Chapter 15 The Human Resouces Management and Payroll Cycle

Accounting  Information System

15.8      The local community feels that secondary school education is a necessity in our society and that lack of education leads to a number of social problems. As a result, the local school board has decided to take action to reverse the rising dropout rate. The board has voted to provide funds to encourage students to remain in school and earn their high school diplomas. The idea is to treat secondary education like a job and pay students. The board, however, could not agree on the details for implementing this new plan. Consequently, you have been hired to devise a system to compensate students for staying in school and earning a diploma.

As you devise your compensation scheme, be sure it meets the following general control objectives for the payroll cycle:

·    All personnel and payroll transactions are properly authorized.

·    All employees are assigned to do productive work, and they do it efficiently and effectively.

·    All transactions are accurately recorded and processed.

·    Accurate records are maintained.

·    All disbursements are proper.

Write a proposal that addresses these five questions:

a.   How should the students be compensated (e.g., for attendance, grades)?

b.   How and by whom will the payments be authorized?

c.   How will the payments be processed?

d.   How should the payments be made (e.g., in cash or other means)?

e.   When will the payments be made?

There is no one correct answer to this problem. Students should answer parts b, c, d and e as if they were developing a payroll system, regardless of how they answer part a. The following are some of the issues that need to be addressed:

·         Who will have custody over records relating to student activity?

·         Are controls in place to ensure that students actually receive their pay?

·         What controls govern adding/deleting students from the database?

·         How will attendance and grades be verified?

·         How will the rewards be safeguarded? (e.g., if pay with cash, what controls will prevent employees from stealing the funds?)

15.9     What is the purpose of each of the following control procedures (i.e., what threats is it designed to mitigate)?

a.   Compare a listing of current and former employees to the payroll register.

To make sure former employees are no longer on the payroll register and still drawing a paycheck.

b.   Reconciliation of labor costs (based on job-time ticket data) with payroll (based on time card data).

To check for inaccurate or incomplete time data as well as errors in processing.

c.   Direct deposit of paychecks.

To reduce the risk of theft of paychecks and to cut costs.

d.   Validity checks on Social Security numbers of all new employees added to the payroll master file.

To prevent the addition of fictitious employees to the payroll.

e.   Cross-footing the payroll register.

To check for inaccurate or incomplete payroll processing.

f.    Limit checks on hours worked for each time card.

To prevent overpaying employees.

g.   Use of a fingerprint scanner in order for employees to record the time they started and the time they quit working each day.

To ensure the validity of employee time and attendance data by preventing one employee from recording that another employee showed up for work when that person was really absent.

h.   Encryption of payroll data both when it is electronically sent to a payroll service bureau and while at rest in the HR/payroll database.

To protect the confidentiality of payroll information.

i.    Establishing a separate payroll checking account and funding it as an imprest account.

To limit the amount of funds at risk to the amount of the imprest fund; to make it easier to reconcile the payroll account and validate payroll expenses.

j.    Comparison of hash totals of employee numbers created prior to transmitting time-worked data to payroll provider with hash totals of employee numbers created by payroll provider when preparing paychecks.

To ensure complete processing of all payroll transactions.

k.   Periodic reports of all changes to payroll database sent to each department manager.

To detect unauthorized changes to the payroll master file.

l.    Providing employees with earnings statements every pay period.

This is a detective control. Employees will likely notice and report errors in payroll calculations as well as mistakes in various withholdings, retirement contributions, etc.