SECOND EDITION

Prepared by CobybyHarmon
Prepared Coby Harmon
Chapter University of California,
University Santa Barbara
of California, Santa Barbara
10-1 Westmont Westmont
CollegeCollege
 Expenditures Processes
and Controls-Payroll and
Fixed Assets
Chapter
10-2
 Study Objectives

1. An introduction to payroll and fixed asset processes

2. Payroll processes
3. Risks and controls in payroll processes
4. IT systems of payroll processes
5. Fixed asset processes
6. Risks and controls in fixed asset processes
7. IT Systems of fixed asset processes
8. Ethical issues related to payroll and fixed assets processes
9. Corporate governance in payroll and fixed assets processes

Chapter
10-3
 Real World Soon after implementing a new ERP system in 2003,
the Prince Georges County, Maryland, school district processed
the regular payroll for its 19,000 teachers, administrators, school bus drivers, and other employees.
Of those 19,000 paychecks, 1,400 were incorrect. In some cases, teachers were paid only 50
percent of what they were owed. In other cases, teachers were paid more than they were owed,
and had to return the overage. This is an extremely high number of errors for payroll, and
employees get very upset with such errors. The school district had just implemented a new $9.5
million integrated accounting software system from Oracle. However, after an investigation, it was
determined that the payroll errors were not hardware or software problems, but problems with
people and processes. The problems were related to the steps that employees used to submit time
cards for payrollin other words, payroll processes. The processes in this case that were faulty
included a time-consuming policy of assigning timekeepers at each school, who had to personally
review each time card before submission. Prince Georges County also had payroll employees who
were inadequately trained in the use of the new payroll module. A similar payroll debacle occurred
at the Los Angeles Unified School District when it implemented the payroll function of its ERP
system in 2007. In mid-2010, the district was still trying to recover $9 million of the $60 million in
overpayments that were made because of glitches in the system and errors made by employees.
An extensive investigation found several problems that led to these payroll problems (both
overpayments and underpayments), one of which was inadequate training for employees who
operated the payroll system.
Chapter
10-4
 Introduction to Payroll and Fixed Asset
Processes

Payroll processes
Acquiring and maintaining human resources.

Capturing and maintaining employee data.

Paying employees.

Recording cash and payroll liabilities and expenses.

Chapter
10-5 SO 1 An introduction to payroll and fixed asset processes
 Introduction to Payroll and Fixed Asset
Processes

Fixed asset processes

Purchasing property.

Capturing and maintaining relevant data about assets.

Paying for and recording the related assets.

Recording depreciation and other expenses.

Accounting for gains or losses.

Chapter
10-6 SO 1 An introduction to payroll and fixed asset processes
 Introduction to Payroll and Fixed Asset
Processes

Various risks
Recorded expenditures may not be valid.
Transactions may be recorded in the wrong amount.
Valid expenditure transactions may have been omitted.
Transactions may have been recorded in the wrong employee or
vendor account.
Transactions may not have been recorded in a timely manner.
Transactions may not have been accumulated or transferred to
the accounting records correctly.
Chapter
10-7 SO 1 An introduction to payroll and fixed asset processes
 Exhibit 10-1
Expenditure Processes within
the Overall System

Payroll and Fixed

Asset Processes

Chapter
10-8 SO 1 Payroll and fixed asset processes
 Introduction to Payroll and Fixed Asset
Processes

Concept Check
Which of the following statements about payroll and fixed asset
processes is true?

a. Both have only routine processes.

b. Both have only nonroutine processes.

c. Both have routine and nonroutine processes.

d. Payroll has only routine processes, while fixed asset has

only nonroutine processes
Chapter
10-9 SO 1 An introduction to payroll and fixed asset processes
 Payroll Processes

Terminology
Human resources department

Organization chart

Time sheet

Payroll register

Payroll disbursements journal

Chapter
10-10 SO 2 Payroll processes
 Payroll Processes

Exhibit 10-3
Payroll Process Map

See next slide for larger image.

Chapter
10-11 SO 2 Payroll processes
 Payroll Processes

Exhibit 10-3
Payroll Process Map

Chapter
10-12 SO 2 Payroll processes
 Payroll Processes

Exhibit 10-3
Payroll Process Map

Chapter
10-13 SO 2 Payroll processes
 Payroll Processes

Concept Check
For a given pay period, the complete listing of paychecks for the
pay period is a

a. payroll register.

b. payroll ledger.

c. payroll journal.

d. paymaster.

Chapter
10-14 SO 2 Payroll processes
 Payroll Processes

Concept Check
A payroll voucher

a. authorizes an employee paycheck to be written.

b. authorizes the transfer of cash from a main operating

account to a payroll account.

c. authorizes the transfer of cash from a payroll account to a

main operating account.

d. authorizes the paymaster to distribute paychecks.

Chapter
10-15 SO 2 Payroll processes
 Risks and Controls in Payroll Processes

Common procedures associated with the payroll

process:
Authorization of transactions

Segregation of duties

Adequate records and documents

Security of assets and documents

Independent checks and reconciliation

Cost-benefit considerations

Chapter
10-16 SO 3 Risks and controls in payroll processes
 Risks and Controls in Payroll Processes

Concept Check
For proper segregation of duties, the department that should
authorize new employees for payroll would be

a. payroll.

b. human resources.

c. cash disbursement.

d. general ledger.

Chapter
10-17 SO 3 Risks and controls in payroll processes
 Risks and Controls in Payroll Processes

Concept Check
Internal control problems would be likely to result if a companys
payroll department supervisor was also responsible for

a. reviewing authorization forms for new employees.

b. comparing the payroll register with the batch transmittal

data.

c. authorizing changes in employee pay rates.

d. hiring subordinates to work in the payroll department.

Chapter
10-18 SO 3 Risks and controls in payroll processes
 Risks and Controls in Payroll Processes

Concept Check
Which of the following departments or positions most likely
would approve changes in pay rates and deductions from
employee salaries?

a. Human resources

b. Treasurer

c. Controller

d. Payroll

Chapter
10-19 SO 3 Risks and controls in payroll processes
 IT Systems of Payroll Processes

Payroll requires routine mathematical calculations and

storing of a large volume of data regarding
employees, deductions,
vacation days,
Some organizations
sick days, and outsource
other data. payroll processing.

IT systems can include

payroll and human resources software,
automated timekeeping,
Internet-based timekeeping, and
electronic transfer of funds.
Chapter
10-20 SO 4 IT systems of payroll processes
 Real World
Scott Paper Company, a manufacturer and marketer of paper tissue
products, implemented an automated payroll system a few years ago.
Traditional time clocks and manual time sheets were replaced with
bar code readers that collect time and attendance data. Before its
new system was implemented, Scott management collected time
sheets by hand from thousands of employees, and personnel
manually keyed the numbers into a payroll system. Now the payroll
figures are electronically calculated and automatically fed into the
payroll system. Many different work schedules and complex pay and
deduction arrangements are accommodated. In terms of increased
efficiency, Scotts new approach paid for itself within its first year of
implementation.

Chapter
10-21 SO 4 IT systems of payroll processes
 IT Systems of Payroll Processes

Concept Check
An integrated IT system of payroll and human resources may
have extra risks above those of a manual system. Passwords
and access logs are controls that should be used in these
integrated systems to lessen the risk of

a. hardware failures.

b. erroneous data input.

c. payroll data that does not reconcile to time cards.

d. unauthorized access to payroll data.

Chapter
10-22 SO 4 IT systems of payroll processes
 Fixed Assets Processes

Fixed assets may include the following:

vehicles,

office equipment and computers,

machinery and production equipment,

furniture, and

real estate (such as land and buildings).

Chapter
10-23 SO 5 Fixed asset processes
 Fixed Assets Processes

Fixed Asset Acquisitions

Initiated by user department.

Large cash outlays sometimes required.

Non-routine transactions that require specific authorization.

Capital budget.

Fixed asset subsidiary ledger.

Chapter
10-24 SO 5 Fixed asset processes
 Fixed Assets Processes

Fixed Asset Continuance

Involves:
Updating cost data for improvements

Updating estimated figures as needed

Adjusting for periodic depreciation

Keeping track of physical location of assets

Depreciation schedule

Chapter
10-25 SO 5 Fixed asset processes
 Fixed Assets Processes

Fixed Asset Disposals

Four Basis Steps:
Date of disposal is noted, and depreciation computations
updated through this date.

Disposed assets are removed from fixed asset subsidiary

ledger.

Related depreciation accounts are removed.

Gains or losses are computed.

Chapter
10-26 SO 5 Fixed asset processes
 Fixed Assets Processes
Exhibit 10-11
Fixed Asset Disposal Process Map

See next slide for larger image.

Chapter
10-27 SO 5 Fixed asset processes
 Fixed Assets Processes

Exhibit 10-11
Fixed Asset Disposal Process Map

Chapter
10-28 SO 5 Fixed asset processes
 Fixed Assets Processes

Exhibit 10-11
Fixed Asset Disposal Process Map

Chapter
10-29 SO 5 Fixed asset processes
 Fixed Assets Processes

Concept Check
The purchase of fixed assets is likely to require different
authorization processes than the purchase of inventory. Which of
the following is not likely to be part of the authorization of fixed
assets?

a. Specific authorization

b. Inclusion in the capital budget

c. An investment analysis or feasibility analysis of the purchase

d. Approval of the depreciation schedule

Chapter
10-30 SO 5 Fixed asset processes
 Risks and Controls in Fixed Assets
Processes

Common procedures associated with the fixed asset

process:
Authorization of transactions

Segregation of duties

Adequate records and documents

Security of assets and documents

Independent checks and reconciliation

Cost-benefit considerations

Chapter
10-31 SO 6 Risks and controls in fixed asset processes
 Risks and Controls in Fixed Assets
Processes

Authorization of Transactions
Three Formal Steps:
Investment analysis

Comparison with the capital budget

Review of the proposal and specific approval

Exhibit 10-13
Fixed Asset
Approval Levels

Chapter
10-32 SO 6
 Risks and Controls in Fixed Assets
Processes

Concept Check
Which of the following is not a part of adequate documents and
records for fixed assets?

a. Fixed asset journal

b. Fixed asset subsidiary ledger

c. Purchase order

d. Fixed asset tags

Chapter
10-33 SO 6 Risks and controls in fixed asset processes
 Risks and Controls in Fixed Assets
Processes

Concept Check
Which of the following questions would be least likely to appear on an
internal control questionnaire regarding the initiation and execution of
new PP&E purchases?
a. Are requests for repairs approved by someone higher than the
department initiating the request?
b. Are prenumbered purchase orders used and accounted for?
c. Are purchase requisitions reviewed for consideration of soliciting
competitive bids?
d. Is access to the assets restricted and monitored?
Chapter
10-34 SO 6 Risks and controls in fixed asset processes
 Risks and Controls in Fixed Assets
Processes

Concept Check
Which of the following reviews would be most likely to indicate that a
companys property, plant, and equipment accounts are not understated?
a. Review of the companys repairs and maintenance expense
accounts.
b. Review of supporting documentation for recent equipment
purchases.
c. Review and recomputation of the companys depreciation expense
accounts.
d. Review of the companys miscellaneous revenue account.
Chapter
10-35 SO 6 Risks and controls in fixed asset processes
 IT Systems of Fixed Assets Processes

The efficiency and effectiveness of accounting for fixed

assets can be greatly improved through the use of
specialized asset management software. Such software
simplifies the
record keeping regarding location and description of fixed
assets,

depreciation and maintenance records,

audit trail, and

linkages to the general ledger.

Chapter
10-36 SO 7 IT systems of fixed assets processes
 Real World
Sophisticated fixed asset software offers many advantages. Tempel
Steel, a Chicago-based company with approximately 1900 employees,
uses FAS 500 Fixed Asset, a structured query language (SQL) software
to account for fixed assets. Prior to using this software, Tempel used an
older system and spreadsheets. The company estimated that the new
fixed assets software cuts paperwork in half and reduces the time spent
on capital project management by half. Pepsi-Cola, Jamaica, a Pepsi
bottler with approximately 300 employees, uses the same fixed asset
software as Tempel. Under its older system, the monthly update of fixed
assets took about three days; while it now takes only a few minutes. This
company also uses bar code technology to conduct inventory of fixed
assets. This improves the efficiency and effectiveness of the fixed asset
inventory process.

Chapter
10-37 SO 7 IT systems of fixed assets processes
 IT Systems of Fixed Assets Processes

Concept Check
Which of the following is not an advantage of fixed asset
software systems when compared with spreadsheets?

a. Better ability to handle nonfinancial data such as asset

location

b. Easier to apply different depreciation policies to different

assets

c. Manual processes to link to the general ledger

d. Expanded opportunities for customized reporting

Chapter
10-38 SO 7 IT systems of fixed assets processes
 Ethical Issues Related to Payroll and Fixed
Assets Processes

Typical sources of time sheet falsifications:

Exaggeration of hours worked

Falsification of overtime or holiday time worked

Falsification of sales in order to increase commission

payouts

Overstatement of job-related expenses

Chapter
10-39 SO 8 Ethical issues related to payroll and fixed assets processes
 Ethical Issues Related to Payroll and Fixed
Assets Processes

Ghost Employee
Clues that a ghost employee may exist:
Payroll register identifies paychecks without adequate tax
withholdings.
Personnel files contain duplicate addresses, Social Security
numbers, or bank account numbers.
Payroll expenses are over budget.
Paychecks not claimed when paymaster distributes them.
Paychecks contain dual endorsements.
Chapter
10-40 SO 8 Ethical issues related to payroll and fixed assets processes
 Ethical Issues Related to Payroll and Fixed
Assets Processes

Fixed asset information is more likely to be manipulated

by management to unethically enhance the financial
statements.
Often, this occurs when management misclassifies
expenses as fixed asset purchases.

Chapter
10-41 SO 8 Ethical issues related to payroll and fixed assets processes
 Real World A misclassification practice was performed at
WorldCom, Inc., as the company transferred
billions of dollars worth of facility-related expenses into asset accounts in
2001 and 2002. These misclassifications led to the restatement of
WorldComs financial statements and the ultimate downfall of the corporation.
Another misclassification case involves Krispy Kreme Doughnuts, Inc.
This company has been criticized for its aggressive practices related to fixed
assets reporting. When Krispy Kreme buys back its doughnut franchises, it
records the amounts paid as intangible assets, even though much of the
outlay is for fixed assets. It does not depreciate or amortize fixed assets, so
the related costs are not reported as expenses on the income statement.
Krispy Kreme defended its practices, claiming that the assets were not
impaired and should not be expensed until used. This is an earnings
management tactic that allowed the company to show favorable financial
results, despite its dwindling profits. Following an SEC investigation, Krispy
Kremes top executives agreed to settle the matter and pay monetary fines,
but they admitted no wrongdoing.
Chapter
10-42 SO 8 Ethical issues related to payroll and fixed assets processes
 Ethical Issues Related to Payroll

Concept Check
The term ghost employee means that

a. hours worked has been exaggerated by an employee.

b. false sales have been claimed to boost commission

earned.

c. overtime hours have been inflated.

d. someone who does not work for the company receives a

paycheck.

Chapter
10-43 SO 8 Ethical issues related to payroll and fixed assets processes
 Corporate Governance in Payroll and
Fixed Assets Processes

In addition to the need for

strong management oversight,

internal controls, and

ethical practices,

corporate managers must recognize their responsibility to be

good stewards of the assets underlying the payroll and
fixed assets processes.

Chapter
10-44 SO 9 Corporate governance in payroll and fixed assets processes
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Chapter
10-45