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Asset Procedures
CR
CR
CR
CR
CR
CR
DR
CR
Payroll Controls
Transaction authorization - the
personnel action form helps prevent:
terminated employees from receiving
checks
wage rates from being improperly
changed for current employees
Payroll Controls
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
Payroll Controls
Accounting Records - audit trail
includes:
time cards
job tickets
disbursement vouchers
labor distribution summary
payroll register
subsidiary ledger accounts
general ledger accounts
Payroll Controls
Access Controls - need to prevent
employees from having improper access
to:
accounting records, such as time cards
which can be altered
unsigned checks
Payroll Controls
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
17
PERSONNEL, PAYROLL
DOCUMENTS
Personnel records
Time record
Payroll register
Employee earnings
record
PERSONNEL RECORDS
18
INTERNAL CONTROL
OBJECTIVES
Authorization
Execution
Recording
Access to assets
Segregation of duties
19
AUTHORIZATION:
Objective, Errors, Procedure
Objective
Error
Employees
hired
according to
criteria
Excessive
training,
relocation costs;
equal opportunity
Clear hiring
policies,
procedures;
updated records
Compensati
on
deductions
according to
authorizatio
n
Excessive labor
costs; violation
union contracts;
inaccurate
accruals
Updated listings
pay rates,
deductions;
review, approval
Procedure
Clear adjustment
policies,
procedures
EXECUTION:
Objective, Errors, Procedure
Objective
Payroll,
personnel
procedures
authorized
Error
Misappropriated
cash from
paychecks for
terminated, fictitious
employees
All payroll
Misappropriated
disbursemen cash, overstated
ts for
labor costs
recognized
21
liability
Procedure
Personnel,
payroll
procedures
manual
Periodically
verify employee
assignments
Prenumber,
control time
records,
paychecks,
adjustment
RECORDING:
Objective, Errors, Procedure
Objective
Amounts due
employees at
proper
amounts,
time periods,
classification
22
Error
Procedure
Payroll costs
inaccurate;
misstated
expenses;
details do
not agree
Document
account
distribution
procedures;
reconcile ledgers,
journals; physical
barriers unused
documents,
forms
ACCESS:
Objective,
Errors,
Procedure
Objective
Error
Procedure
Access to
personnel,
payroll
records,
forms,
documents
restricted to
authorized
personnel
23
Records,
forms,
documents
misused;
unauthorize
d labor costs
Prenumber, contro
forms, documents
Segregate
authorizing,
executing,
recording;
maintain listings
authorized
signatories
CONSIDERING INTERNAL
CONTROL: Payroll
Obtain understanding
Preliminary review
Document system
Perform transaction walkthrough
Determine whether controls are
potentially reliable in assessing
control risk below maximum
Test controls
24
TESTS OF CONTROLS:
Personnel & Payroll
Obtain payroll register
Verify mathematical accuracy
TESTS OF CONTROLS:
Distribution
Paychecks
Obtain sample canceled payroll checks
Trace details to payroll register
Compare endorsements to signatures in
file
26
SUBSTANTIVE TESTS:
Payroll
Obligations, Valuation
Determine by analytical procedures,
reasonableness
28
ANALYTICAL PROCEDURES:
Payroll & Accruals
Compare ratios
Total payroll expenses & accrued
expense with prior years; & adjusted
for pay rate changes
Direct labor to budgets, sales, prior
years
Commissioned sales payroll: sales X
average commission rates
Payroll tax expense to payroll with
prior years
29
MANIPULATED EARNINGS:
Capitalized Costs at Safety-Kleen
CEO, CFO, others capitalized payroll costs
to unrealized contingent-contract claims
to understate period expenses
Board investigation reduced income for
1997 1999 by $534 million
SEC filed suit alleging management
falsely represented financial statements
30
AUDIT JUDGMENT
Required for
Postretirement benefits other
than pensions
Health care obligations
32
Dec
lin
2. Depreciation.
3. Subsequent
expenditures.
e in
ass
ets
s
er v
ice
Cost
4. Disposal
of asset.
pot
e
ntia
l
Salvage
value
ComputerBased
FAS
Flowchart
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
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
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.
Asset Disposal
At the end of an assets 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.
FAS Controls
Authorization - should be formal and
explicit because of high cost of FAS:
acquisitions
changes in depreciation methods
FAS 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)