation Discharge of employees due to voluntary or involuntary termination

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HRM and Payroll General Threats

Inaccurate or invalid master data
Unauthorized disclosure of sensitive information Loss or destruction of data

Hiring unqualified or larcenous employees

Violations of employment laws

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HRM and Payroll General Controls

Data processing integrity controls
Restriction of access to master data Review of all changes to master data Access controls Encryption Backup and disaster recovery procedures Sound hiring procedures, including verification of job applicants credentials, skills, references, and employment history Criminal background investigation checks of all applicants for finance-related positions Thorough documentation of hiring, performance evaluation, and dismissal procedures
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Payroll Cycle

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Payroll Cycle Activities

1. Update master data

2. Validate time and attendance

3. Prepare payroll

4. Distribute payroll
5. Disburse taxes and miscellaneous deductions

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Update Payroll Master Data

Internally initiated changes (updated by HR):
New hires Terminations Changes in pay rates

Changes in withholdings

Externally determined changes (updated by payroll dept.):

Tax rates Insurance deductions

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Update Master File Threats

Unauthorized changes to payroll master data
Inaccurate updating of payroll master data

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Update Master File Controls

Segregation of duties: HRM department updates master data, but only payroll department issues paychecks
Access controls Data processing integrity controls Regular review of all changes to master payroll data

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Validate Time and Attendance Data

Time cards
Time sheets

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Validation Threats
Inaccurate time and attendance data

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Validation Controls
Source data automation for data capture
Biometric authentication Segregation of duties (reconciliation of job-time tickets to time cards) Supervisory review

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Prepare Payroll
Edit and sort payroll transaction data
Prepare employee paychecks
Calculate gross pay Deductions summed and deducted from gross pay to obtain net pay Categories of deductions: Payroll tax withholdings Voluntary deductions

Update year-to-date fields for gross pay, deductions, and net pay
Create payroll and deductions registers Print employee paychecks and earnings statement

Produce payroll reports

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Prepare Payroll Threats

Errors in processing payroll

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Prepare Payroll Controls

Data processing integrity controls: batch totals, crossfooting of the payroll register, use of a payroll clearing account, and a zero-balance check
Supervisory review of payroll register and other reports

Issuing earnings statements to employees

Review of IRS guidelines to ensure proper classification of workers as either employees or independent contractors

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Disburse Payroll
Accounts payable reviews and approves payroll register
Prepare disbursement voucher to authorize transfer of funds from general checking to payroll bank account Update general ledger Cashier prepares check or EFT to transfer funds Distribute checks or initiate direct deposits to employee accounts

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Disburse Payroll Threats

Theft or fraudulent distribution of paychecks

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Disburse Payroll Controls

Restriction of physical access to blank payroll checks and the check signature machine
Restriction of access to the EFT system Prenumbering and periodically accounting for all payroll checks and review of all EFT direct deposit transactions Require proper supporting documentation for all paychecks Use of a separate checking account for payroll, maintained as an imprest fund Segregation of duties (cashier versus accounts payable; check distribution from hiring/firing; independent reconciliation of the payroll checking account) Restriction of access to payroll master database Verification of identity of all employees receiving paychecks

Re-depositing unclaimed paychecks and investigating cause

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Disburse Taxes and Deductions

Calculate and remit payroll taxes and employee benefits to appropriate government or other entity

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Disburse Taxes and Deduction Threats

Failure to make required payments
Untimely payments Inaccurate payments

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Disburse Taxes and Deductions Controls

Configuration of system to make required payments using current instructions from IRS (Publication Circular E)
Processing integrity controls Supervisory review of reports Employee review of earnings statement

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

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