AIS Chapter 6

who should authorize the disposal of fixed assets

. When an asset is taken out of service, the responsible manager issues a request to dispose of it. Like any other transaction, the disposal of an asset requires proper approval that will be determined by its nature and materiality. In some cases, multiple levels of management may be involved, in other situations the manager in charge of the asset may have the authority to dispose of it.

three categories of the fixed asset system

1. asset acquisition 2. asset maintenance 3. asset disposal

two documents prepared by the production department

1. job tickets 2. time cards

Two general forms of payroll fraud

1. nonexistent employee receives a paycheck 2. overpayment of an employee

where does independent verification take place in the payroll system

1. payroll reconciles time cards with list of active employees 2. gl reconciles labor dist. summary and salaried employee summary with cash voucher 3. upper mgmt reviews salaried employee summary 4. controller of IA performs a reconciliation

independent verification controls (3)

1. time and attendance (supervisors verify time cards and sign them) 2. A/p dept. ap clerk verifies accuracy of payroll register before creating disbursement voucher 3. general ledger- reconciles labor dist summary to payroll disbursement voucher

Asset Maintenance

A depreciation schedule is a record used to initiate depreciation calculations. Depreciation calculations are internal transactions that the fixed asset system bases upon the depreciation schedule The fixed asset system uses the depreciation schedules to record end-of-period depreciation transactions automatically. Physical improvements must also be recorded to increase the subsidiary account balances and depreciation schedule where the asset is must be tracked

why should employee's supervisor not distribute pay checks

A form of payroll fraud involves a supervisor submitting fraudulent time cards for nonexistent employees. The resulting paychecks, when given to the supervisor are then cashed by the supervisor. This type of fraud can be reduced or eliminated by using a paymaster to distribute paychecks to employees in person. Any uncollected paychecks are then returned to payroll.

why should employees clocking on and off the job be supervised

A form of payroll fraud involves employees clocking the time cards of absent employees. By supervising the clocking in and out process, this fraud can be reduced or eliminated.

why should employee paychecks be drawn against a special checking acct?

A separate imprest account is established for the exact amount of the payroll based on the payroll summary. When the paychecks are cashed, this account should clear leaving a zero balance. Any errors in checks (additional checks or abnormal amounts) would result in a non-zero balance in the imprest account and/or some paycheck would not clear. This will alert management to the problem so corrective action can be taken.

Prepare A/P

After summarizing the Payroll Register, A/P prepares a cash disbursements voucher for the total amount of the payroll. They send copies of the cash disbursements voucher to Cash Disbursements and also to the General Ledger (to be compared with Labor Distribution Summary)

what are the tree tasks of the fixed asset system

Asset acquisition, asset maintenance, and asset disposal

What stops individual departments from ordering unnecessary/excessive fixed assets?

Authorization must be granted by either the Budget Department, or by management before fixed assets are ordered by the Purchasing Department

internal control that would prevent acquisition office equipment that the firm does not need

Authorize fixed asset acquisitions; part of the authorization is showing that a need for the asset exists

why is it crucial to the integrity of the financial statements that the fixed asset department be informed of asset improvements and disposals

Because the fixed asset department authorizes the removal of the asset from the general ledger, they must know when to record the authorization. Further, if improvements or asset disposals are made and the fixed asset department is unaware, then the depreciation amounts calculated and reported in the financial statements will be incorrect.

what is the biometric time clock

Biometric time clocks verify employees' identities by using fingerprint or hand-vein scan technology. To protect employee privacy, these devices use a mathematical algorithm for verification rather than storing actual fingerprints in a database.

Prepare Cash Disbursement

Cash disbursements reviews and signs the paychecks and forwards them to a paymaster for distribution to the employees. Then they write a check for the total amount of payroll and deposit into the payroll imprest account. The payroll imprest account is an account into which a single check for the entire amount of the payroll is deposited. Why do we use a single account for payroll? If account is overdrawn, then we know there was a payroll problem! Summary of payroll distribution summary

personnel action forms

Document identifying employees authorized to receive a paycheck; the form is used to reflect changes in pay rates, payroll deductions, and job classification. Created by personnel department

Time cards/sheets

Documents the number of hours worked by hourly employees, created by production sent to payroll.

authorization controls- fixed asset

Fixed asset acquisitions should be formal and explicitly authorized because of the high cost of fixed assets

what controls reduce the risk that employees are clocking in for others

In a mobile and/or distributed workforce environment in which employees directly enter time and attendance data into the system, the organization is at risk from data entry errors and payroll fraud. Input controls reduce these risks. For example, limit tests are used to detect excessive hours reported per period. Also, check digits detect transcription errors in employee identification numbers. Finally, the use of biometric scanners, swipe cards, and PINs reduce the risk of payroll fraud by ensuring that the individuals clocking into the system are valid employees.

update WIP account

In the Production Department job tickets are used to update the Work In Process accounts and then the Cost Accounting Department prepares a labor distribution summary and forwards it to the general ledger to compare against payroll information. Job tickets are mechanisms to capture the time that individual workers spend on each production job. Collecting all the costs on each job (for product or client) Sorted by class (by client in accounting firms) Goes to cost accounting to general ledger Overtime is not always charged to a job so the job tickets and time cards may not equal each other but number of hours should match up Time cards are a tool to capture the time the employee is at work. These must be signed by a supervisor Where the people are recording their hours Go to payroll WIP accounts are used to track labor costs based on job tickets The Labor Distribution Summary is a summarization of labor costs in work-in-process accounts. Goes to general ledger

what are service industries that require their workers to use job tickets

Law firms require their employees to log the amount of time spent on each client for billing purposes. Accounting firms also require that their employees keep job tickets for the time they spend on each client. Car repair shops are another example. The mechanic must keep track of how much time he/she spends working on each automobile

What controls are needed over the disposal of fixed assets?

Main risks are authorization (i.e. trying to replace assets before necessary) and custody (i.e. trying to profit from assets that are being replaced but don't need to be) Disposals should be officially authorized and that authorization should occur at least one managerial level above the requestor's level Employee must "turn-in" asset to be disposed of. Sale of any fixed asset should be treated as a regular Sale/Cash Receipt transaction.

supervision controls

Need to monitor employees to ensure they are not "clocking in" for one anothera

what are negative consequences when fixed asset records include assets that the firm no longer owns

On the financial statements, assets will be overstated and depreciation expense could be overstated. Assets on property tax returns will be overstated and too much tax will be paid. Insurance premiums will be paid on nonexistent assets.

how can info systems reduce time lags

One example is the reduction in the time it takes to record the receipt of inventory into the inventory records. Further, the automated system will be less likely to pay an invoice early, while at the same time not missing the discount period. Thus, cash management is improved

unclaimed paychecks should never go to

Payroll

what are the time lags in the payroll system

Payroll costs such as wages to workers accrue each minute, hour or day that they work. However, these costs are not recorded as a liability during the time between when the workers earn their wages and when they are paid. These time lags typically average from half a week to a week. This time lag is of no concern until the firm is closing its books or preparing interim financial statements. At these points, however, estimates or accruals of the amounts owed should be made and the books should be adjusted.

Prepare Payroll

Payroll receives personnel action forms and time cards. These are used to prepare the payroll register and to enter the information into employee payroll records. Payroll then prepares the paychecks and sends them to Cash Disbursements. They also send a copy of the Payroll Register to A/P. Employee payroll records is the system an employer uses to calculate, track, and report employee pay. Personnel action form is a document identifying employees authorized to receive a paycheck; the form is used to reflect changes in pay rates, payroll deductions (someone gets married), and job classification (eligible for overtime?). It is also used to activate new employees and to terminate employees THIS IS THE FORM THAT STOPS THEM FROM ADDING RANDOM PEOPLE TO PAYROLL. Paychecks are bank checks given as salary or wages. The payroll register is a document showing gross pay, deductions, overtime pay, and net pay. One copy is filed One copy sent to accounts payable

what internal control would prevent payment of insurance premiums on a car that the company no longer owns

Perform an annual physical inventory of fixed assets and adjust the records to reflect assets no longer on hand. Prepare reports about the disposal of assets.

independent verification controls-fixed asset

Periodically, the internal auditor should review the asset acquisition and approval procedures to determine the reasonableness of factors (such as useful life, location, condition, etc.) used in such decisions.

internal control to prevent charging of dep expense to mainenance for a sweeper that is located in engineering

Prepare reports about the transfer of fixed assets. Perform an annual physical inventory and note the location of assets. Budget and then hold each department accountable for depreciation expense for assets located in each department.

what does the payroll clerk do

Prepares payroll register showing gross pay, deductions, overtime, net pay Enters information into employee payroll records Prepares employee paychecks Sends paychecks to distribute paycheck function Files timecards, personnel action form, and copy of the payroll register

objectives of fixed asset system

Process the acquisition of fixed assets as needed and in accordance with formal management approval and procedures. Maintain adequate accounting records of asset acquisition, cost, description, and physical location in the organization. Maintain accurate depreciation records for depreciable assets in accordance with acceptable methods. Provide management with information to help plan for future fixed asset investments. Properly record the retirement and disposal of fixed assets.

what are the objectives of a fixed asset system

Process the acquisition of fixed assets as needed and in accordance with formal management approval and procedures; b. Maintain adequate accounting records of asset acquisition, cost description, and physical location in the organization; c. Maintain accurate depreciation records for depreciable assets in accordance with acceptable methods; d. Provide management with information to help them plan future fixed asset investments; e. Properly record the retirement and disposal of fixed assets

what is a proximity card?

Proximity cards are similar to swipe cards but don't require the user to slide the card through a reader. Instead, the employee places the card in front of the reader to record attendance time. The advantage is that these cards can be read through wallets, purses, and card holders.

what does the payroll dept receive

Receives pay rate and withholding data from personnel Receives hours worked from production

cash disbursement

Receives voucher packet from AP , prepares single check and deposits it in the payroll imprest account Sends copy of check with disbursement voucher and payroll register to AP where they are filed and journal voucher is prepared and sent to update g/l function

general ledger dept

Receives: labor dist. Summary from cost accounting, disbursement voucher from AP, journal voucher from cash disbursements Makes journal entry Labor distribution summary je: Dr. WIP Dr. Factory overhead Cr. Wages Payable Cash Disbursement JE Dr. wages payable Cr Cash Cr taxes payable Labor distribution summary and voucher are then filed

Disposal Procedures

Requires additional authorization due to increased risk of theft of high value items Asset disposal is when an asset has reached the end of its useful life or when management decides to dispose of it, the asset must be removed from the fixed asset subsidiary ledger. The disposal report formally authorizes the fixed asset department to remove from the ledger an asset disposed of by the user department.

what does A/P do

Reviews payroll register for correctness and then prepares copies of cash disbursement voucher for total amount of the payroll Records voucher in voucher register and submits voucher packet to prepare cash disbursements function, and a copy of disbursement is sent to general ledger

Payroll Risks

Risk of Inaccurately Recording Transactions Risk of Misappropriation of Cash through Payroll Fraud Risk of Unauthorized Access to Payroll Records and Confidential Employee Data Payroll information is at risk to unauthorized access from outsiders as well as employees of the organization

if a f.a that is not fully depreciated is sold, but the f.a records are not adjusted, how this will affect financial statements

Since the asset remains on the books, depreciation on it will continue to be calculated. Fixed assets will be overstated, the depreciation amount charged in each period will be overstated, and equity will be misstated. Further, if insurance is being paid on assets no longer owned, an unnecessary expense will be incurred, thus lowering net income and retained earnings

what is a personnel action form

The Personnel Action Form is prepared by the Personnel Department for the authorization of new employees and changes in job class and pay rates. It enables the Payroll Department to prepare a list of currently active employees. Any submission of time cards by supervisors for fictitious or ex-employees should thus be detected.

what is the auditors role with respect to the fixed asset system

The auditor should review the authorization control procedures to determine the reasonableness of authorizations used for acquisition of fixed assets. The auditors should also examine the supervision controls over the physical guarding of the assets. Lastly, the auditors should periodically verify the location, condition, and fair value of the organization's fixed assets against the fixed asset records in the subsidiary ledgers. Also, the depreciation schedules should periodically be analyzed to determine the accuracy and completeness

how do fixed asset systems differ from purchase systems

The fixed asset system processes non-routine transactions for a wider group of users in the organization than the expenditure cycle. Further, the expenditure cycle processes routine acquisitions of raw materials inventories for the production function and finished goods inventories for the sales function. The expenditure cycle transactions are oftentimes automatically approved by the system, while fixed asset transaction approvals typically demand individual attention due to the uniqueness of the transactions. Additionally, fixed asset systems must include cost allocation procedures in order to account for the apportioned acquisition cost and depreciation of the fixed asset. This is not required as part of the previously discussed purchasing system, which handles inventory acquisitions that represent current-period expenses only

update general ledger

The general ledger function receives the labor distribution summary from cost accounting, the disbursement voucher from accounts payable, and the journal voucher from cash disbursements. An independent verification is performed to ensure the debits and credits match and then the general ledger is updated and the clerk files the journal voucher and the labor distribution summary.

what is the importance of the job ticket

The job ticket is used to allocate each labor hour of work to specific WIP accounts. These job tickets are very important for cost accounting. The job tickets are completed by production workers as they capture the total amount of time that they spend on each production job. Upon completion, they route these to the cost accountants who use them to post the labor costs to specific WIP accounts such as direct labor, indirect labor and overhead. The cost accountant prepares a labor distribution summary which contains the information for the general ledger clerk to make the necessary entries to the general ledger accounts

What controls are needed over the depreciation of fixed assets?

The only risk is improper recording. Depreciation procedures and amounts should be reviewed/checked periodically. A sample of Fixed Assets should be physically validated periodically as to their location/existence and use

Distribute Paychecks

The paymaster distributes the paychecks to the employees (or this process can be done by direct deposit).

what tasks does a payroll clerk perform upon receipt of hours worked data from the production dept

The payroll clerk reconciles the information received from personnel and production, calculates the payroll and distributes the paychecks. Further, the payroll clerk sends summary information to the accounts payable clerk.

what are the advantages of payroll outsourcing

The primary advantage of payroll outsourcing is cost savings. By transferring this function to a third party, the client organization avoids the salaries and benefit costs of running an inhouse payroll department. Also, the cost of continuing education for payroll staff is a financial burden. An in-house payroll department needs to be up to date on an ever-changing array of legal and technical matters. Such training is disruptive, costly, and can be avoided by outsourcing the payroll function.

what is an internal control that would prevent an employee from removing a computer and then reporting it as scrapped

The responsible supervisors must authorize the disposal of the computer

what are risks associated with payroll outsourcing

The risks associated with outsourcing are nontrivial. One is that an outside organization will have access to extremely confidential employee data and to the client firm's financial resources. Another risk is that the service provider will have poor internal controls and/or act incompetently in a way that causes material errors or fraud. A client organization may outsource any function it chooses, but it cannot outsource its responsibility for implementing adequate internal controls.

supervision controls- fixed assets

The threat of misappropriation requires constant oversight Management supervision is an important element in the physical security of fixed assets. Must secure physical locations of assets Protect from misuse by monitoring on-the-job activities

what information is found on the depreciation schedule? how can this info be verified?

The typical information found on a depreciation schedule is: type of asset, description, month, current depreciation amount, accumulated depreciation amount, book value, and asset location. Also, a group code may be assigned. The physical location of the asset is recorded, and the verification that this asset exists should be performed by physically observing the asset. The date and amount of the purchase of the asset can be verified by locating the original purchase order and invoice amount for the asset.

How are errors or misstatements in either the Fixed Asset Posting summary or the Fixed Asset Purchases Journal Voucher detected?

Through the G/L reconciliation of those two documents.

segregation of duties controls

Timekeeping and personnel functions should be separated use of independent paymaster

assets used for production are secured in a warehouse. who has custody of fixed assets

Unlike production assets, fixed asset inventory is distributed widely across the organization. Individual items such as automobiles, computers, and office furniture are in the custody of the end-users.

the following are all transactions processed in f.a. system except a. purchase of raw materials b. purchase of building c. repair of equip d. sale of company van e. all

a

who below is most likely to distribute paychecks a. paymaster b. timekeeping clerk c. personnel clerk d. supervisor

a

fundamental risks and control issues with f.a

a. Authorization controls. Because fixed assets are requested and employed by end-users asset acquisitions should be formal and explicitly authorized. Each material transaction should be initiated by a written request from the user or department. In the case of high-value items, there should be an independent approval process that evaluates the merits of the request on a cost-benefit basis. b. Supervision controls. Because capital assets are widely distributed around the organization, they are more susceptible to theft and misappropriation than inventories that are secured in a warehouse. Therefore, management supervision is an important element in the physical security of fixed assets. Supervisors must ensure that fixed assets are being used in accordance with the organization's policies and business practices. c. Independent verification controls. i. Periodically, the internal auditor should review the asset acquisition and approval procedures to determine the reasonableness of key factors including: the useful life of the asset, the original financial cost, proposed cost savings as a result of acquiring the asset, the discount rate used, and the capital budgeting method used in justifying decisions to buy or dispose of assets. ii. The internal auditor should verify the location, condition, and fair value of the organization's fixed assets against the fixed asset records in the subsidiary ledger. iii. The automatic depreciation charges calculated by the fixed asset system should be reviewed and verified for accuracy and completeness. System errors that miscalculate depreciation can result in the material misstatement of operating expenses, reported earnings, and asset values.

job tickets document

account for the time employees spend working on each production job, sent to cost accounting prepared by production

payroll imprest account

account into which a single check for the entire amount of the payroll is deposited

Time cards

are a tool to capture the time the employee is at work. These must be signed by a supervisor, created by the employees

Paychecks

are bank checks given as salary or wages

job tickets

are mechanisms to capture the time that individual workers spend on each production job.

WIP accounts

are used to track labor costs based on job tickets

an independent verification control in the payroll system is when a. the production dept compares the number of hours reported on job tickets to the number of hours reported on time cards b. the gl dept compares the labr dist summary from cost acct to the disbursement voucher from a/p c. the personnel dept compares the number of employees authorized to receie a paycheck to the number of paychecks prepared d. the payroll dept compares labor dis summary to the hours reported on time cards

b

which one of the following documents captures the total amt of time that individual workers spend on each production job a. time card b. job ticket c. personnel action form d. labor dist. form

b

Time keeping file tools

biometric time clocks (fingerprints) magnetif swipe id cards proximity cards mobile remote devices

all of the following controls are likely to apply to the f.a. system except a. formal analysis of purchase request b. review of assumptions used in capital budgeting model c. development of an economic order quantity model d. estimates of anticipated cost savings

c

human resource mgmt system

captures data about employee benefits, labor planning, internal training, direct access for planning and changes

employee records file

comprises the additions of new employees, deletions of terminated employees, changes in work dependents, changes in withholdings, and changes in job status such as job title and pay rate. Human resources clerks enter data into the employee records file in real time from terminals

who does the recording in the payroll system

cost acct records hourly wages personnel- salary wages payroll- processing/recording to employee payroll records

labor distribution summary

created by cost accounting, sent to GL function

which of the following are not f.a. control tasks a. authorizing acquisition of f.a. b. recording dep. exp c. computing g/ on disposal of f.a d. all above e. none above

d

which of the following is not a payroll system internal controls a. supervisors verify the accuracy of employee time cards b. the personnel dept. submits a personnel action form to the payroll dept c. paychecks are distributed by an independent paymaster d. the a/p dept verifies the accuracy of payroll register before transferring payroll funds to the general checking account

d

which one of the following docs captures the total amt of time that individual workers spend at the work location a. labor dist. form b. job ticket c. personnel action form d. time card e. none

d

which one of the following functions is responsible for submitting employee pay rate changes a. payroll b. treasurer c. cash disbursements d. personnel

d

all of the following data items are likely to be included in a fixed asset record except a. residual value b.book value c. dep method d. location e. all

e

what does HR do in advanced system

enter data into employee records file

what does cost accounting do in advanced system

enters job cost data into labor usage file.

which dept performs the formal record keeping function for fixed assets

fixed assets

what stops a payroll employee from issuing an additional payroll check to himself

g/l verification would be incorrect, not enough money in imprest account

time and attendance file

generated by employees directly entering timekeeping data in real time

advanced payroll systems are usually integrated with

human resource management system

Personnel action form

is a document identifying employees authorized to receive a paycheck; the form is used to reflect changes in pay rates, payroll deductions, and job classification. It is also used to activate new employees and to terminate employees- this is the form that allows the company to add a person to payroll

payroll register

is a document showing gross pay, deductions, overtime pay, and net pay.

The Labor Distribution Summary

is a summarization of labor costs in work-in-process accounts.

The payroll imprest account

is an account into which a single check for the entire amount of the payroll is deposited.

asset acquisition

is obtaining a new asset or replacing an existing one. The process 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. It may require an authorizing signature for items over a pre-specified limit The fixed asset accounting clerk maintains the fixed asset records (fixed asset subsidiary ledger). The clerk receives a receiving report and a cash disbursement voucher (or document that says whatever we paid for the asset). These documents provide evidence that the firm has physically received the asset and show its cost.

Employee payroll records

is the system an employer uses to calculate, track, and report employee pay.

Which document is used by the cost accounting dept. to allocate direct labor charges to work in progress?

job tickets

IT controls payroll system

limit tests to detect excessive hours reported per period. biometric scanners, swipe cards, and PINs reduce the risk of payroll fraud by ensuring that individuals clocking into the system are valid employees. automated tests to validate employee time cards against a valid and up-to-date employee file. paycheck direct deposit options for employees.

access controls

need to prevent employees from having improper access to: accounting records, such as time cards which can be altered unsigned checks

who has custody in the payroll system

paymaster cash disbursements

how to prevent submitting time cards for non existent employees

paymaster distributes checks to employees. paymaster is independent of the payroll process

What stops a departmental manager from issuing a time card ofr a ghost employee

payroll reconciles time cards with valid employee data on personnel action forms

What initiates the payroll process

personnel action forms from personnel and time/attendance information from production

Where is authorization necessary in the payroll system?

personnel authorizes payroll to generate paychecks dept. managers authorize hours on time cards

which dept authorizes changes in employee pay rates

personnel, through personnel action form

accounting records control

the audit trail includes: -time cards -job tickets -disbursement vouchers -labor distribution summary -payroll register -subsidiary ledger accounts -general ledger accounts -salaried employee summary

what doc shows when fixed assets are fully depreciated

the fixed asset dep schedule

what stops a payroll employee from increasing his/her pay

the g/l reconciliation. also not enough money in the imprest account, review of payroll register

What stops a departmental manager from issuing a time card for a recently fired employee

the personnel action form

Transaction Authorization Controls

the personnel action form helps prevent: terminated employees from receiving checks wage rates from being improperly changed for current employees

types of inaccurate recording transactions

time and attendance data inaccurate wages payable are unrecorded or are recorded in wrong period employee earnings and cash payments are inaccurately posted payroll register, a/p, and cash disbursements are incorrectly posted to respective GL accounts

what documents are included in the audit trail for payroll

time cards, job tickets, and disbursement vouchers. b. journal information which comes from the labor distribution summary and the payroll register. c. subsidiary ledger accounts (employee records and expense accounts). d. general ledger accounts (payroll control, cash, and payroll clearing).

Payroll Activities

•Update WIP Account •Prepare Payroll •Prepare A/P •Prepare Cash Disbursement •Distribute Paychecks •Update General Ledger