AcctIS10E Ch06 Hall

Chapter 6
The
Expenditure
Cycle Part II:
Payroll
Processing and
Fixed Asset
Procedures
James A. Hall, Accounting Information Systems, 10th Edition. © 2019

Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
PAYROLL SYSTEM GENERAL TASKS
• Personnel Department
• Personnel action forms is a document identifying employees
authorized to receive a paycheck; the form is used to reflect
changes in pay rates, payroll deductions, and job classification.
• Production Department
• Job tickets are mechanisms to capture the time that individual
workers spend on each production job.
• Time cards are a tool to capture the time the employee is at
work.
• Update WIP Account
• A labor distribution summary is a summarization of labor
costs in work-in-process accounts.
James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
Data Flow Diagram of Payroll Procedures
Personnel Action Form
Job Ticket
Time Card
PAYROLL SYSTEM GENERAL TASKS
(continued)
• Prepare Payroll
• Employee payroll records is the system an employer uses to
calculate, track, and report employee pay.
• Paychecks are a bank check given as salary or wages.
• The payroll register is a document showing gross pay,
deductions, overtime pay, and net pay.
• Distribute Paycheck
• Prepare Accounts Payable
• Prepare Cash Disbursement
• The payroll imprest account is an account into which a single
check for the entire amount of the payroll is deposited.
Payroll Register
Employee Payroll Record
Employee Paycheck
UPDATE GENERAL LEDGER
• The general ledger function receives the labor distribution
summary from cost accounting, the disbursement voucher
from accounts payable, and the journal voucher from cash
disbursements.
• The debits and credits from these entries must be equal.
• When the equality has been verified, the clerk files the
voucher and labor distribution summary.
BASIC TECHNOLOGY PAYROLL SYSTEM
• Key tasks of a basic technology system:

1. Personnel action and time and attendance information from the
personnel and production departments, respectively, initiate the
payroll process.
2. The payroll department reconciles this information, calculates the
payroll, and sends the paychecks to the paymaster for distribution
to employees.
3. Cost accounting receives information regarding the time spent on
each job from production
4. Accounts payable receives payroll summary information (payroll
register) from the payroll department and authorizes the cash
disbursements department to deposit a single check, in the
amount of the total payroll, in a bank imprest account on which
the payroll is drawn.
5. The general ledger department reconciles summary information
from cost accounting and accounts payable.
ADVANCED TECHNOLOGY PAYROLL SYSTEM
• The human resource management (HRM) system

captures and processes a wide range of personnel related
data, including employee benefits, labor resource
planning, employee relations, employee skills, and
personnel actions (pay rates, deductions, and so on), as
well as payroll. HRM systems need to provide real-time
access to personnel files for purposes of direct inquiries
and recording changes in employee status as they occur.
• Human Resources
• Cost Accounting
• The labor usage file is a file in which the cost accounting
department enters job cost data (real time or daily).
(continued)
• Employee Timekeeping
• The time and attendance file is generated by employees
directly entering timekeeping data in real time.
• Biometric time clocks verify employees’ identities by using
fingerprint or hand-vein scan technology.
• Magnetic swipe ID cards work like a credit card. Each
employee is issued an ID card that has a magnetic strip
containing employee information. The employee swipes the
card through the time clock to record start and end time on the
job.
• Proximity cards are similar to swipe cards but don’t require
the user to slide the card through a reader.
(continued)
• Employee Timekeeping (continued)

• Mobile remote devices allow employees to clock in using
handheld devices (PDA or cell phone) or web browsers from
laptop computers. This option is popular among businesses
with employees in the field who travel between clients and with
companies engaged in global business with foreign-based
employees.
• Data Processing
• The employee records file comprises the additions of new
employees, deletions of terminated employees, changes in
work dependents, changes in withholdings, and changes in job
status such as job title and pay rate. Human resources clerks
enter data into the employee records file in real time from
terminals.
Basic Technology Payroll System
Basic Technology Payroll System
(continued)
Integrated Payroll and HRM System
PAYROLL SYSTEM RISKS AND INTERNAL
CONTROLS
• Risk of Inaccurately Recording Transactions
• Physical Controls
• ACCOUNTING RECORDS
• INDEPENDENT VERIFICATION
• IT Controls
• DATA INPUT EDITS
• ERROR MESSAGES
• FILE BACKUP
• AUTOMATED POSTING TO ACCOUNTS
CONTROLS (continued)
• Risk of Misappropriation of Cash through Payroll Fraud
• Physical Controls
• TRANSACTION AUTHORIZATION
• SEGREGATION OF DUTIES
• SUPERVISION
• ACCESS CONTROL
• IT Controls
1. Limit tests to detect excessive hours reported per period.
2. Biometric scanners, swipe cards, and PINs reduce the risk of
payroll fraud by ensuring that individuals clocking into the system
are valid employees.
3. Automated tests to validate employee time cards against a valid
and up-to-date employee file.
4. Paycheck direct deposit options for employees.
CONTROLS (continued)
• Risk of Unauthorized Access to Payroll Records and
Confidential Employee Data
• Payroll information is at risk to unauthorized access from
outsiders as well as employees of the organization.
• IT Controls
• PASSWORDS
• MULTILEVEL SECURITY
• Outsourcing the Payroll Function
• Advantages and Risks Associated with Payroll
Outsourcing
Summary of Payroll System Risks and Controls
The Conceptual Fixed Asset System
• Fixed assets are the property, plant, and equipment used
in the operation of a business.
• The specific objectives of the fixed asset system are to:
1. Process the acquisition of fixed assets as needed and in
accordance with formal management approval and
procedures.
2. Maintain adequate accounting records of asset acquisition,
cost, description, and physical location in the organization.
3. Maintain accurate depreciation records for depreciable assets
in accordance with acceptable methods.
4. Provide management with information to help plan for future
fixed asset investments.
5. Properly record the retirement and disposal of fixed assets.
THE LOGIC OF A FIXED ASSET SYSTEM
• Asset Acquisition
• Asset acquisition is obtaining a new asset or replacing an
existing one.
• Asset Maintenance
• A depreciation schedule is a record used to initiate
depreciation calculations.
• Asset Disposal
• Asset disposal is 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.
Data Flow Diagram for Fixed Asset System
Depreciation Schedule
THE PHYSICAL FIXED ASSET SYSTEM
• Acquisition Procedures
• When the fixed asset accounting clerk receives a receiving
report and a cash disbursement voucher. These documents
provide evidence that the firm has physically received the
asset and show its cost.
• Asset Maintenance
• The fixed asset system uses the depreciation schedules to
record end-of-period depreciation transactions 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.
Computer-Based Fixed Asset System
Fixed Assed Record Structure
Asset Status Report
Fixed Asset Depreciation Report
FIXED ASSET SYSTEM RISKS AND CONTROLS
• Authorization Controls
• Fixed asset acquisitions should be formal and explicitly
authorized.
• Supervision Controls
• Management supervision is an important element in the
physical security of fixed assets.
• Independent Verification Controls
• Periodically, the internal auditor should review the asset
acquisition and approval procedures to determine the
reasonableness of factors used in such decisions.

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Chapter 6

James A. Hall, Accounting Information Systems, 10th Edition. © 2019

• Key tasks of a basic technology system:

• The human resource management (HRM) system

• Employee Timekeeping (continued)

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