Expenditure Cycle: Payroll and Fixed Asset Processes Summary

Learning Objectives

  • Recognize fundamental tasks of payroll and fixed asset processes.
  • Identify functional departments involved in payroll and fixed asset activities and trace transaction flow.
  • Specify documents, journals, and accounts for audit trails and historical records.
  • Understand risks in payroll and fixed assets and recognize controlling measures.
  • Be aware of the technology's operational features and control implications.

Conceptual Payroll System

  • Payroll processing resembles a purchasing system where labor is 'purchased'.
  • Unique procedures are necessary due to:
    1. Ability to create general purchasing procedures for all vendors.
    2. Regularity of general expenditure activities.
    3. Need for special controls on employee payments.

Payroll System General Tasks

  • Personnel Department: Uses personnel action forms to manage employee pay changes.
  • Production Department: Uses job tickets and time cards to record employee work time.
  • Cost Accounting: Updates WIP account with labor distribution summaries.
  • Payroll Preparation:
    • Employee Payroll Records: Track and report employee pay.
    • Payroll Register: Document detailing gross pay, deductions, and net pay.
    • Imprest Account: Used for managing payroll checks.

Update General Ledger

  • Integrates labor distribution, disbursement voucher, and journal voucher.
  • Ensures equal debits and credits in entries.

Physical Payroll System

  • Discusses features and controls specific to payroll technology systems.

Technology in Payroll Systems

  • Basic Technology Tasks:
    1. Personnel and time attendance initiation.
    2. Payroll calculation and paycheck distribution.
    3. Information reconciliation by cost accounting and accounts payable.
    4. General ledger reconciliation.
  • Advanced Technology Features:
    • Real-time HRM systems for personnel data.
    • Modern timekeeping via biometric systems or mobile devices.

Payroll System Risks and Internal Controls

  • Risk of Inaccurate Transactions: Addressed by physical controls and IT controls like data input edits and automated postings.
  • Risk of Payroll Fraud: Managed through authorization, segregation of duties, and supervision.
  • Unauthorized Access Risks: Use of passwords and multilevel security.

Conceptual Fixed Asset System

  • Fixed assets are essential for business operations. Objectives include:
    1. Acquisition processes with formal approval.
    2. Maintenance of asset records.
    3. Accurate depreciation tracking.
    4. Future planning information.
    5. Recording disposal of fixed assets.

Logic of a Fixed Asset System

  • Acquisition, maintenance, and disposal of assets are key processes.

Fixed Asset System Risks and Controls

  • Emphasizes the need for authorization controls, supervision for physical security, and independent verifications by internal auditors.