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The Expenditure Cycle Part Ii: Payroll Processing and Fixed Assets Procedures
The Expenditure Cycle Part Ii: Payroll Processing and Fixed Assets Procedures
CHAPTER 6
REVIEW QUESTIONS
1. Job tickets capture the time spent on each job during the day and are used to
2. The personnel department, through the personnel action form authorizes changes to
3. A form of payroll fraud involves a supervisor submitting fraudulent time cards for
nonexistent employees. The resulting paychecks, when given to the supervisor are
then cashed by the supervisor. This type of fraud can be reduced or eliminated by
4. A separate imprest account is established for the exact amount of the payroll based
on the payroll summary. When the paychecks are cashed, this account should clear
amounts) would result in a non-zero balance in the imprest account and/or some
paycheck would not clear. This will alert management to the problem so corrective
5. A form of payroll fraud involves employees clocking the time cards of absent
employees. By supervising the clocking in and out process, this fraud can be
reduced or eliminated.
6. The personnel action form is a list of personnel changes that enables the payroll
7. The payroll clerk reconciles the information received from personnel and production,
calculates the payroll and distributes the paychecks. Further, the payroll clerk sends
b. journal information which comes from the labor distribution summary and the
payroll register.
10. Proximity cards are similar to swipe cards but don’t require the user to slide the card
through a reader. Instead, the employee places the card in front of the reader to
record attendance time. The advantage is that these cards can be read through
11. 1. Process the acquisition of fixed assets as needed and in accordance with
4. Provide management with information to help them plan future fixed asset
investments; and
12. The fixed asset system processes nonroutine transactions for a wider group of users
in the organization than the expenditure cycle. Further, the expenditure cycle
function and finished goods inventories for the sales function. The expenditure cycle
transactions are oftentimes automatically approved by the system, while fixed asset
the transactions. Additionally, fixed asset systems must include cost allocation
procedures in order to account for the apportioned acquisition cost and depreciation
of the fixed asset. This is not required as part of the previously discussed
14. The typical information found on a depreciation schedule is: type of asset,
book value, and asset location. Also, a group code may be assigned. The physical
location of the asset is recorded, and the verification that this asset exists should be
performed by physically observing the asset. The date and amount of the purchase
of the asset can be verified by locating the original purchase order and invoice
15. Because the fixed asset department authorizes the removal of the asset from the
general ledger, they must know when to record the authorization. Further, if
improvements or asset disposals are made and the fixed asset department is
unaware, then the depreciation amounts calculated and reported in the financial
16. The auditor should review the authorization control procedures to determine the
should also examine the supervision controls over the physical guarding of the
assets. Lastly, the auditors should periodically verify the location, condition, and fair
value of the organization’s fixed assets against the fixed asset records in the
17. The fixed asset department provides record keeping for fixed asset inventory.
18. The fixed asset depreciation schedule shows when and how much depreciation to
record. It also shows when to stop taking depreciation on fully depreciated assets.
This information in a management report is also useful for planning asset retirement
and replacement.
19. When an asset is taken out of service, the responsible manager issues a request to
dispose of it. Like any other transaction, the disposal of an asset requires proper
approval that will be determined by its nature and materiality. In some cases multiple
20. Unlike production assets, fixed asset inventory is distributed widely across the
DISCUSSION QUESTIONS
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1. The job ticket is used to allocate each labor hour of work to specific WIP accounts.
These job tickets are very important for cost accounting. The job tickets are
completed by production workers as they capture the total amount of time that they
spend on each production job. Upon completion, they route these to the cost
accountants who use them to post the labor costs to specific WIP accounts such as
direct labor, indirect labor and overhead. The cost accountant prepares a labor
distribution summary which contains the information for the general ledger clerk to
2. Payroll costs such as wages to workers accrue each minute, hour or day that they
work. However, these costs are not recorded as a liability during the time between
when the workers earn their wages and when they are paid. These time lags
typically average from half a week to a week. This time lag is of no concern until the
firm is closing its books or preparing interim financial statements. At these points,
however, estimates or accruals of the amounts owed should be made and the books
should be adjusted.
enter time and attendance data into the system, the organization is at risk from data
entry errors and payroll fraud. Input controls reduce these risks. For example, limit
tests are used to detect excessive hours reported per period. Also, check digits
biometric scanners, swipe cards, and PINs reduce the risk of payroll fraud by
ensuring that the individuals clocking into the system are valid employees.
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function to a third party, the client organization avoids the salaries and benefit costs
of running an in-house payroll department. Also, the cost of continuing education for
5. One example is the reduction in the time it takes to record the receipt of inventory
into the inventory records. Further, the automated system will be less likely to pay an
invoice early, while at the same time not missing the discount period. Thus, cash
management is improved.
6. Law firms require their employees to log the amount of time spent on each client for
billing purposes. Accounting firms also require that their employees keep job tickets
for the time they spend on each client. Car repair shops are another example. The
mechanic must keep track of how much time he/she spends working on each
automobile.
7. The risks associated with outsourcing are nontrivial. One is that an outside
organization will have access to extremely confidential employee data and to the
client firm’s financial resources. Another risk is that the service provider will have
poor internal controls and/or act incompetently in a way that causes material errors
or fraud. A client organization may outsource any function it chooses, but it cannot
calculated. Fixed assets will be overstated, the depreciation amount charged in each
period will be overstated, and equity will be misstated. Further, if insurance is being
approval process that evaluates the merits of the request on a cost-benefit basis.
SUPERVISION CONTROLS.
Because capital assets are widely distributed around the organization, they are more
physical security of fixed assets. Supervisors must ensure that fixed assets are
being used in accordance with the organization’s policies and business practices.
including: the useful life of the asset, the original financial cost, proposed
cost savings as a result of acquiring the asset, the discount rate used, and
of assets.
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2. The internal auditor should verify the location, condition, and fair value
of the organization’s fixed assets against the fixed asset records in the
subsidiary ledger.
10. The responsible supervisors must authorize the disposal of the computer.
11. Perform an annual physical inventory of fixed assets and adjust the records to reflect
12. Prepare reports about the transfer of fixed assets. Perform an annual physical
inventory and note the location of assets. Budget and then hold each department
13. Authorize fixed asset acquisitions; part of the authorization is showing that a need
14. On the financial statements, assets will be overstated and depreciation expense
could be overstated. Assets on property tax returns will be overstated and too much
MULTIPLE CHOICE
1. B
2. A
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3. C
4. C
5. C
6. C
7. B
8. A
9. C
10. D
11. A
PROBLEMS
time cards for terminated employees. Since the foreman also distributes
should list all current employees. Time cards for terminated or non-existent
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3. Risks:
Foremen have too much control over the human resources they are responsible
The high degree of casual labor creates an environment that lends itself to
abuse.
difficult.
Controls:
4. The checks should be processed through accounts payable and the cash
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disbursement departments. The payroll personnel should not have access to a bank
account with funds. The checks should be prepared, and the money should be
transferred into the payroll account by the cash disbursements department. The
payroll department should use personnel action forms (new employees and
sensitive. Payroll employees should be able to verify that an employee has the
status of an active employee, but should not be able to change this status. The
personnel employees, on the other hand, should be able to activate new employees
and change the status of an employee from active to terminated. The personnel
employees should not be able to submit time cards for employees. This separation
of tasks prevents either the payroll employee or the personnel employees from
employees should only be able to retrieve information which is necessary for payroll.
The human resource database will most likely contain other information which the
health records, pension plan balances, injury claims, etc. Thus, the central location
of data needs good controls to make sure that this sensitive data cannot be viewed
should be necessary to access this information. Payroll rate data is also very
6. Risks:
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Supervisor submits the personnel action form. This allows him/her to create
nonexistent employees.
review and reconciliation of the payroll register is based on the presumption that the
personnel action form and time cards are legitimate and accurate. Since they are
Controls:
7. Transaction authorization
form.
Segregation of duties
by payroll.
writes checks.
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Payroll checks and vendor check are paid through the general cash account. An
The supervisor should not distribute the paychecks to employees. This should
Accounting records
No journal vouchers are prepared. The general ledger is being updated from
source documents.
8. Risks:
The user’s authority to select vendors and prepare purchase orders without
The user’s authority to receive and validate the invoices without independent
Cash disbursements makes payment base only on the invoice from the user.
The absence of accounts payable form the process allows for the payment of
Controls:
The invoice, receiving report, and approved purchase order should be reviewed
A fixed asset function should be implemented to account for acquisition, use, and
9. Risks:
Users have custody of the assets and maintain usage records. Key information
employee.
Controls:
10. Risks:
Cash disbursements makes payment base on the invoice and receiving report,
User has custody of the asset and maintains the fixed asset ledger.
Controls:
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The invoice, receiving report, and approved purchase order should be reviewed
A fixed asset function should be implemented to account for acquisition, use, and
11. a. The source documents represent wells which are being drilled. Equipment
which is used may be rented, in which case the invoice for rental would be
drilling site, and the source document would be a receiving report. Many
times the equipment used to drill the well is owned, and the source
document for applying the cost of the equipment to drill the well would be
document for labor distribution reports, which would also be used by the
fixed asset accounting department. Also food and lodging for the
electricity, etc.
b. The costs would be allocated by the fixed asset accountants based upon
the method of accounting by the firm. Many firms would include the cost of
both wells.
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c. The fixed asset accountant must constantly revise the depletion rate
being used to allocate the drilling and completion costs. The standard
calculation is:
Total Drilling and Completion Costs
Estimated Equivalent Units of Reserves
In the above equation, the denominator may change periodically, as the production
engineers revise their estimates about the recoverable reserves. The numerator may
also change if improvements are made for better recovery. The fixed asset
accountant must be advised of these changes. Figure 6-13 does not have to be
forms. Invoices and labor distribution forms for improvements to the well would be
distributed the FAAs, and they should then update their depletion calculations.
d. The auditors should trace the total well costs capitalized to each
accountant should visit the well site and verify that reserves are being
extracted.
Supervision
There is inadequate supervision of employees with regards to filling out their time
cards. Mary does not directly supervise the employees when they are checking “in”
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and “out.” The inherent threat here is that employees can misstate the amount of
Transaction Authorization
Lack of personnel action form from Human Resources poses a threat that
Independent Verification
Coupled with the lack of a personnel action form, allowing supervisors to distribute
employees. Supervisors are submitting time cards for employees no longer working
Accounting Records
detailed audit for payroll. This keeps the general ledger department from being able
2. Recommendations
13. a. Assets are items which have probable future economic benefit. The patent to
produce this radar detector exclusively for 4 years should produce economic
benefits for this firm in the future. This asset should be capitalized and
amortized over the period in which the probable economic benefits are expected
b. The source document for capitalizing the patent would be the legal agreement of
rights and the invoice for the $8M. The costs may be amortized using various
amortization schedule would be the source document. Some firms may try to
project sales and use a per unit amortization schedule. If this approach is used,
the project sales figures and the actual sales figures would be needed to
c. The fixed asset accounting department needs to be notified to change the life of
the asset, either in years or in total sales units. The amortization schedule would
change would stem from market surveys assessing the demand for the product.
d. The auditors need to verify (for material assets) the appropriateness of the
estimated life of the asset. The auditors must determine if the firm has
expected to decrease sales (the auditors should request market survey results
and sales by territories as supporting evidence), then the asset may need to be
impaired if it is worth less than was expected. Thus the depreciation, depletion,
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and amortization output of the fixed asset accounting system is based upon
these assumptions.
C. Control Weaknesses
accounts
paychecks
d) IT Contols
C. Control Weaknesses
Payroll System
D.
IT Controls
E. Flowcharts for this part of the case will vary. Solutions should address the issues
c,
Control WeaknessesFixed Asset System
1. Segregation of duties necessary for asset acquisition, maintenance, and disposal
(departmental manager has charge of all decisions).
2. Need fixed assets department to authorize the manager’s asset functions.
3. No receiving department to prepare a receiving report for AP to match with purchase order,
etc.
Control WeaknessesPayroll System
1. Should have personnel action form (prevents submitting time cards for past employees,
transaction authorization of time cards).
2. Time-keeping and personnel function should be separated from supervisor, so pay rates are
less likely to contribute to fraud.
3. Supervisor does the time card verification and collecting and distributing of paychecks. This
allows the supervisor to verify paychecks for false employees and collect them for
him/herself. A “paymaster” should take responsibility to verify and distribute checks to
ensure no checks from non-existing employees.
4. AP should not review Cash Disbursement department activities regarding accuracy of
paycheck amounts and creating voucher packet.
5. No (verified) journal voucher from cash disbursement sent to general ledger.
d,
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e,
Student solutions will vary for this part of the case. They should
Fixed Assets
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Payroll
Fixed Assets
receiving report.
records.
D.
IT Controls
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5)
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Payroll
2) Segregation of duties – Supervisors should not submit and review time cards
journal voucher from cash disbursements and an account summary from the
AP department.
Fixed Assets
5) Segregation of Duties – The end user should not be solely responsible for
D.
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6. Solution to Orbits
a), b) see diagrams on the following pages.
2) Receiving does not get a blind copy of the PO. The blind copy would force the
receiving clerk to count and inspect the goods to complete the receiving report. The
clerk is only using the packing slip to prepare the receiving report.
4) The accounts payable department doesn’t receive the supplier’s invoice, thus it
only reconciles and posts the liability from the PR, PO, and RR. The supplier’s
invoice instead is sent directly to the general ledger.
5) The General ledger should receive journal vouchers and account summaries not
the vendor’s invoice or the CD voucher.
2) The current system has no paymaster. The paychecks are returned to the
supervisors for distribution to employees.
2) The accounts payable department should prepare an accounts payable summary that
goes to the general ledger function.
3) Cash disbursements should prepare a journal voucher and send it to the general ledger
department.
4) No formal receiving function exists to produce a receiving report.
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2) Customers are billed and the sales journal updated before the good are shipped
2) The bank reconciliation of cash deposits should not be performed by the cash
receipts department. This should be an independent reconciliation.
3) Cash receipts should prepare a journal voucher that goes to the General Ledger
Department.
D.
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