AIS Chapter 17 - Human Resources Management and Payroll Cycle

human capital management

the process of managing how people are hired, trained, assigned, motivated, retained, and fired

HCM philosophy has three main principles:

- an individual's value to an organization is derived from his/her job-related knowledge, skills, attitudes, and motivations

- human assets include full-time permanent employees, temporary employees, independent contractors, supply channel partners and employees, and customers

- a person's relationship with an organization, from hiring through firing, must be managed to obtain maximum lifetime value

Selecting employees may be initiated one of two ways:

1. department managers and supervisors may initiate the process to satisfy their immediate hiring needs

2. system may automatically start the selection process. these systems are tied to production needs

What is evaluating employees comprised of?

- department manager or supervisor initiates the evaluation of employees

- manager of personnel appraisal and development (in HR) typically approves the review and implements such changes

What are procedures for terminating employees?

- retraining offers to terminated employees

- preventing employee access to company systems and offices

- offering severance pay

Who is responsible for the payroll function?

traditionally, accountants are responsible for payroll functions

What are the five major sources of input to the payroll system?

1. HRM department provides information about hiring, terminations, and pay-rate changes

2. employees provide changes in discretionary deductions

3. various departments provide data about the actual hours worked by employees

4. government agencies provide tax rates and regulatory instructions

5. insurance companies and other organizations provide instructions for calculating and remitting various withholdings

What are the seven basic activities in the payroll cycle?

1. update payroll master file

2. update tax rates and deductions

3. validate time and attendance data

4. prepare payroll

5. disburse payroll

6. calculate employer-paid benefits and taxes

7. disburse payroll taxes and miscellaneous deductions

What does the HRM department provide?

information on new hires, terminations, changes in pay rates, and changes in discretionary withholdings

ghost employees

employees who don't exist but collect but collect a paycheck

falsification of hours

employee overstates number of hours worked

commission schemes

sales employees collecting commission on false sales or using false commission rates

workers comp schemes

faking injury to receive compensation

What are the controls to minimize payroll fraud types?

- segregation of duties (HR, payroll and AP/cashier should be separated)

- review of employee master data to look for duplicate names and/or social security numbers

- comparison of actual payroll to budgets

Reimbursement fraud

- claiming personal expenses as business related

- altering receipts to increase expenses

- submitting false receipts

- submitting same expense multiple times

Threats in Employment practices (1)

1. hiring unqualified or larcenous employees - can increase production expenses, can result in theft of assets, can result in civil and criminal penalties for the company

Controls: state skill qualifications for each position explicitly in the position control report; ask candidates to sign a statement confirming the accuracy of the information on their application ; conduct background checks and verify skills and references, including college degrees earned

Threats in Employment practices (2)

2. violation of employment law - can result in stiff government penalties as well as civil suits

Controls: carefully document all actions relating to advertising, recruiting, hiring new employees, and dismissal of employees, to demonstrate compliance; provide employees with continual training to keep them current with employment law

Threats in payroll processing (1)

1. unauthorized changes to the payroll master file - can increase expenses if wages, salaries, commissions, or base rates are falsified and can result inaccurate reporting and erroneous decisions

Controls: proper segregation of duties - only HRM department should be able to update payroll master file, HRM employees should not directly participate in payroll processing or distribution (prevents the creation of ghost employees and fraudulent checks), changes to the payroll master file should be reviewed and approved by someone other than the person recommending the change; restrict logical and physical access to the payroll system: utilize user IDs, passwords, and an access control matrix, control terminals from which payroll data and programs can be accessed

Who authorizes in this cycle?

Human Resources

Who records in this cycle?

Payroll

Who has custody in this cycle?

the cashier

Threats in payroll processing (2)

2. inaccurate time data - can result in payments for services not rendered, inaccurate or missing checks can damage employee morale, can result inaccurate labor reporting

Controls: automation can reduce intentional inaccuracies with badge readers, bar code scanners, online terminals; data entry programs should include edit checks (field checks for employee number and hours worked, limit checks on hours worked, validity checks on employee numbers); segregation of duties can reduce intentional inaccuracies

Threats in payroll processing (3)

3. inaccurate processing of payroll - errors damage employee morale, penalties can accrue if proper payroll taxes are not remitted to the government, court-ordered paycheck garnishments are not made appropriately

Controls: batch totals - run and reconcile batch totals before and after processing and at the end of each stage, including hash totals of employee numbers, cross-footing of payroll register

Payroll clearing accounts

a general ledger account is used in a two-step process:

- first step: payroll control account is debited for amount of gross pay, cash is credited for net pay, various liabilities are credited for withholdings

- second step: cost accounting process distributes labor costs to various expense categories and credits payroll control account for sum of the allocations

result should be a zero balance in the control account

Threats in payroll processing (4)

4. theft or fraudulent distribution of paychecks - payments may be made to fictitious or terminated employees resulting in increased expenses and loss of cash

Controls: restrict access to blank payroll checks and check signing machine, all checks should be sequentially pre-numbered and accounted for periodically, direct deposit, cashier should sign all checks, but only when supported by proper documentation, an impress payroll bank account should be used

Who updates the employee master file?

Human Resources

General threats

Loss, alteration, or unauthorized disclosure of data - can result in delayed and/or inaccurate paychecks and reports and unauthorized disclosure of confidential employee data can violate state and federal laws and damage employee morale

Controls: payroll files should be backed up regularly (at least one backup on site and one offsite), all disks and tapes should have external and internal file labels to reduce chance of accidentally erasing important data, access controls should be utilized: user IDs and passwords, compatibility matrices, controls for individual terminals, logs of all activities, particularly those requiring specific authorizations, should be maintained

Many entities outsource payroll and HRM to:

- payroll service bureaus (maintain the payroll master file and perform payroll processing activities)

- professional employer organizations (PEOs) - perform the services of the payroll service bureau, administer and design employee benefit plans

knowledge management systems

software that stores and organizes expertise possessed by individual employees so that the knowledge can be shared and used by others

What are the steps of the HRM/payroll cycle?

1. update payroll master database

2. validate time and attendance data

3. prepare payroll

4. disburse payroll

5. calculate and disburse employer-paid benefits, taxes, and voluntary employee deductions

time card

a document that records the employee's arrival and departure times for each work shift

time sheet

a data entry screen (or paper documents) used by salaried professionals to record how much time was spent performing various tasks for specific clients

payroll register

a listing of payroll data for each employee for a payroll period

deduction register

a report listing the miscellaneous voluntary deductions for each employee

earnings statement

A report listing the amount of gross pay, deductions, and net pay for the current period and the year-to-date totals for each category.

Information for distributing labor charges to jobs, departments, or other accounts comes primarily from:

a. attendance time cards

b. job time tickets

c. a temporal event

d. employee paychecks

b is correct answer

Which of the following represents a weakness in internal control regarding the human resources area?

a. the payroll staff distributes paychecks to employees in other departments

b. the payroll department supervisor makes decisions regarding the hiring of payroll department employees

c. the supervisors of all departments are responsible for initiating requests for salary increases for their subordinate employees

d. supervisors are responsible for reviewing and approving time reports of their subordinate employees

a is correct answer

Payroll deductions fall into the broad categories of..?

a. payroll tax withholding and voluntary deductions

b. unemployment and social security taxes

c. employment and income taxes

d. voluntary deductions and income taxes

a is correct answer

Which department should have the sole ability to provide information to the AIS about hiring, terminations, and pay rate changes?

a. payroll

b. timekeeping

c. production

d. human resources

d is correct answer

Payroll is one AIS application that is processed in what mode?

a. sequential

b. real time

c. batch

d. safe

c is correct answer

One threat to the HRM/payroll cycle is the potential for violation of employment laws. This threat relates directly to the process or activity of?

a. payroll processing

b. general activities found in the cycle

c. hiring and recruiting

d. training

c is correct answer

Which of the following internal controls methods transfers the exact amount of funds necessary to reimburse the account for payroll checks to be cashed?

a. approve attendance time data and job time data

b. use payroll clearing account

c. independent paycheck distribution

d. imprest payroll bank account

d is correct answer

The payroll supervisor usually reports directly to :

a. the treasurer

b. the cashier

c. the controller

d. the VP finance

c is correct answer

In an HR management process, needs requests, supervisor review, employee termination, and employee requests are approved by:

a. various departments

b. employees

c. computer

d. HR department

d is correct answer (HR does all authorization)

Which of the following is NOT one of the HR related events performed by the HR management process?

a. selecting employees

b. paying employees

c. evaluating employees

d. terminating employees

b is correct answer

The process of preparing paychecks for hourly employees is triggered by which of the following data flows?

a. validated attendance time cards

b. job time tickets

c. request from the supervisor

d. employee paychecks

a is correct answer

The department responsible for authorizing employee pay deductions is the ?

a. payroll department

b. HR

c. cashier

d. production department

b is correct answer