The document describes the payroll and fixed asset expenditure cycles for a company. It outlines the key steps in processing payroll, including timekeeping, payroll preparation, distribution of paychecks, and general ledger recording. It also outlines the acquisition, maintenance, and disposal of fixed assets. The document discusses important controls for both cycles, such as transaction authorization, segregation of duties, supervision, access controls, and independent verification.
The document describes the payroll and fixed asset expenditure cycles for a company. It outlines the key steps in processing payroll, including timekeeping, payroll preparation, distribution of paychecks, and general ledger recording. It also outlines the acquisition, maintenance, and disposal of fixed assets. The document discusses important controls for both cycles, such as transaction authorization, segregation of duties, supervision, access controls, and independent verification.
The document describes the payroll and fixed asset expenditure cycles for a company. It outlines the key steps in processing payroll, including timekeeping, payroll preparation, distribution of paychecks, and general ledger recording. It also outlines the acquisition, maintenance, and disposal of fixed assets. The document discusses important controls for both cycles, such as transaction authorization, segregation of duties, supervision, access controls, and independent verification.
The document describes the payroll and fixed asset expenditure cycles for a company. It outlines the key steps in processing payroll, including timekeeping, payroll preparation, distribution of paychecks, and general ledger recording. It also outlines the acquisition, maintenance, and disposal of fixed assets. The document discusses important controls for both cycles, such as transaction authorization, segregation of duties, supervision, access controls, and independent verification.
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EXPENDITURE CYCLE: PAYROLL
CONCEPTUAL SYSTEM: PAYROLL
1. Personnel department – hold relevant information about the employee; they authorize any changes in pay rates, deductions, and job classification.
2. Production department – prepare job tickets (used to account for direct labor) and time cards (used to capture the amount of time the employee is at work).
3. Update WIP account – WIP account is increased by the amount of direct labor.
4. Prepare payroll
Payroll department prepares a payroll register showing gross compensation,
deductions, and net pay Enters information in employee payroll records Prepares employee paychecks Sends paychecks to distribute paycheck function Files relevant documents such as payroll register
5. Distribute paycheck – companies may use a paymaster or an individual independent
from the authorization and preparation of payroll to distribute the paychecks.
6. Prepare accounts payable – AP clerk prepares a voucher packet for the payroll to be sent to cash disbursements department for release of checks
7. Prepare Cash Disbursement – transfer the cash from the general account to the payroll imprest account, where employees would draw their payments from.
8. Update GL – record in the GL the following accounts:
Payroll xx Accrued liabilities xx Accrued Payroll xx
WIP xx FOH xx SAE xx Payroll xx PAYROLL CONTROLS
Transaction Authorization
Personnel department keeps a current employee record indicating the
employees who currently work for the firm, their pay rates and deductions. Personnel department authorizes the payment of valid employees in the organization
Segregation of duties
Time-keeping function should be separated from personnel function
Time keeping records the number of hours an employee worked while personnel function authorizes the pay rates of an employee.
Supervision
Supervision must be done on the time in and out of employees during work hours
Accounting records The audit trail for payroll includes the following documents: 1. Time cards, job tickets and disbursement vouchers 2. Journal entries of payroll and distribution of labor to factory activities and administrative activities 3. Subsidiary ledgers 4. General ledgers
Access Controls
Restricted access should be imposed on cash and the documents used to record the number of labor hours spent by an individual
Independent verification
Verification of time – supervisors verify time cards for their accuracy
Paymaster – independent distributor of checks helps identify ghost employees Accounts payable – verifies the accuracy of payroll registers General ledger – verifies the overall payroll processes MANUAL PAYROLL SYSTEM 1. Personnel department authorizes the pay rates and deductions of employees; Production department provides job tickets, to determine the number of hours spent by factory workers on specific jobs, and time cards, to determine the number of hours spent by employees on a particular work.
2. Payroll department reconciles information, calculates payroll (payroll register) and
distributes the paychecks
3. Cost accounting receives information on direct labor then it is posted in WIP account
4. Accounts payable receives payroll information from payroll department and authorizes cash disbursement department to deposit a single check to the imprest account
5. GL department reflects the journal entries in the respective control accounts
EXPENDITURE CYCLE: FIXED ASSETS
Conceptual System: Fixed Asset 1. Asset acquisition Departmental manager can authorize the purchase of capital expenditures Acquisition procedures is the same with inventories except the fixed asset received is sent to the user rather than the warehouse
2. Asset maintenance It involves adjusting the balance of PPE by recording depreciation Adjusting the carrying amount of PPE by reflecting physical improvements
3. Asset disposal Asset disposal (selling the PPE) should be derecognized in the books Controls in the Fixed Asset System Authorization
Fixed assets should be formally and explicitly authorized by the department manager. Supervision
Supervisors must ensure that there is physical security of fixed assets
Independent Verification
Internal auditors should review the acquisition and approval procedures of fixed assets Internal auditors should review useful life of the asset, its acquisition cost and annual depreciation charges 1. The Golf Club Company makes custom golf clubs. The manufacturing supervisor interviews people who have specialized manufacturing skills, and he informs payroll when an employee is hired. The employees use a time clock to record the hours they work. The employees are also required to keep a record of the time they spend working on each order. The supervisor approves all time cards. The accountant analyzes the job tickets and prepares a labor distribution summary. Payroll prepares the payroll register and paychecks. The supervisor distributes the paychecks to the employees. Payroll informs cash disbursement of the funds required to cover the entire payroll amount. The cash disbursements clerk ensures that there are adequate funds in the company's regular checking account to cover the payroll.
Question: Identify two (2) internal control weaknesses and provide a recommendation to improve internal controls.
2. Describe an internal control procedure that would prevent a supervisor from stealing the unclaimed paychecks of employees who have been terminated. 3. Describe an internal control procedure that would prevent an employee from punching the time clock for another absent employee. 4. Describe an internal control that would prevent an employee from stealing a computer and then reporting it as scrapped. 5. What adverse consequences result when fixed asset records include assets that are no longer owned by the firm?
