1. 1 Chapter 6 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

2. 2 Objectives for Chapter 6 zFundamental tasks that constitute the payroll and fixed asset processes zThe functional departments involved in payroll and fixed asset activities and the flow of these transactions through the organization zThe documents, journals, and accounts that provide audit trails, promote the maintenance of records, and support internal decision making and financial reporting zThe exposures associated with payroll and fixed asset activities and the controls that reduce these risks zThe operational features and the control implications of technology used in payroll and fixed asset systems

3. 3 Manual Payroll System zThe Personnel department uses personnel action forms to: yactivate new employees ychange the pay rate of employees ychange marital status and/or number of dependents yterminate employees

4. 4 Manual Payroll System zThe production employees fill out two forms: yjob tickets - account for the time spent by the individual worker on each production job ytime cards - used to capture the total time worked each pay period for payroll calculations; must be signed by a supervisor

5. 5 Manual Payroll System zThe Cost Accounting department: yuses the job tickets to allocate labor costs to WIP accounts ysummarizes these charges in a labor distribution summary which is forwarded to the General Ledger department

6. 6 Manual Payroll System zThe Payroll department receives the personnel action forms and the time cards. zIt uses them to perform the following tasks: yprepares the payroll register yenters the information into the employee payroll records yprepares paychecks ysends paychecks to Cash Disbursements and a copy of the payroll register to Accounts Payable

7. 7 Manual Payroll System zAccounts Payable department: yprepares a cash disbursements voucher for the total amount of the payroll ysends copies to the Cash Disbursements and General Ledger departments

8. 8 zCash Disbursements reviews and signs the paychecks and forwards them to a paymaster for distribution to the employees. zCash Disbursements writes a check for the payroll and deposits it into the payroll imprest account. Manual Payroll System

9. 9 zGeneral Ledger makes the following entries: yFROM LABOR DISTRIBUTION SUMMARY WIP (Direct Labor)DR Factory Overhead (Indirect Labor)DR Wages PayableCR yFROM DISTRIBUTION VOUCHER Wages PayableDR Cash CR Fed. Inc. Tax Withholding PayableCR State Inc. Tax Withholding Payable CR FICA Withholding Payable CR Other Withholding PayablesCR

10. 10 Manual Payroll System zFurther, 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 AccountDR Cash - Operating AccountCR

11. 11 Payroll Controls zTransaction authorization - the personnel action form is important in preventing: yterminated employees from receiving checks ywage rates from being improperly changed for current employees

12. 12 Payroll Controls zSegregation of Duties - timekeeping and personnel functions should be separated zSupervision - need to monitor employees to ensure they are not “clocking in” for one another

13. 13 Payroll Controls zAccounting Records - audit trail includes: ytime cards yjob tickets ydisbursement vouchers ylabor distribution summary ypayroll register ysubsidiary ledger accounts ygeneral ledger accounts

14. 14 Payroll Controls zAccess Controls - need to prevent employees from having improper access to: yaccounting records, such as time cards which can be altered yunsigned checks

15. 15 zIndependent Verification: yverification of time cards ydistribution of paychecks to authorized employees yverification of accuracy of payroll register by accounts payable ygeneral ledger reconciles the labor distribution summary and the payroll disbursement voucher Payroll Controls

16. 16 Computer-Based Payroll Systems zPayroll 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. zThe computer program performs the detailed recordkeeping, check-writing, and general ledger functions.

17. 17 Human Resource Management (HRM) Systems zA re-engineered IT that captures and processes a wide range of personnel- related data, including: yemployee benefits ylabor resource planning yemployee skills ypay rates and deductions yevaluations ypayroll

18. 18 Key Features of HRM Systems zPersonnel - can make changes to the employee file in real time zCost Accounting - enters job cost data either daily or in real time zTimekeeping - enters the attendance file daily zData Processing - still uses batch processing and prepares all reports, the checks, and updates the general ledger

19. 19 HRM Systems zdiffer from automated batch, sequential file systems in the following ways: yoperations depts. transmit transactions to data processing via terminals ydirect access files are used for storage ymany processes are performed real time yreal-time access to personnel files required for direct inquiries

20. 20 The Fixed Asset System (FAS) zFixed Assets - property, plant, and equipment used in the operation of a business

21. Life of a Fixed Asset 1. Acquisition of asset. 2. Depreciation. 3. Subsequent expenditures. 4. Disposal of asset. Asset cost Salvage value $ Time (useful life) Decline in asset’s service potential Cost

22. 22 Objectives of the FAS zProcess the acquisition of fixed assets as needed and in accordance with formal management approval and procedures zMaintain adequate accounting records of asset acquisition, cost, description, and physical location in the organization zMaintain accurate depreciation records for depreciable assets in accordance with acceptable method zProvide management with information to help it plan future fixed asset investments zProperly record the retirement and disposal of fixed assets

23. 23 Asset Acquisition zGenerally 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 zThe manager fills out a purchase requisition and may require a signature for items over a prespecified limit. zThe fixed asset department performs the recordkeeping function.

24. 24 Asset Maintenance zInvolves adjusting the fixed asset subsidiary account balances as the assets depreciate over time (or deplete with usage) zDepreciation calculations are internal transactions that the fixed asset system must process based upon a depreciation schedule. zPhysical improvements must also be recorded to increase the subsidiary account balance and depreciation schedule.

25. 25 Asset Disposal zAt the end of the useful life or an earlier disposition of the asset, the asset must be removed from the records. zThe disposal requires a disposal request and disposal report as source documents to remove the asset from the records and the depreciation schedules.

26. 26 Computer-Based Fixed Asset System--Acquisition zAcquisition - the receipt of the asset is recorded, along with information such as its useful life, depreciation methods, etc., and the ledgers are automatically updated

27. 27 Computer-Based Fixed Asset System--Maintenance zComputerized FAS will automatically: yCalculate current period’s depreciation yUpdate the accumulated depreciation and book-value fields in the subsidiary records yPost the total amount of depreciation to the affected general ledger accounts xdepreciation expense and accumulated depreciation yRecord the depreciation transaction by adding a record to the journal voucher file

28. 28 Computer-Based Fixed Asset System--Disposal zComputerized FAS will automatically: yPost an adjusting entry to the fixed asset control account in the general ledger yRecord any loss or gain associated with the disposal transaction yPrepare a journal voucher record

29. 29 Controlling the Fixed Asset System zAuthorization should be formal and explicit because of high cost of PPE: yacquisitions ychanges in depreciation methods zSupervision - threat of misappropriation requires constant management supervision: ytheft--secure the physical location of assets ymisuse--monitor on-the-job activities

30. 30 Controlling the Fixed Asset System zIndependent Verification Controls - the internal auditor should periodically verify FAS records: ythe reasonableness of factors used in decisions (useful life, discounts, budgeting model) ylocation, condition, and fair value of the fixed asset records in the subsidiary ledger ythe programming logic for automatic calculations (depreciation)