After studying this chapter, you should:
• Recognize the fundamental tasks that constitute the payroll and fixed asset processes.
• Be able to identify the functional departments involved in payroll and fixed asset activities and trace the flow of these transactions through the organization.
• Be able to specify the documents, journals, and accounts that provide audit trails, promote the maintenance of historical records, and support internal decision making and financial reporting.
• Understand the exposures associated with payroll and fixed asset activities and recognize the controls that reduce these risks.
• Be aware of the operational features and the control implications of technology used in payroll and fixed asset systems.
This chapter is divided into two major sections. The first begins with a conceptual overview of the payroll process emphasizing logical tasks, key entities, sources and uses of information, and the flow of key documents through an organization. We illustrate these features first with a manual system and then consider the operational and control issues related to computer-based alternatives. The second section examines fixes asset systems. Fixed assets are the property, plant, and equipment used in the operation of a business. This discussion focuses on processes pertaining to the acquisition, maintenance, and disposal of its fixed assets. Finally, we illustrate these concepts with a real-time example.
The Conceptual Payroll SystemPayroll processing is actually a special-case purchases system in which the organization purchases labor rather than raw materials or finished goods for resale. The nature of payroll processing, however, creates the need for specialized procedures, for the following reasons:
1. A firm can design general purchasing and disbursement procedures that apply to all vendors and inventory items. Payroll procedures, however, differ greatly among classes of employees. For example, different procedures are needed for hourly employees, salaried employees, piece workers, and commissioned employees. Also, payroll processing requires special accounting procedures for employee deductions and withholdings for taxes that do not apply to trade accounts.
2. General expenditure activities constitute a relatively steady stream of purchasing and disbursing transactions. Business organizations thus design purchasing systems to deal with their normal level of activity. Payroll activities, on the other hand, are discrete events in which disbursements to employees occur weekly, biweekly, or monthly. The task of periodically preparing large numbers of payroll checks in addition to the normal trade account checks can overload the general purchasing and cash disbursements system.
3. Writing checks to employees requires special controls. Combining payroll and trade transactions can encourage payroll fraud. Although specific payroll procedures vary among firms, Figure 6-1 presents a data flow diagram (DFD) depicting the general tasks of the payroll system in a manufacturing firm. The key points of the process are described below.
The personnel department prepares and submits personnel action forms to the prepare payroll function. These documents identify employees authorized to receive a paycheck and are used to reflect changes in hourly pay rates, payroll deductions, and job classification. Figure 6-2 shows a personnel action form used to advise payroll of an increase in an employee’s salary.
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. These are sent to the prepare payroll function for calculating the amount of the employee’s paycheck. Figure 6-3 illustrates a job ticket, and Figure 6-4 illustrates a time card.
Each day at the beginning of the shift, employees place their time cards in a special clock that records the time. Typically, they clock out for lunch and at the end of the shift. This time card is the formal record of daily attendance. At the end of the week, the supervisor reviews, signs, and sends the time cards to the payroll department.
Update WIP Account
After cost accounting allocates labor costs to the WIP accounts, the charges are summarized in a labor distribution summary and forwarded to the general ledger function.
The payroll department receives pay rate and withholding data from the personnel department and hours-worked data from the production department. A clerk in payroll then performs the following tasks.
1. Prepares the payroll register (Figure 6-5) showing gross pay, deductions, overtime pay, and net pay.
2. Enters the above information into the employee payroll records (Figure 6-6).
3. Prepares employee paychecks (Figure 6-7).
4. Sends the paychecks to the distribute paycheck function.
5. Files the time cards, personnel action form, and copy of the payroll register (not shown).
A form of payroll fraud involves submitting time cards for nonexistent employees. To prevent this, many companies use a paymaster to distribute the paychecks to employees. This individual is independent of the payroll process—not involved in payroll authorization or preparation tasks. If a valid employee does not claim a paycheck, the paymaster returns the check to payroll. The reason the check went unclaimed can then be investigated.
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. The clerk records the voucher in the voucher register and submits the voucher packet (voucher and payroll register) to cash disbursements. A copy of the disbursement voucher is sent to the general ledger function.
Prepare Cash Disbursement
Upon receipt of the voucher packet, the cash disbursements function prepares a single check for the entire amount of the payroll and deposits it in the payroll imprest account.
The employee paychecks are drawn on this account, which is used only for payroll. Funds must be transferred from the general cash account to this imprest account before the paychecks can be cashed. The clerk sends a copy of the check along with the disbursement voucher and the payroll register to the AP department, where they are filed (not shown). Finally, a journal voucher is prepared and sent to the general ledger function.
Update General Ledger
The general ledger function receives the labor distribution summary from cost accounting, the disbursement voucher from AP, and the journal voucher from cash disbursements. With this information, the general ledger clerk makes the following accounting entries:
The debits and credits from these entries must equal. If they do not, there is an error in the calculation of either labor distribution charges or payroll. When the equality has been verified, the clerk files the voucher and labor distribution summary.
Transaction Authorization :
A form of payroll fraud involves submitting time cards for employees who no longer work for the firm. To prevent this, the personnel action form helps payroll keep the employee records current. This document describes additions, deletions, and other changes to the employee file and acts as an important authorization control to ensure that only the time cards of current and valid employees are processed.
Segregation of Duties :
The time-keeping function and the personnel function should be separated. The personnel function provides payroll with pay rate information for authorized hourly employees. Typically, an organization will offer a range of valid pay rates based on experience, job classification, seniority, and merit. If the production (time-keeping) department provided this information, an employee might submit a higher rate and perpetrate a fraud.
For purposes of operational efficiency, the payroll function performs several tasks. Some of these are in contradiction with basic internal control objectives. For example, the payroll function has both asset custody (employee paychecks) and record-keeping responsibility (employee payroll records). This is the equivalent in the general purchases system of assigning accounts payable and cash disbursement responsibility to the same person.1 Segregating key aspects of the payroll transaction between AP and cash disbursement functions returns control to the process. AP reviews the work done by payroll (payroll register) and approves payment. Cash disbursements then writes the check to cover the total payroll. None of the employee paychecks is a negotiable instrument until the payroll check is deposited into the imprest account.
Supervision : Sometimes employees will clock in for another worker who is late or absent. Supervisors should observe the time-keeping process and reconcile the time cards with actual attendance.
Accounting Records :
The audit trail for payroll includes the following documents
1. Time cards, job tickets, and disbursement vouchers.
2. Journal information, which comes from the labor distribution summary and the payroll register.
3. Subsidiary ledger accounts, which contain the employee records and various expense accounts.
4. The general ledger accounts: payroll control, cash, and the payroll clearing (imprest) account.
: Access Controls :
The assets associated with the payroll system are labor and cash. Both can be misappropriated through improper access to accounting records. A dishonest individual can misrepresent the number of hours worked on the time cards and thus embezzle cash. Similarly, control over access to all journals, ledgers, and source documents in the payroll system is important, as it is in all expenditure cycle systems.
Independent Verification :
The following are examples of independent verification controls in the payroll system:
1. Verification of time. Before sending time cards to payroll, the supervisor must verify their accuracy and sign them.
2. Paymaster. The use of an independent paymaster to distribute checks (rather than the normal supervisor) helps verify the existence of the employees. The supervisor may be party to a payroll fraud by pretending to distribute paychecks to nonexistent employees.
3. Accounts payable. The AP clerk verifies the accuracy of the payroll register before creating a disbursement voucher that transfers funds to the imprest account.
4. General ledger. The general ledger department provides verification of the overall process by reconciling the labor distribution summary and the payroll disbursement voucher
The Physical Payroll System
In this section we examine the physical payroll system. This begins with a very brief review of manual procedures.2 We then move on to review examples of automated and reengineered payroll systems.
1 This opens the opportunity for the person to create a false liability to himself (or an agent), approve payment, and write the check.
2 At this point you should be able to navigate the payroll document flowchart with little need for supporting narrative.
Manual Payroll System
Figure 6-8 presents a flowchart detailing the previous procedures in the context of a manual system. The following key tasks are discussed.
1. 1. Payroll authorization and hours worked enter the payroll department from two different sources: personnel and production
2. The payroll department reconciles this information, calculates the payroll, and distributes paychecks to the employees.
3. Cost accounting receives information regarding the time spent on each job from production. This is used for posting to WIP account.
4. AP receives payroll summary information 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 AP. Control accounts are updated to reflect these transactions.
Computer-Based Payroll Systems
Automating the Payroll System Using Batch Processing
Because payroll systems run periodically (weekly or monthly), they are well suited to batch processing. Figure 6-9 shows a flowchart for such a system. The data processing department receives hard copy of the personnel action forms, job tickets, and time cards, which it converts to digital files. Batch computer programs perform the check writing, detailed record keeping, and general ledger functions
The strengths and weaknesses of this system are similar to those in the batch system for general expenditures discussed earlier. This system promotes accounting accuracy and reduces check-writing errors. Beyond this, it does not significantly enhance operational efficiency; however, for many types of organizations, this level of technology is adequate.
Reengineering the Payroll System
For moderate-sized and large organizations, payroll processing is often integrated within the human resource management (HRM) system. The 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 realtime access to personnel files for purposes of direct inquiries and recording changes in employee status as they occur. Figure 6-10 illustrates a payroll system as part of an HRM system.
This system differs from the simple automated system in three ways: (1) the various departments transmit transactions to data processing via terminals, (2) direct access files are used for data storage, and (3) many processes are now performed in real time. We discuss the key operating features of this system next.
["]Personnel : The personnel department makes changes to the employee file in real time via terminals. These changes include additions of new employees, deletions of terminated employees, changes in dependents, changes in withholding, and changes in job status (pay rate).
Cost Accounting : The cost accounting department enters job cost data (real time or daily) to create the labor usage file.
Time-Keeping : Upon receipt of the approved time cards from the supervisor at the end of the week, the time-keeping department creates the current attendance file.
Data Processing : At the end of the work period, the following tasks are performed in a batch process:
1. Labor costs are distributed to various WIP, overhead, and expense accounts.
2. An online labor distribution summary file is created. Copies of the file are sent to the cost accounting and general ledger departments.
3. An online payroll register is created from the attendance file and the employee file. Copies of the files are sent to the AP and cash disbursements departments.
4. The employee records file is updated.
5. Payroll checks are prepared and signed. They are sent to the treasurer for review and reconciliation with the payroll register. The paychecks are then distributed to the employees.3
6. The disbursement voucher file is updated and a check is prepared for the funds transfer to the payroll imprest account. The check and a hard copy of the disbursement voucher are sent to cash disbursements. One copy of the voucher is sent to the general ledger department, and the final copy is sent to AP.
7. At the end of processing, the system retrieves the labor distribution summary file and the disbursements voucher file and updates the general ledger file.
The real-time features of the payroll system provide many of the operational benefits discussed earlier, including reductions in paper, clerical labor, and the lag time between event occurrence and recording them. As mentioned before, these features carry control implications. Computer-based systems must produce adequate records for independent verification and audit purposes. Also, controls must be implemented to protect against unauthorized access to data files and computer programs.
الذين يشاهدون الموضوع الآن: 1 (0 من الأعضاء و 1 زائر)