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Hall, Accounting Information Systems, 8e
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,in whole or in part.
Accounting Information Systems, 8e
James A. Hall
Chapter 6
The Expenditure Cycle
Part II: Payroll Processing
and Fixed Asset Procedures
1

Objectives for Chapter 6
 Fundamental tasks of payroll and fixed asset processes
 Functional depts. of payroll and fixed asset activities and
the flow of transactions through the organization
 Documents, journals, and accounts needed for audit
trails, record maintenance, 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
2

DFD of Payroll Procedures
3
Figure 6-1

Conceptual Payroll System
 Personnel dept. uses personnel action
forms to:
 activate new employees
 change the pay rate of employees
 change marital status and/or number of
dependents
 terminate employees
4

 Production employees fill out two forms:
 job tickets - account for the time spent by
the 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
5

 Cost Accounting dept:
 uses the job tickets to allocate labor
costs to WIP accounts
 summarizes these charges in a labor
distribution summary which is
forwarded to G/L dept.
6

 Payroll dept receives personnel action forms and
time cards.
 Uses them to:
 prepare the payroll register
 enter the information into the employee payroll
records
 prepare paychecks
 send paychecks to Cash Disbursements and a copy of
the payroll register to Accounts Payable
7

 Accounts Payable dept:
 prepares a cash disbursements
voucher for the total amount of the
payroll
 sends copies to the Cash
Disbursements and G/L depts.
8

 Cash Disbursements dept:
 reviews and signs the paychecks and
forwards them to a paymaster for
distribution to the employees
 writes a check for the payroll and
deposits it into the payroll imprest
account
9

Basic Technology Payroll System
10

Payroll Physical Controls
 Transaction authorization - the
personnel action form helps prevent:
 terminated employees from receiving
checks
 wage rates from being improperly
changed for current employees
11

 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
12

 Accounting Records - audit trail
includes:
 time cards
 job tickets
 disbursement vouchers
 labor distribution summary
 payroll register
 subsidiary ledger accounts
 general ledger accounts
13

 Access Controls - need to prevent
employees from having improper
access to:
 accounting records, such as time cards
which can be altered
 unsigned checks
14

 Independent Verification:
 verification of time cards
 distribution of paychecks to
authorized employees
 verification of accuracy of payroll
register by A/P dept.
 G/L dept. reconciles the labor
distribution summary and the payroll
disbursement voucher
15

Payroll IT Controls: Input
 Edit controls will minimize risk of corrupt WIP,
employee records, and payroll register
 Checks for missing data, numeric-alphabetic data, and
invalid data values
• reduce the risk of undetected data entry errors by clerks in the cost
accounting, personnel, payroll, accounts payable, and cash
disbursements departments.
 Check digit control
• provides control over accessing the wrong employee records by
payroll and personnel clerks.
16

Payroll IT Controls: Processing
 ERROR MESSAGES.
 Any mismatch when posting time card or personnel
action data to employee records should produce an
error message to the computer operator.
 PASSWORDS.
 Password control should be implemented on
department computers to reduce the risk of
unauthorized access to payroll files.
 FILE BACKUP.
 Backup procedures will reduce the risk of data loss
due to file destruction and/or corruption.
17

Payroll IT Controls: Output
 Output controls pertain to the loss or misdirection
of journal vouchers, account summaries, and
payroll checks.
 Output controls include e-mailing the digital copies of
the documents to secure mail boxes or having the
documents physically collected by authorized
personnel (or security officer).
 Direct deposit of digital paychecks into employee bank
accounts provides good control and eliminates the
need for a separate paymaster function.
18

Advanced Technology Payroll
 Payroll can be reengineered as a part of human
resource management (HRM).
 IT can process a wide range of personnel-
related data, including:
 employee benefits
 labor resource planning
 employee skills and training
 pay rates, deductions, and pay checks
 evaluations
19

Integrated Payroll and HRM system
20Figure 6-10

Key Operating Features
 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
21

Modern Time-Keeping Systems
 Biometric time clocks
 verify employees’ identities by using fingerprint or hand-vein
scan technology.
 Magnetic swipe ID cards
 work like a credit card 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.
 Mobile remote devices
 allow employees to clock in using handheld devices (PDA or
cell phone) or web browsers from laptop computers.
22

Advanced Tech. Physical Controls
23

Advanced Technology IT Controls
24

The Fixed Asset System (FAS)
 Fixed Assets - property, plant, and
equipment used in the operation of a
business
25

Objectives of FAS
 Acquire fixed assets in accordance with
management approval and procedures
 Maintain adequate accounting records of asset
acquisition, cost, description, and location
 Maintain 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
26

DFD of Fixed Asset System
27

Asset Acquisition
 Begins when a dept. manager determines that an
old fixed asset needs to be replaced or that a
new fixed asset is warranted
 A purchase requisition is filled out.
 May require an authorizing signature for items over a
pre-specified limit
 FAS dept. performs record-keeping functions.
28

Asset Maintenance
 Involves adjusting FAS subsidiary account
balances as assets depreciate
 Depreciation calculations are internal transactions
that the FAS system bases upon a depreciation
schedule.
 Physical improvements must also be recorded to
increase the subsidiary account balance and
depreciation schedule.
29

Asset Disposal
 At the end of an asset’s useful life (or
earlier disposition), the asset must be
removed from the records and
depreciation schedule
 Disposals require disposal request
forms and disposal reports as source
documents.
30

Computer-Based Fixed Asset System
31

Physical Fixed Asset System—
Acquisition
 Receipt of assets are digitally recorded in
the system, along with information such
as its useful life, depreciation methods,
etc.
 Ledgers are automatically updated
32

Maintenance
 Computerized FAS automatically:
 calculate current period’s depreciation
 update accumulated depreciation and book-value
fields in the subsidiary records
 post total depreciation to the affected general ledger
accounts
 record depreciation transactions by adding records to
the journal voucher file
33

Disposal
 Computerized FAS automatically:
 post adjusting entries to the fixed asset
control account in the general ledger
 record losses or gains associated with the
disposal transaction
 prepare journal voucher records
34

Fixed Asset System Controls
 Authorization - should be formal and explicit
because of high cost of FAS:
 acquisitions
 changes in depreciation methods
 Supervision - threat of misappropriation
requires constant management oversight:
 theft - secure physical locations of assets
 misuse - monitor on-the-job activities
35

Fixed Asset System Controls
 Independent Verification - internal auditors
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)
36

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