CHAPTER 6

REVIEW QUESTIONS:
1. Production employees prepare two types of time records: job tickets and time cards. Cost
accounting uses these documents to allocate direct labor charges to work-in-process (WIP)
accounts.
2. Personnel Department
3. Supervisor should not distribute the paychecks because the supervisor gathers the time cards
and reviews them for accuracy. By not allowing the supervisor to distribute the paycheck an
increased amount of separation of duties helps lower the risk of fraud.
4. A separate imprest account is established for the exact amount of the payroll based on the
payroll summary. When the pay checks are cashed, this account should clear leaving a zero
balance.
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 department prepares and submits personnel action forms to the prepare payroll
function. These documents identify employees authorized to receive a paycheck and are used to
reflect changes in hourly pay rates, payroll deductions, and job classification.
7. A payroll clerk performs the following tasks upon receipt of hours-worked data from the
production department:

 Prepare the payroll register.

 Enter information into employee payroll records.
 Prepare employee pay checks.
 Send the pay checks to distribute pay check function.
 File the time cards, personnel action form, and copy of the payroll register.
8. Time cards, job tickets, disbursement vouchers and Journal Information that comes from the
labor distribution summary and the payroll registers. Subsidiary ledger accounts, which contain
the employee records, WIP, and various expense accounts. The general ledger accounts, payroll
control, cash, and the payroll imprest account. 
9. The major advantage of a batch process with sequential files is control. Back-up is also another
advantage. The disadvantages are inefficiency due to high labor costs to manually prepare journal
vouchers and handle them. Another disadvantage is the infrequency of reconciliation.
10. Strength: reduction in paper, clerical labor and the lag time between occurrence and recording
them.
Weaknesses: Control implications such as unauthorized access to data files and computer
programs
11. Process acquisition of fixed assets as needed in accordance with formal management
approval and procedures, maintain adequate accounting records of fixed asset acquisition, cost,
depreciation and physical location in an organization, maintain adequate depreciation records for
 depreciable assets in accordance with acceptable methods, Provide management with info to help
plan future asset investments, and properly record retirement and disposal of fixed assets.
12. Fixed Asset Systems processes non-routine for a wider group of users in the organizations
13. Asset acquisition, Asset maintenance and Asset disposal.
14. Depreciation schedule have information regarding when and how mush depreciation is
needed to record. Depreciation schedule also shows when to stop calculating depreciation values
on fully depreciated or life ended asset. This information is also useful for management in deciding
how and when to dispose a fixed asset.
15. The fixed asset department authorizes the removal of the asset from the general ledger, they
must know when to record the authorization.
16. They review the authorization control procedures to determine the reasonableness of
authorizations used for acquisition of fixed assets. Examine the supervision controls over the
physical guarding of assets. Periodically verify the location, condition and fair value of the
organization fixed assets.
17. Fixed Asset Department
18. Depreciation schedule
19. Management and the fixed asset accounting department
20. Unlike production assets, fixed asset inventory is distributed widely across the organization.
Individual items such as automobiles, computers, and office furniture are in the custody of the
end-users.

DISCUSSION QUESTIONS:
1. It helps in calculating and preparing various human resource policies such as compensation as it
contains the information regarding the department and designation of the employee. Job
ticket provides accurate information which helps in making correct financial reports.
2. Time lags in recording economic events. Time slack is a handling time between two procedures.
Decreasing the time-lag basically implies minimizing the operation time between two processing of
work timing. In automated payroll system, posting records information automatically to subsidiary
and general ledger accounts reduce time-lag in an organization. Sending information about
employee time-keeping, cash distribution statements, accounts payable information from time to
time making the entries will reduce time-lag in an organization.
3. Computerized accounting has the advantage of increased efficiency and time management when
compared with manual accounting. Computers may more rapidly perform accounting functions or
assessments than manual accounting systems, once data has been entered into the system.
4. The first control implication is that a fundamental separation between authorization and
transaction processing no longer exists. The computer programs both authorize and process the
orders and issue checks to the vendors. The compensating control is to provide transaction
listings and summary reports that describe the automated activities taken by the system to
management. In order for these controls to work, the managers must take the time to carefully
 review these reports. The second implication is that the accounting records as well as the
computer programs reside on magnetic disks. These disks should not be accessed by any
individuals not authorized to access them in any fashion. The compensating control is to employ
hardware, software, and procedural controls over the data stores.
5. The reporting requirements of external users such as lending institutions, the IRS, the SEC, and
stockholders are subject to stringent reporting standards. Thus, firms have historically placed a
very high emphasis on the accuracy of the AIS and the reports they produce for external agencies
since failure to provide accurate and timely information carries heavy penalties. Internal users,
such as managers, also need vital information to make good decisions. Firms are beginning to
realize that the needs of these internal users are also very important to efficiently and effectively
operate and plan for the future.
6. Just like manufacturing industry, they can use the job ticket to know the efficiency of employees
as it records productivity of each employee every day.
7. Payroll systems are often put into practice using batch processing. The master folder would have
the reports for all company's workers, including their worker number, charge of compensate and
how much they have been remunerated so far this year. Magnetic tape is a good example when
batch processing because of the confidential information maintained in the payroll function.
8. Removal of Fixed asset. Since fixed asset detail is maintained in a sub ledger, the system needs
to be notified when a change in assets occurs. If the system is not instructed to make a change,
such as a sale or disposal, then the normal course of transactions will still occur in the general
ledger and the financial statements will be overstated.
9. Control issues of fixed asset as compared to physical payroll. Fixed asset is an objective which is
used for operations in organization for many years depending on life of that objective. These
assets are collectively used for denoting the financial investment by the organization which is
largest. These are all known as permanent items which basically denote building, trees,
properties, equipment in productive department, and organization furniture and machinery used
for various purposes in production department, land organization and vehicles for transport and
operation and vehicles for transport and operations for business.
10. Supervisors must authorize the disposal of the computer. Unless so authorized, the record will
continue to show that the employee is responsible for the computer.
11. Perform an annual physical inventory of fixed assets and adjust the records to reflect assets no
longer on hand. Prepare reports about the disposal of assets.
12. Internal control preventing the charging of depreciation expense. It is basically involves two types
of controls as physical and IT controls. Auditor I internal control maintains records regarding the
asset value, operating expenses, current earnings, depreciation and salvation values. Internal
control of physical payroll deals with calculating maintenance bills like sweeper payroll, repair
expenses, and other maintenance cost. Fraud and miscalculations are reduced or removed by
distributing duties, supervision, and updating information from time to time.
13. Internal control involves the norms and rules which are followed by a company to protect the
company from fraud it is done to keep a check on the internal activities of organization which can
impact the organization adversely. Auditors should check whether the departments are using all
the fixed assets or not.
14. Financial Statements, assets will be overstated and depreciation expense will be overstated.
Assets on property tax returns will be overstated and too much tax will be paid. Insurance
premiums will be paid on non-existent assets.
 PROBLEMS:
1. a. An employee action report from the personnel department should list all current employees.
Time cards for terminated or non-existent employees should be identified when reconciled with
the personnel report.
b. An independent paymaster should distribute the pay checks to the employees. If an employee
is not present to receive the pay check, it should be returned to the payroll department.
2. a. The payroll department has no independent information as to changes in an employee’s status.
For example, the foreman may continue to submit timecards for terminated employees. Because
the foreman also distributes pay checks, he could steal and forge the uncollected checks.
b. i. An employee action report from the personnel department should list all current employees.
Timecards for terminated or non-existent employees should be identified when reconciled with the
personnel report.
ii. An independent paymaster should distribute the pay checks to the employees. If an
employee is not present to receive the pay check, it will be returned to the payroll department.
3. The risks for payroll fraud in Sherman company payroll system:
a. Supervisors perform both time keeping function and personnel function. It is possible that
supervisor does not update payroll department about termination of an employee and retain
unclaimed pay checks with him instead of returning it to payroll department and cashes it with the
help of forgery.
b. As payroll department receives time cards from supervisor and on that basis they issue pay
checks, there is a possibility that supervisor will submit time cards of non-existent employees.
c. As the clock machine is located in an unattended room, there is a risk that an employee clocks
in for another employee who is absent or late.
Controls to reduce the risk:
Authorization: A separated personnel function should be established to account for employees
and to authorize their payment
Segregation of Duties: The department supervisors should not distribute the pay checks to
employees. This should be the task of a paymaster.
Supervision: The clocking in and out process should be supervised.
4. The control weakness is that the company is preparing form for new employees as well as for
terminated employees that could be a waste of time. Here, instead of new employee forms and
terminated employee forms, personnel department should prepare personnel action form.
Personnel action form also contains details of changes in pay rates, deductions and job
classification.
5. Human resources: Data about appointment or termination of employees, changes in work
dependants, changes in pay rate or job title, changes in withholdings, etc. entered by human
resource clerk in employee record file.
Cost Accounting: Job cost data updated by cost accounting department to generate labor usage
file.
Employee Time-Keeping: In an organization, where there is mobile or distributed workforce,
employees directly enter timekeeping data to generate time and attendance file.