BP Chapter 6

Reason why people have different withholdings, but same income:

1) Exemptions - when you get a job you fill out a W4; determines how much your withholdings should be decreased 2) Filing stats - whether you are married or not 3) How much you make 4) Weekly income?

2 main controls required of auditors:

1) auditors are ALWAYS required to gain an understanding of the controls ---Inquiry - talk to people ---Walk trough a couple of transactions ---Look at documentation - job descriptions, flow charts, policy manuals Observation 2) auditors must DOCUMENT their understanding of the controls; if you didn't document it, it did not happen; options: ---Little narrative ---Flowchart NOTE: it is NOT required that auditors RELY on controls; but it sure makes their lives a hell of a lot easier if they do

Nature of the payroll processing system creates the need for specialized procedures for the following reasons:

1. A firm can design general purchasing and disbursement procedures that apply to all vendors and inventory items. Payroll procedure, however, differ greatly among classes of employees - hourly employees, salaried employees, piece workers, commissioned employees. Payroll processing requires special accounting procedures for employee deductions and withholdings for taxes. 2. General expenditure activities constitute a relatively steady stream of purchasing and disbursements. Payroll activities, contrastingly, are discrete events in which disbursements to employees occur weekly, biweekly, or monthly. The task of periodically preparing large numbers of payroll checks in addition to normal trade account checks can overload the general purchasing and cash disbursements system. 3. Writing checks to employees requires special controls. Combining payroll and trade transactions can encourage payroll fraud.

General payroll processing activities:

1. hiring - pay rates establishes, W4 filled out, part of employee perm file (personnel action file) 2. collecting of time info - easy, convenient, accurate 3. calculation of payroll - complex because withholdings 4. disbursement - direct deposit (still have to prepare a paper of electronic pay-stub that makes its way to cash disbursements journal?) or physical check 5. journal, sub ledger (employee records) - sub ledgers necessary because of the W4 obligation; job order costing- WIP 6. agree to GL 7. update job tickets

At the end of the work period, the following tasks are performed in a batch process:

1. labor costs are distributed to various WIP, overhead and expense accounts 2. an online labor distribution summary file is created - copies accessible from terminals in the cost accounting and GL departments 3. payroll is calculated, and an online payroll register is created form the time and attendance file and the employee records file - payroll register file is accessible from the AP and CD departments 4. employee records file is updated 5. paychecks are prepared, signed and distributed to the employees 6. funds sufficient to cover the full amount of the payroll are transferred to the payroll imprest account, and the transfer is recorded in the check register 7. digital journal vouchers are entered into the journal voucher file - the system automatically updates the GL from the journal voucher and the labor distribution summary files

The general ledger function receives:

1. labor distribution summary from cost accounting 2. disbursement voucher from AP 3. journal voucher from cash disbursements

Input controls to reduce payroll fraud:

1. limit tests to detect excessive hours reported per period 2. biometric scanners, swipe cards and PINs ensure that individual clocking into the system are valid employees 3. automated tests to validate employee timecards against up-to-date employee files 4. paycheck direct deposit options for employees

Risk if unauthorized access to payroll records; motives include:

1. malicious acts such as corrupting or deleting payroll data 2. theft of confidential employee info; SSN, pay rates 3. attempt to perpetrate a payroll fraud

Payroll fraud 2 general forms:

1. nonexistent employee receives a paycheck; phantom/ghost employee may be a complete fabrication or a laid-off employee 2. overpayment of an employee; inflation of hours works

Basic Technology Payroll System

1. personnel action and time and attendance info from the personnel and production departments initiate the payroll process 2. payroll department reconciles this info, calculates payroll and sends the paychecks to the paymaster for distribution 3. cost accounting receives info regarding the time spent on each job from production; used for posting to accounts in the WIP sub ledger 4. AP receives payroll summary info (payroll register) from the payroll department and authorized the CD department to deposit a single check, in the amount of the TOTAL payroll, in a bank imprest account on which the payroll is drawn 5. general ledger department reconciles summary info from cost accounting and AP; GL accounts are updates to reflect these transactions

Payroll Department Tasks

1. prepares the payroll register showing gross pay, deductions, overtime pay and net pay 2. enters this info into the employee payroll records 3. prepares employee paychecks 4. sends paychecks to the distribute paycheck function 5. files the time cards, personnel action form, and copy of the payroll register

Segregation of Duties

1. timekeeping function and personnel function - personnel function provides the payroll function with pay rate info for authorized hourly employees; if the production (time keeping) function were to provide this info, an employee may submit a higher rate 2. AP department approves the work of the payroll department (payroll register) and approves payment 3. Independent paymaster to distribute checks (rather than an employee supervisor) helps verify the existence of employees

Payroll Fraudulent Disbursement

4th most common fraudulent disbursement average loss = 72K

IF statement excel example

=IF(B3>127200,(127200*0.062),(B3*0.062)) =IF(logical test, if true, if false)

NOTE:

A client organization may outsource any function it chooses, but it cannot outsource its responsibility for implementing adequate internal controls

Advantages and Risks of Payroll Outsourcing

Advantages - cost savings; organization does not need an in-house payroll department (salaries, continued education/training) Risks - an outside organization will have access to extremely confidential employee data and to the client firm's financial resources -service provider may have poor internal controls and/or act incompetently in a way that allows material errors or fraud

Tax journal entry for weekly payroll, 20 hours, $10 an hour, federal withholding $16

DEBIT - salaries and wages expense $200 CREDIT - federal withholding payable 16 CREDIT - social security payable 12.40 CREDIT - Medicare payable 2.9 CREDIT - Net paycheck 168.7 --- DEBIT- payroll tax expense 15.30 CREDIT - SS payable 12.4 CREDIT - Medicare payable - 2.9

Periodic analytics on employees

If 2 people have same address, not too weird because 2 people might be married - 7 people with the same address, a bit strange

Payroll System - Manufacturing Firm Departments on a DFD

Production department Personnel department Employee Bank

Unemployment Taxes (Federal and State)

SOLEY the burden of the employer DEBIT - payroll tax expense CREDIT - some current liability

Payroll Processing

Special-case purchases system in which the organization purchases labor rather than raw materials or finished goods for resale

Passwords

_____ control should be implemented on department computers to reduce the risk of unauthorized access to payroll files users should be required and prompted to change _____ periodically 8 or more alphabetic and numeric characters = strong

File Backup

_____ procedures need to be in place to reduce the risk of data loss due to file destruction and/or corruption

Access Control

assets associated with the payroll system: labor and cash both can be misappropriated with improper _____ to accounting records

Adverse Opinion

auditors believes financial statements are NOT presented fairly

Disclaimer

auditors have NO opinion WHY? ---independence issues ---not enough evidence to have an opinion one way or another

Ghost employee events that must occur:

add to the payroll ----choose a similar name of someone that works there; someone peaking at the payroll register won't have anything stand out at them ---easiest/most common way: use someone who already was laid-off or quit collect time info paycheck issued delivery of paycheck ---job rotation is a very important control; ; if the paymaster comes up with scheme to pocket checks, once he gets rotated his scheme would end ---periodic verification of current employees ---comparison of payroll budgets to actuals

Labor Distribution Summary

after cost accounting allocates labor costs to the WIP accounts, the charges are summarized in a ___________ and forwarded to the general ledger function --- General ledger clerk can then: DEBIT work in process (direct labor) DEBIT factory overhead (indirect labor) CREDIT wages payable --- list of ALL workers and their allowance to each job

Mobile Remote Devices

allow employees to clock in using handheld devices or web browsers from laptops popular among businesses with employees in the field who travel between clients and with companies engaged in global business with foreign-based employees

QuickBooks

alternative to outsourcing payroll pretty good; it can do everything, if set up correctly

Error Messages

any mismatch when posting time card or personnel action data to employee records should produce an _____

Examples of control in payroll processing:

authorize new hires authorize time worked segregation of duties supervision access to files verification paymaster periodic verification of current employees compare budgeted payroll to actual impreset account custody procedures after control has taken place

Employee payroll record

individual employee pay and earnings information

Social Security

caps out; after you have made 127k (2017), they do not take out the 6.2% anymore ponzi scheme by the government take money from working people to give to not-working/old people there has been a surplus - long ago the government decided to take that surplus and use it for other things actuaries believe that by 2021 there will be a deficit; NOT BANKRUPTCY Note: Medicare - does not cap out

Job Tickets

capture the time that individual workers spend on each production job cost accounting uses these documents to allocate direct labor charges to WIP accounts supervisor reviews and signs

Time Cards

capture the time the employee is at work these are sent to the prepare payroll function for calculating the amount of the employee's paycheck formal record of daily attendance supervisor reviews and signs at the end of each week; sends to payroll department

Accounting Records

control objective is to maintain an audit trail adequate for tracing a transaction from its source document to the financial statements Audit Trail for Payroll: -time cards, job tickets, disbursement vouchers -journal info, which comes form the labor distribution summary and the payroll register - sub ledger accounts, which contain the employee records, WIP and various expense accounts -the GL accounts: payroll control, cash and the payroll CLEARING (imprest) account

IT Controls - examples

data input edits error messages file backup automated posting to accounts passwords multilevel security

Production Department

department that is responsible for hours-worked data

Personnel Department

department that is responsible for pay rate and withholding data

Payroll Imprest Account

employee paychecks are drawn on this account, which is used ONLY for payroll funds must be transferred from the general cash account to this _____ before paychecks can be cashed individual employee checks are not negotiable instruments until the payroll check is deposited into the _____ at the bank if someone performs a scam, they don't have to hit the company for a huge amount

Employee Timekeeping Department

employees directly enter timekeeping data in real-time to produce the TIME AND ATTENDANCE FILE --- technologies developed for this task: biometric time closes magnetic swipe ID cards proximity cards mobile remote devices

Human Resources Department

enter data into the employee records file in real time from terminals additions/deletions of employees, changes in work dependents, changes in withholdings, changes in job title and pay rate

Cost Accounting Department

enters job cost data in real to create the LABOR USAGE FILE

ASK JULIA

even if accounting was a complete disaster, auditors can propose adjustments that if made can lead to a clean opinion - WHAT IS THIS CALLED?

Qualified Opinion

everything is good "except for" - qualification; this exists here

Deviation

exception; times when control did not work

Human Resource Management (HRM) System

for moderate-sized and large organizations, payroll processing is often integrated within the ______ captures and processes a wide range of personnel-related data, including employee benefits, labor resource planning, employee relations, employee skills, internal training, personnel actions and payroll processing provide real-time access to personnel files for purposes of direct inquiries and making changes in employee status as they occur

HRM System Key Operating Features (payroll components)

human resources cost accounting employee timekeeping data processing

Pay-as-you-go system

if it was lump-sum at the end of the year, many people would not pay take some out of each check and apply it to your balance at the end of the year - that is why you end of with a refund at the end of the year

Automated Posting to Accounts

in advanced technology systems, computer applications perform many "physical" activities (timekeeping, personnel, AP, CD, GL) eliminating the human element reduces the potential for errors and significantly improves efficiency of operations benefits depend upon application integrity

Primary risks associated with payroll transactions:

inaccurately recording payroll transactions in accounts misappropriation of cash through payroll fraud unauthorized access to payroll records and confidential employee data

Production employees prepare 2 types of time records:

job tickets time cards

Multilevel Security

means of achieving segregation of duties in an integrated data processing environment where multiple users simultaneously access a common central application HR, AP, CD, cost accounting and GL personnel are limited in their access based on the privileges assigned to them

Excel cleansing

objective of a pivot table: allows us in a reasonable fashion to parse / drill down / analyze a large data set the trick is "cleansing" the worksheet in such a way that it will flow properly into a pivot table in the sheet just look at rows 4 to 11 ---a bunch of extraneous crap What do we really need? ---simply the four individual transactions in rows 5 to 8 ---our cleansing was to achieve that objective ---we needed to label each of the transactions in rows 5 to 8 as advertising expense and then simply get rid of the extraneous stuff and format it easily see comparisons, patterns, and trends enable you to make informed decisions about critical data in your enterprise all columns must have header field names or titles (vital) ---which is why we delete empty columns avoid blank cells especially in Column A ---avoiding blank cells in column A helps with the setup of dynamic named ranges and avoiding blank cells in the data fields helps the Pivot Table to select the correct summary function remove any totals or subtotals in the data rows, your pivot table will do all the summarizing you need (vital)

Check example one thousand six hundred forty-four and 43/100 dollars (1,644.43)

p. 259

Reconciliation

person _____ the payroll should have NO other function in the process recurring and timely basis

Transaction Authorization

personnel action form helps payroll keep current the employee records important control to ensure that only the time cards of current and valid employees are process

Internal Control Activities

physical controls IT controls

Personnel Action Forms

prepared and submitted by personnel department to prepare payroll function these documents identify employees authorized to receive a paycheck and are used to reflect changes in hourly pay rates, payroll deductions and job classification EX: form used to inform payroll of an increase in an employee's salary AKA "employee perm file"

Physical controls

purpose - to control the actions of people and consist of 6 classes of activities: 1. transaction authorization 2. segregation of duties 3. supervision 4. accounting records 5. access controls 6. independent verification

Amazon (longer document)

qualified opinion 2nd paragraph = scope paragraph ---says there are not MATERIAL mistakes, not no mistakes 3rd paragraph = DEFINTION paragraph ---defines internal control 4th paragraph = limitations paragraph 5th paragraph = opinion paragraph 6th paragraph = reference paragraph

How to prevent a Social Security deficit:

raise the age of individuals who receive the benefits (67 and 9 months) reduce the benefits of people who have significant sources of other income keep raising the cap of 127K Note: difference between taking it early at 62 or 6 years later is huge

Accounts Payable (AP) Clerk

reviews the payroll register for correctness and prepares copies of a cash disbursement voucher for the amount of the payroll records the voucher in the voucher register and submits the voucher packet (voucher and payroll register) to cash disbursements --- a copy of the disbursement is sent to the general ledger function --- General ledger clerk can then: DEBIT wages payable CREDIT cash CREDIT federal income tax withholdings payable CREDIT state income tax withholdings payable CREDIT FICA income tax withholdings payable CREDIT group insurance premiums payable CREDIT pension fund withholdings payable CREDIT union dues payable

ASK JULIA 2

secretaries as exposure?

Payroll register

shows gross pay, deductions, overtime pay and net pay for all employees ______ file is accessible from the AP and CD deparments

Proximity Cards

similar to swipe cards but do not require the user to slide the card through a reader employee places the card in front of the reader to record attendance time advantage - can be read through wallets, purses and cardholders

FICA (Federal Insurance Contributions Act)

social security (6.2%) Medicare - government healthcare (1.45%)

Supervision

sometimes employees clock in for another work who is late or absent _____ should observe the timekeeping process and reconcile the time cards with actual attendance

Federal Withholding - Circular E

the amount taken out of your paycheck is an ESTIMATE; pretty good guess what employers use to see how much they should take out of your check for federal withholding complex - a lot of different parts examples of items that can be taken out of paychecks (credit some other current liability): health insurance, child support, 401k, tax garnishment

Control Risk

the possibility that the controls would NOT prevent, detect or correct a misstatement in the ordinary course of business low, medium, high ---if high, you probably do not want to rely on it

Unqualified (clean) Opinion

there is no "except for" - everything is standard

Independent Verification -examples

time and attendance - supervisor must verify accounts payable - AP clerk verifies the accuracy of the payroll register because creating a disbursement voucher that transfers funds to imprest account general ledger - provides verification for the overall process by reconciling the labor distribution summary and the payroll disbursement voucher

Inaccurate Transaction Recording - examples

time and attendance calculated incorrectly wages payable go unrecorded or are recorded in the wrong period employee earnings and cash payments are inaccurately posted to employee records or are posted to the wrong employee payroll register, AP and CD amounts are incorrectly posted to their respective GL accounts

General documents in the payroll cycle:

time cards job tickets pay stubs checks to others payroll journal employee sub ledger personnel files paychecks

Data Input Edits

transaction data are assumed to be "dirty" and contain errors - transposed digits, invalid employee numbers, invalid pay rates, other clerical errors if not detected before processing, errors will corrupt the master files of the system input controls verify the integrity of transaction data being entered into the system examples: checks for missing data, numeric-alphabetic data tests, tests for invalid data values, check digits

Outsourcing Payroll

transferring all payroll processing tasks to a third-party provider service provider collects time and personnel action data, calculates the payroll, withholds taxes, deposits funds to employee accounts, provides, W-2 forms at year end in traditionally organized companies, client firm submits employee time data to the service provider weeks or biweekly via web connection alternatively, distributed workforce employees may submit their time and attendance data directly to the service provider by laptop or handheld devices employees may also access their accounts online and make changes to withholding, medical savings accounts and retirement plans service provider requires the client firm to set up a bank account and allow the payroll company to access it ---funds deposited into the bank account cover total payroll, funds transfers to state and federal tax authorities and the service provider's fees

4 Types of Audit Opinions

unqualified (clean) qualified adverse disclaimer

Amazon (shorter document)

unqualified, clean opinion 1st paragraph = intro paragraph 2nd paragraph = scope paragraph ---says there are not MATERIAL mistakes, not no mistakes 3rd paragraph = opinion paragraph 4th paragraph = reference paragraph ---hey we have a second document you should take a look at

Cash Disbursement Function

upon receipt of the voucher packet, the _____ prepares a single check for the entire amount of the payroll and deposits it in the payroll imprest account sends a (1) copy of check along with (2) disbursement voucher and (3) payroll register to AP department, where they are all filed journal voucher is prepared and sent to the general ledger function

Paymaster

used to prevent payroll fraud that involves submitting time cards for nonexistent employees (the perpetrator then collects the paycheck and cashes it) this individual is independent of the payroll process - not involved in payroll authorization or preparation tasks if a valid employee does not claim a paycheck, the _____ returns the check to payroll (the reason can then be investigated)

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

Voucher Packet

voucher + payroll register

W40

when you get a job you fill out a _____; determines how much your withholdings should be decreased

Magnetic Swipe ID Cards

work like a credit card each employee is issued an _____ that has a magnetic strip containing employee information for additional verification, an employee may be asked to enter a password or PIN

Test of Controls

you cannot just say "that's cool" and rely on controls _____ supports your alliance on that control EX: small non-profit checks have 2 signatures; person making it and person on board of directors ---If you were testing these controls, you would grab a sample of the check and look for a DEVIATION ---Sampling presents a lot of risk; the sample needs to represent the entire population 80% of auditing is testing controls

1040 Form

your individual tax return calculates your individual federal liability