Chapter 6 The Expenditure Cycle Part II: Payroll Processing 1.
1. Prepares the payroll register showing gross pay, deductions, overtime
and Fixed Asset Procedures
The Conceptual Payroll System
Payroll processing is actually a special-case purchases system in which the
organization purchases labor rather than raw materials or finished goods
for resale
Personnel Department
The personnel department prepares and submits personnel action forms
to the prepare payroll function.
personnel action forms - identify employees authorized to receive a
paycheck and are used to reflect changes in hourly pay rates, payroll
deductions, and job classification
Production Department
Production employees prepare two types of time records: job tickets and
time cards.
Job tickets capture the time that individual workers spend on each
production job
-cost accounting uses these documents to allocate direct labor
charges to work-in-process (WIP) accounts.
Time cards capture the time the employee is at work.
Update WIP Account
After cost accounting allocates labor costs to the WIP accounts, the
charges are summarized in a labor distribution summary
Prepare Payroll
pay, and net pay.
2. Enters the this information into the employee payroll records
3. Prepares employee paychecks
4. Sends the paychecks to the distribute paycheck function.
5. Files the time cards, personnel action form, and copy of the payroll
register
Distribute Paycheck
Paymaster To prevent submitting time cards for nonexistent employees,
this is used to distribute the paychecks to employees
 If a valid employee does not claim a paycheck, the paymaster
returns the check to payroll
Prepare Accounts Payable
The accounts payable (AP) clerk reviews the payroll register for
correctness and prepares copies of a cash disbursement voucher for
the amount of the payroll.
voucher register - The clerk records the voucher here
voucher packet (voucher and payroll register) submit to cash
disbursements.
Prepare Cash Disbursement
payroll imprest account - Upon receipt of the voucher packet, the cash
disbursements function prepares a single check for the entire amount of
the payroll and deposits it here
PAYROLL CONTROLS
Transaction Authorization
the personnel action form helps payroll keep the employee records 1. Verification of time. Before sending time cards to payroll, the supervisor
current. must verify their accuracy and sign them.

- This document describes additions, deletions, and other changes 2. Paymaster. The use of an independent paymaster to distribute checks
to the employee file and acts as an important authorization (rather than the normal supervisor) helps verify the existence of the
control to ensure that only the time cards of current and valid employees. The supervisor may be party to a payroll fraud by pretending
employees are processed. to distribute paychecks to nonexistent employees.

Segregation of Duties 3. Accounts payable. The AP clerk verifies the accuracy of the payroll
register before creating a disbursement voucher that transfers funds to the
The time-keeping function and the personnel function should be separated. imprest account.

The personnel function provides payroll with pay rate information for 4. General ledger. provides verification of the overall process by
authorized hourly employees reconciling the labor distribution summary and the payroll disbursement
voucher.
Supervision
The Physical Payroll System
Supervisors should observe the time-keeping process and reconcile the
time cards with actual attendance. MANUAL PAYROLL SYSTEM

Accounting Records 1. Payroll authorization and hours worked enter the payroll department
from two different sources: personnel and production.
*The audit trail for payroll includes the following documents:
2. The payroll department reconciles this information, calculates the
1. Time cards, job tickets, and disbursement vouchers. payroll, and distributes paychecks to the employees.
2. Journal information, which comes from the labor distribution
summary and the payroll register. 3. Cost accounting receives information regarding the time spent on each
3. Subsidiary ledger accounts, which contain the employee records job from production. This is used for posting to WIP account.
and various expense accounts.
4. The general ledger accounts: payroll control, cash, and the 4. AP receives payroll summary information from the payroll department
payroll clearing (imprest) account. and authorizes the cash disbursements department to deposit a single
check, in the amount of the total payroll, in a bank imprest account on
Access Controls which the payroll is drawn.
The assets associated with the payroll system are labor and cash.
5. The general ledger department reconciles summary information from
Independent Verification cost accounting and AP. Control accounts are updated to reflect these
transactions.
* examples of independent verification controls in the payroll system:
Computer-Based Payroll Systems  Upon receipt of the approved time cards from the supervisor at
the end of the week, the time-keeping department creates the
AUTOMATING THE PAYROLL SYSTEM USING BATCH current attendance file.
PROCESSING
Data Processing
Batch computer programs perform the check writing, detailed record
keeping, and general ledger functions.
Control Implications
Control Implications
 must produce adequate records for independent verification and
 promotes accounting accuracy audit purposes
 reduces check-writing errors
 controls must be implemented to protect against unauthorized
 it does not significantly enhance operational efficiency
access to data files and computer programs.
REENGINEERING THE PAYROLL SYSTEM
The Conceptual Fixed Asset System
Human resource management (HRM) system Fixed assets are the property, plant, and equipment used in the operation
of a business.
 For moderate-sized and large organizations, payroll processing is - These are relatively permanent items that often collectively
often integrated within this represent the largest financial investment by the organization.
 captures and processes a wide range of personnel- related data, THE LOGIC OF A FIXED ASSET SYSTEM
including employee benefits, labor resource planning, employee 1. asset acquisition
relations, employee skills, and personnel actions (pay rates, 2. asset maintenance
deductions, and so on), as well as payroll 3. asset disposal.
Asset Acquisition
Personnel Asset acquisition usually begins with the departmental manager (user)
 The personnel department makes changes to the employee file in recognizing the need to obtain a new asset or replace an existing one
real time via terminals - depend on the asset’s value.
Asset Maintenance
Cost Accounting - involves adjusting the fixed asset subsidiary account balances as
the assets (excluding
 The cost accounting department enters job cost data (real time or - land) depreciate over time or with usage
daily) to create the labor usage file.  Common depreciation methods in use are
1. straight line,
Time-Keeping 2. sum-ofthe-years’ digits
3. double-declining balance
4. units of production
  Depreciation calculations are transactions that the fixed asset
system must be designed to anticipate internally when no external
event (source document) triggers the action. An important record
used to initiatethis task is the depreciation schedule
Asset Disposal
 When an asset has reached the end of its useful life or when
management decides to dispose of it, the asset must be removed
from the fixed asset subsidiary ledger.
 In the case of high-value items, there should be an independent
approval process that evaluates the merits of the request on a
cost-benefit basis.
Supervision Controls
 fixed assets are being used in accordance with the organization’s
policies and business practices

Independent Verification Controls

The Physical Fixed Asset System
 Periodically, the internal auditor should review the asset
COMPUTER-BASED FIXED ASSET SYSTEM acquisition and approval procedures to determine
 the reasonableness of factors used in the analysis
Acquisition Procedures

The process begins when the fixed asset accounting clerk receives a
receiving report and a cash disbursement voucher.

Asset Maintenance

The fixed asset system uses the depreciation schedules to record end-of-
period depreciation transaction automatically

Disposal Procedures

The disposal report formally authorizes the fixed asset department to

remove from the ledger an asset disposed of by the user department.

CONTROLLING THE FIXED ASSET SYSTEM

Authorization Controls

 Fixed asset acquisitions should be formal and explicitly

authorized.