Chapter 6

The Expenditure Cycle

Part II: Payroll Processing
and
Fixed Asset Procedures

Objectives for Chapter 6

Fundamental tasks of the payroll and fixed asset
processes
Functional departments of payroll and fixed asset activities
and the flow of transactions through the organization
Documents, journals, and accounts that provide audit
trails, promote the maintenance of records, and support
decision making and financial reporting
Exposures associated with payroll and fixed asset
activities and the controls that reduce these risks
Operational features and the control implications of
technology used in payroll and fixed asset systems

DFD of Payroll Procedures

Manual Payroll System

The Personnel department uses
personnel action forms to:
activate new employees
change the pay rate of employees
change marital status and/or number
of dependents
terminate employees

Manual Payroll System

The production employees fill out two
forms:
job tickets - account for the time spent by
the individual worker on each production
job
time cards - used to capture the total time
worked each pay period for payroll
calculations; must be signed by a
supervisor

Manual Payroll System

The Cost Accounting
department:
uses the job tickets to
allocate labor costs to WIP
accounts
summarizes these charges
in a labor distribution
summary which is
forwarded to the General
Ledger department

Manual Payroll System

The Payroll department receives the
personnel action forms and the time cards.
It uses them to perform the following tasks:
prepares the payroll register
enters the information into the employee
payroll records
prepares paychecks
sends paychecks to Cash Disbursements and a
copy of the payroll register to Accounts Payable

Manual Payroll System

Accounts Payable department:
prepares a cash disbursements
voucher for the total amount of the
payroll
sends copies to the Cash
Disbursements and General Ledger
departments

Manual Payroll System

Cash Disbursements reviews and signs
the paychecks and forwards them to a
paymaster for distribution to the
employees.
Cash Disbursements
writes a check for the
payroll and deposits
it
into the payroll
imprest
account.

Manual Payroll System

General Ledger makes the following entries:
FROM LABOR DISTRIBUTION SUMMARY
WIP (Direct Labor)
DR
Factory Overhead (Indirect Labor)
DR
Wages Payable
FROM DISTRIBUTION VOUCHER
Wages Payable
DR
Cash
Fed. Inc. Tax Withholding Payable
State Inc. Tax Withholding Payable
FICA Withholding Payable
Other Withholding Payables

CR

CR
CR
CR
CR
CR

Manual Payroll System

Further, the General Ledger department
needs to make a journal entry to transfer
the cash from the operating bank account
to the payroll imprest account:
Cash - Payroll Imprest Account
Cash - Operating Account

DR
CR

Payroll Controls
Transaction authorization - the
personnel action form is important in
preventing:
terminated employees from receiving
checks
wage rates from being improperly
changed for current employees

Payroll Controls
Segregation of Duties - timekeeping
and personnel functions should be
separated
Supervision - need to monitor
employees to ensure they are not
clocking in for one another

Payroll Controls
Accounting Records - audit trail
includes:
time cards
job tickets
disbursement vouchers
labor distribution summary
payroll register
subsidiary ledger accounts
general ledger accounts

Payroll Controls
Access Controls - need to prevent
employees from having improper
access to:
accounting records, such as time cards
which can be altered
unsigned checks

Payroll Controls
Independent Verification:
verification of time cards
distribution of paychecks to authorized
employees
verification of accuracy of payroll
register by accounts payable
general ledger reconciles the labor
distribution summary and the payroll
disbursement voucher

Computer-Based Payroll
Systems
Payroll is well-suited to batch processing
and sequential files, since a majority of
the employees on the master file will
receive a paycheck every pay period.
The computer program performs the
detailed record-keeping, check-writing,
and general ledger functions.

Human Resource Management

(HRM) Systems
A re-engineered IT that captures and
processes a wide range of personnel-related
data, including:
employee benefits
labor resource planning
employee skills
pay rates and deductions
evaluations
payroll

Key Features of HRM Systems

Personnel - can make changes to the
employee file in real time
Cost Accounting - enters job cost data
either daily or in real time
Timekeeping - enters the attendance
file daily
Data Processing - still uses batch
processing and prepares all reports, the
checks, and updates the general ledger

HRM Systems
differ from automated batch, sequential file
systems in the following ways:
operations depts. transmit transactions to
data processing via terminals
direct access files are used for storage
many processes are performed real time
real-time access to personnel files
required for direct inquiries

Reengineering Payroll
Payroll can be reengineered as a part of
human resource management (HRM).
In reengineered payroll systems
operations departments transmit
transactions to data processing via terminals
direct access files are used for data storage
many processes are now performed in real
time.

Reengineering Payroll--Before

Reengineering Payroll--After

The Fixed Asset System (FAS)

Fixed Assets - property, plant, and
equipment used in the operation of a
business

Life of a Fixed Asset

1. Acquisition
of asset.
Asset
cost $

Dec
lin

2. Depreciation.
3. Subsequent
expenditures.

e in

ass

ets
s

er v
ice

Cost

4. Disposal
of asset.

pot
e

ntia
l
Salvage
value

Time (useful life)

DFD of Fixed Asset System

Objectives of the FAS

Process the acquisition of fixed assets as needed
and in accordance with formal management approval
and procedures
Maintain adequate accounting records of asset
acquisition, cost, description, and physical location in
the organization
Maintain accurate depreciation records for
depreciable assets in accordance with acceptable
method
Provide management with information to help it
plan future fixed asset investments
Properly record the retirement and disposal of
fixed assets

Asset Acquisition
Generally begins with a department manager
determining that an old fixed asset needs to
be replaced or the need for a new fixed asset
is warranted
The manager fills out a purchase
requisition and may require a signature for
items over a pre-specified limit.
The fixed asset department performs the
record-keeping function.

Asset Maintenance
Involves adjusting the fixed asset subsidiary
account balances as the assets depreciate
over time (or deplete with usage)
Depreciation calculations are internal
transactions that the fixed asset system must
process based upon a depreciation schedule.
Physical improvements must also be
recorded to increase the subsidiary account
balance and depreciation schedule.

Asset Disposal
At the end of the useful life or an earlier
disposition of the asset, the asset must
be removed from the records.
The disposal requires a disposal
request and disposal report as source
documents to remove the asset from the
records and the depreciation schedules.

Computer-Based Fixed Asset

System--Acquisition
Acquisition - the
receipt of the asset is
recorded, along with
information such as its
useful life, depreciation
methods, etc. and the
ledgers are
automatically updated

Computer-Based Fixed Asset

System--Maintenance
Computerized FAS will automatically:
calculate current periods depreciation
update the accumulated depreciation and
book-value fields in the subsidiary records
post the total amount of depreciation to the
affected general ledger accounts
depreciation expense and accumulated depreciation

record the depreciation transaction by adding

a record to the journal voucher file

Computer-Based Fixed Asset

System--Disposal
Computerized FAS will automatically:
post an adjusting entry to the fixed asset
control account in the general ledger
record any loss or gain associated with the
disposal transaction
prepare a journal voucher record

Controlling the Fixed Asset

System
Authorization should be formal and explicit
because of high cost of PPE:
acquisitions
changes in depreciation methods

Supervision - threat of misappropriation

requires constant management supervision:
theft--secure the physical location of assets
misuse--monitor on-the-job activities

Controlling the Fixed Asset

System
Independent Verification Controls the internal auditor should periodically
verify FAS records:
the reasonableness of factors used in
decisions (useful life, discounts, budgeting
model)
location, condition, and fair value of the fixed
asset records in the subsidiary ledger
the programming logic for automatic
calculations (depreciation)