Accounting information systems controls and process 2nd tunnwe weickgenannt chapter 010

Ethical issues related to payroll and fixed assets processes 9.. Payroll has only routine processes, while fixed asset has only nonroutine processes Introduction to Payroll and Fixed Ass

Chapter

10-2

Expenditures Processes and Controls-Payroll and Fixed Assets

Chapter

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

Study Objectives

Study Objectives

Chapter

10-4

Real World

Real World Soon after implementing a new ERP system in 2003,

the Prince George’s 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 payroll—in 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 George’s 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

Payroll processes

 Acquiring and maintaining human resources.

 Capturing and maintaining employee data.

 Paying employees

 Recording cash and payroll liabilities and expenses

Introduction to Payroll and Fixed Asset

Processes

Introduction to Payroll and Fixed Asset

Processes

Chapter

10-6

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.

Introduction to Payroll and Fixed Asset

Chapter

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.

Introduction to Payroll and Fixed Asset

Processes

Introduction to Payroll and Fixed Asset

Processes

Chapter

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

Introduction to Payroll and Fixed Asset

Processes

Introduction to Payroll and Fixed Asset

Processes

Concept Check

Chapter

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

Payroll Processes

Payroll Processes

Concept Check

 Adequate records and documents

 Security of assets and documents

 Independent checks and reconciliation

 Cost-benefit considerations

Risks and Controls in Payroll Processes

Risks and Controls in Payroll Processes

SO 3 Risks and controls in payroll processes

Chapter

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

Risks and Controls in Payroll Processes

Risks and Controls in Payroll Processes

Concept Check

Chapter

10-18

Internal control problems would be likely to result if a company’s 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

Risks and Controls in Payroll Processes

Risks and Controls in Payroll Processes

SO 3 Risks and controls in payroll processes

Concept Check

Chapter

Which of the following departments or positions most likely

would approve changes in pay rates and deductions from

Risks and Controls in Payroll Processes

Risks and Controls in Payroll Processes

Concept Check

Chapter

10-20

Payroll requires routine mathematical calculations and

storing of a large volume of data regarding

 employees, deductions,

 vacation days,

 sick days, and

 other data

IT systems can include

 payroll and human resources software,

 automated timekeeping,

 Internet-based timekeeping, and

 electronic transfer of funds

IT Systems of Payroll Processes

IT Systems of Payroll Processes

SO 4 IT systems of payroll processes

Some organizations

outsource payroll processing.

Chapter

Real World

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, Scott’s new approach paid for itself within its first year of

implementation.

Chapter

10-22

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

IT Systems of Payroll Processes

IT Systems of Payroll Processes

SO 4 IT systems of payroll processes

Concept Check

Chapter

Fixed Assets 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

10-24

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.

Fixed Assets Processes

Fixed Assets Processes

SO 5 Fixed asset processes

Chapter

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

Fixed Assets Processes

Fixed Assets Processes

Chapter

10-26

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.

Fixed Assets Processes

Fixed Assets Processes

SO 5 Fixed asset processes

Chapter

Fixed Assets Processes

Fixed Assets Processes

Exhibit 10-11

Fixed Asset Disposal Process Map

See next slide for larger image.

Chapter

10-28

Fixed Assets Processes

Fixed Assets Processes

SO 5 Fixed asset processes

Exhibit 10-11 Fixed Asset Disposal Process Map

Chapter

Fixed Assets Processes

Fixed Assets Processes

Exhibit 10-11 Fixed Asset Disposal Process Map

Chapter

10-30

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

Fixed Assets Processes

Fixed Assets Processes

SO 5 Fixed asset processes

Concept Check

 Adequate records and documents

 Security of assets and documents

 Independent checks and reconciliation

 Comparison with the capital budget

 Review of the proposal and specific approval

Risks and Controls in Fixed Assets

Chapter

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

Risks and Controls in Fixed Assets

Processes

Risks and Controls in Fixed Assets

Processes

Concept Check

Chapter

10-34

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?

Risks and Controls in Fixed Assets

Chapter

Which of the following reviews would be most likely to indicate that a

company’s property, plant, and equipment accounts are not understated?

a Review of the company’s repairs and maintenance expense

d Review of the company’s miscellaneous revenue account.

Risks and Controls in Fixed Assets

Processes

Risks and Controls in Fixed Assets

Processes

Concept Check

Chapter

10-36

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.

IT Systems of Fixed Assets Processes

IT Systems of Fixed Assets Processes

SO 7 IT systems of fixed assets processes

Chapter

Real World

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

10-38

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

IT Systems of Fixed Assets Processes

IT Systems of Fixed Assets Processes

SO 7 IT systems of fixed assets processes

Concept Check

Chapter

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

Ethical Issues Related to Payroll and Fixed Assets Processes

Ethical Issues Related to Payroll and Fixed Assets Processes

Chapter

10-40

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.

Ethical Issues Related to Payroll and Fixed Assets Processes

Ethical Issues Related to Payroll and Fixed Assets Processes

SO 8 Ethical issues related to payroll and fixed assets processes

Chapter

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

Ethical Issues Related to Payroll and Fixed Assets Processes

Ethical Issues Related to Payroll and Fixed Assets Processes

Chapter

10-42

Real World

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

WorldCom’s 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 Kreme’s top executives agreed to settle the matter and pay monetary

fines, but they admitted no wrongdoing

SO 8 Ethical issues related to payroll and fixed assets processes