CHAPTER 6:

The Expenditure Cycle Part II:

Payroll Processing and Fixed Asset Procedures

REVIEW QUESTIONS

1. Which document is used by cost accounting to allocate direct labor charges to work-in-
process?

 Production employees prepare two types of time records: job tickets and
timecards. Cost accounting uses these documents to allocate direct labor
charges to work-in-process (WIP) accounts.

2. Which department authorizes changes in employee pay rates?

 Personnel Department

3. Why should the employee’s supervisor not distribute paychecks?

 Supervisor should not distribute the paychecks because the supervisor

gathers the timecards 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. Why should employee paychecks be drawn against a special checking account?

 A separate impress account is established for the exact amount of the

payroll based on the payroll summary. When the paychecks are cashed, this
account should clear leaving a zero balance. Any errors in checks (additional
checks or abnormal amounts) would result in a non-zero balance in the impress
account and/or some paycheck would not clear. This will alert management to
the problem so corrective action can be taken.

5. Why should employees clocking on and off the job be supervised?

  A form of payroll fraud involves employees clocking the timecards of
absent employees. By supervising the clocking in and out process, this fraud can
be reduced or eliminated.

6. What is a personnel action form?

 The personnel action form provides the payroll department with a list of
currently active employees, so that any submission of timecards by supervisors
for fictitious or ex-employees will not be processed.

7. What tasks does a payroll clerk perform upon receipt of hours-worked data from the
production department?

 Here are the following:

a. Prepare the payroll register.

b. Enter information into employee payroll records.
c. Prepare employee paychecks.
d. Send the paychecks to distribute paycheck function.
e. File the timecards, personnel action form, and copy of the payroll register.

8. What documents are included in the audit trail for payroll?

 Here are the following:

a. Timecards, job tickets, disbursement vouchers and:

b. Journal Information that comes from the labor distribution summary and the
payroll registers.
c. Subsidiary ledger accounts, which contain the employee records, WIP, and
various expense accounts.
d. The general ledger accounts, payroll control, cash, and the payroll impress
account.

9. What are the strengths and weaknesses of a batch process with sequential files?

 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. What are the strengths and weaknesses of a batch system with direct access files?

 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. What are the objectives of a fixed asset system?

 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. How do fixed asset systems differ from purchases systems?

 Fixed Asset Systems processes non-routine for a wider group of users in

the organizations.

13. What are three tasks of the fixed asset system?

 The 3 tasks are the following:

a. Asset acquisition
b. Asset maintenance
c. Asset disposal

14. What information is found on the depreciation schedule? How can this information be
verified?

 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. Type of asset, description, month, current depreciation, amount,
book value, and asset location. Sometimes a group code. To verify check the
original PO and physically observing.
 15. Why is it crucial to the integrity of the financial statements that the fixed asset
department be informed of asset improvements and disposals?

 The fixed asset department authorizes the removal of the asset from the
general ledger, they must know when to record the authorization.

16. What is the auditor’s role with respect to the fixed asset system?

 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. Which department performs the formal record keeping function for fixed assets?

 Fixed Asset Department

18. What document shows when fixed assets are fully depreciated?

 Depreciation schedule

19. Who should authorize disposal of fixed assets?

 Management and the fixed asset accounting department

20. Assets used for production are secured in a warehouse. Who has custody of fixed
assets?

 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. What is the importance of the job ticket? Illustrate the flow of this document and its
information from inception to impact on the financial statements.

 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. Are any time lags in recording economic events typically experienced in payroll systems?
If so, what are they? Discuss the accounting profession’s view on this matter as it
pertains to financial reporting.

 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 timekeeping, cash distribution statements, accounts payable
information from time to time making the entries will reduce time-lag in an
organization.

3. What advantages are achieved in choosing a basic batch computer system over a manual
system? What advantages are achieved in choosing a batch system with real-time data
input over a basic batch system?

 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. Discuss the major control implications of batch systems with real-time data input. What
compensating procedures are available?

 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. Discuss some specific examples in which information systems can reduce time lags and
how the firm is positively affected by such time lags.

 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. Discuss some service industries that may require their workers to use job tickets.

 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 is often used as a good example of when batch processing by using magnetic
tapes is considered appropriate. Why is payroll typically considered a good application
for this type of storage device?

 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. If an asset that is not fully depreciated is sold or disposed, but the fixed asset records are
not adjusted, what effect will this have on the financial statements?

 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. Discuss the fundamental risk and control issues associated with fixed assets that are
different from raw materials and finished goods.

 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. Describe an internal control that would prevent an employee from removing a
computer and then reporting it as scrapped.

 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. Describe an internal control that would prevent the payment of insurance premiums on
an automobile the company no longer owns.

 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. Describe an internal control that would prevent the charging of depreciation expense to
the maintenance department for a sweeper that is now located in and used by the
engineering department.

 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. Describe an internal control that would prevent the acquisition of office equipment that
the firm does not need.

 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. What negative consequences result when fixed asset records include assets that the
firm no longer owns?

 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.

MULTIPLE-CHOICE QUESTIONS

1. The document that captures the total amount of time that individual workers spend on
each production job is called a

a. timecard.

b. job ticket.

c. personnel action form.

d. labor distribution form.

2. An important reconciliation in the payroll system is when

a. the general ledger department compares the labor distribution summary from
cost accounting to the disbursement voucher from accounts payable.

b. the personnel department compares the number of employees authorized to

receive a paycheck to the number of paychecks prepared.
 c. the production department compares the number of hours reported on job
tickets to the number of hours reported on timecards.

d. the payroll department compares the labor distribution summary to the hours
reported on timecards.

3. Which internal control is not an important part of the payroll system?

a. supervisors verify the accuracy of employee timecards

b. paychecks are distributed by an independent paymaster

c. the accounts payable department verifies the accuracy of the payroll register
before transferring payroll funds to the general checking account

d. the general ledger department reconciles the labor distribution summary and
the payroll disbursement voucher

4. The department responsible for approving pay rate changes is

a. payroll

b. treasurer

c. personnel

d. cash disbursements

5. Which function should distribute paychecks?

a. personnel

b. timekeeping

c. paymaster

d. payroll

6. Which transaction is not processed in the fixed asset system?

a. purchase of building
 b. repair of equipment

c. purchase of raw materials

d. sale of company van

7. Depreciation

a. is calculated by the department that uses the fixed asset.

b. allocates the cost of the asset over its useful life.

c. is recorded weekly.

d. results in book value approximating fair market value.

8. Depreciation records include all of the following information about fixed assets EXCEPT
the

a. economic benefit of purchasing the asset.

b. cost of the asset.

c. depreciation method being used.

d. location of the asset.

9. Which control is not a part of the fixed asset system?

a. formal analysis of the purchase request

b. review of the assumptions used in the capital budgeting model

c. development of an economic order quantity model

d. estimates of anticipated cost savings

10. Objectives of the fixed asset system do NOT include

a. authorizing the acquisition of fixed assets.

b. recording depreciation expense.

 c. computing gain and/or loss on the disposal of fixed assets.

d. maintaining a record of the fair market value of all fixed assets.

11. Which of the following is NOT a characteristic of the fixed asset system?

a. acquisitions are routine transactions requiring general authorization

b. retirements are reported on an authorized disposal report form

c. acquisition cost is allocated over the expected life of the asset

d. transfer of fixed assets among departments is recorded in the fixed asset

subsidiary ledger