Complete
Solutions for Accounting Information System 12e by Marshall B. Romney Paul J. Steinbart
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CHAPTER 15
THE HUMAN RESOURCES
MANAGEMENT/PAYROLL CYCLE
15.1 This chapter noted many of the benefits that can arise by
integrating the HRM and payroll databases. Nevertheless, many companies
maintain separate payroll and HRM information systems. Why do you think this is
so? (Hint: Think about the differences in employee
background and the functions performed by the HRM and payroll departments.)
15.2 Some accountants have advocated that a company’s human assets be
measured and included directly in the financial statements. For example, the
costs of hiring and training an employee would be recorded as an asset that is
amortized over the employee’s expected term of service. Do you agree or
disagree? Why?
15.3 You are responsible for implementing a new employee performance
measurement system that will provide factory supervisors with detailed information
about each of their employees on a weekly basis. In conversation with some of
these supervisors, you are surprised to learn they do not believe these reports
will be useful. They explain that they can already obtain all the information
they need to manage their employees simply by observing the shop floor. Comment
on that opinion.
How could formal reports supplement and enhance what the
supervisors learn by direct observation?
15.4 One of the threats associated
with having employees telecommute is that they may use company-provided
resources (e.g., laptop, printer, etc.) for a side business. What are some
other threats?
What controls can mitigate the risk of these threats?
15.5 How
would you respond to the treasurer of a small charity who tells you that the
organization does not use a separate checking account for payroll because the
benefits are not worth the extra monthly service fee?
15.6 This chapter
discussed how the HR department should have responsibility for updating the HRM/payroll
database for hiring, firing, and promotions. What other kinds of changes may
need to be made?
What controls should be implemented to ensure the accuracy and
validity of such changes?
15.1 Match the terms in the left column with the appropriate definition
from the right column.
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1. Payroll service
bureau
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a. A list of each
employee’s gross pay, payroll deductions, and net pay in a multicolumn
format.
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2. Payroll clearing
account
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b. Used to record the
activities performed by a salaried professional for various clients.
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3. Earnings statement
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c. Used to record time
worked by an hourly-wage employee.
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4. Payroll register
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d. An organization that
processes payroll and provides other HRM services.
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5. Time card
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e. An organization that
processes payroll.
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6. Time sheet
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f. A list of all the
deductions for each employee.
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g. A document given to
each employee that shows gross pay, net pay, and itemizes all deductions both
for the current pay period and for the year-to-date.
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h. Special general ledger
account used for payroll processing.
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15.2 What internal control procedure(s) would be most effective in
preventing the following errors or fraudulent acts?
a. An inadvertent data entry error caused an
employee’s wage rate to be overstated in the payroll master file.
b. A fictitious employee payroll record was added to
the payroll master file.
c. During data entry, the hours worked on an
employee’s time card for one day were accidentally entered as 80 hours, instead
of 8 hours.
d. A computer operator used an online terminal to
increase her own salary.
e. A factory supervisor failed to notify the HRM
department that an employee had been fired. Consequently, paychecks continued
to be issued for that employee. The supervisor pocketed and cashed those
paychecks.
f. A factory employee punched a friend’s time
card in at 1:00 p.m. and out at 5:00 p.m. while the friend played golf that
afternoon.
g. A programmer obtained the payroll master file and
increased his salary.
h. Some time cards were lost during payroll
preparation; consequently, when paychecks were distributed, several employees
complained about not being paid.
i. A large portion of the payroll master file
was destroyed when the disk pack containing the file was used as a scratch file
for another application.
j. The organization was fined $5000 for making a late quarterly
payroll tax payment to the IRS.
15.3 You have been hired to evaluate
the payroll system for the Skip-Rope Manufacturing Company. The company
processes its payroll in-house. Use Table 15-1 as a reference to prepare a list
of questions to evaluate Skip-Rope’s internal control structure as it pertains
to payroll processing for its factory employees. Each question should be phrased
so that it can be answered with either a yes or a no; all no answers should
indicate potential internal control weaknesses. Include a third column listing
the potential problem that could arise if that particular control were not in
place.
15.4 Although most medium and large
companies have implemented sophisticated payroll and HRM systems like the one
described in this chapter, many smaller companies still maintain separate
payroll and HRM systems that employ many manual procedures. Typical of such
small companies is the Kowal Manufacturing Company, which employs about 50
production workers and has the following payroll procedures:
§ · The
factory supervisor interviews and hires all job applicants. The new employee
prepares a W-4 form (Employee’s Withholding Exemption Certificate) and gives it
to the supervisor. The supervisor writes the hourly rate of pay for the new
employee in the corner of the W-4 form and then gives the form to the payroll
clerk as notice that a new worker has been hired. The supervisor verbally
advises the payroll department of any subsequent pay raises.
§ · A
supply of blank time cards is kept in a box near the entrance to the factory.
All workers take a time card on Monday morning and fill in their names. During
the week they record the time they arrive and leave work by punching their time
cards in the time clock located near the main entrance to the factory. At the
end of the week the workers drop the time cards in a box near the exit. A
payroll clerk retrieves the completed time cards from the box on Monday
morning. Employees are automatically removed from the payroll master file when
they fail to turn in a time card.
§ · The
payroll checks are manually signed by the chief accountant and then given to
the factory supervisor, who distributes them to the employees. The factory
supervisor arranges for delivery of the paychecks to any employee who is absent
on payday.
§ · The
payroll bank account is reconciled by the chief accountant, who also prepares
the various quarterly and annual tax reports.
a. Identify weaknesses in current procedures, and
explain the threats that they may allow to occur.
b. Suggest ways to improve the Kowal Manufacturing
Company’s internal controls over hiring and payroll
processing.
15.5 Arlington Industries
manufactures and sells engine parts for large industrial equipment. The company
employs over 1,000 workers for three shifts, and most employees work overtime
when necessary. Figure 15-10 depicts the procedures followed to process
payroll. Additional information about payroll procedures follows:
§ · The
HRM department determines the wage rates of all employees. The process begins
when a form authorizing the addition of a new employee to the payroll master
file is sent to the payroll coordinator for review and approval. Once the
information about the new employee is entered in the system, the computer
automatically calculates the overtime and shift differential rates for that
employee.
§ · A
local accounting firm provides Arlington with monthly payroll tax updates,
which are used to modify the tax rates.
§ · Employees
record time worked on time cards. Every Monday morning the previous week’s time
cards are collected from a bin next to the time clock, and new time cards are
left for employees to use. The payroll department manager reviews the time
cards to ensure that hours are correctly totaled; the system automatically
determines if overtime has been worked or a shift differential is required.
§ · The
payroll department manager performs all the other activities depicted in Figure
15-10.
§ · The
system automatically assigns a sequential number to each payroll check. The
checks are stored in a box next to the printer for easy access. After the
checks are printed, the payroll department manager uses an automatic
check-signing machine to sign the checks. The signature plate is kept locked in
a safe. After the checks have been signed, the payroll manager distributes the
paychecks to all first-shift employees. Paychecks for the other two shifts are
given to the shift supervisor for distribution.
§ · The
payroll master file is backed up weekly, after payroll processing is finished.
a. Identify and describe at least three weaknesses in
Arlington Industries’ payroll process.
b. Identify and describe at least two different
areas in Arlington’s payroll processing system where controls are
satisfactory.
15.6 Excel Problem
Objective: Learn how to find and correct errors in complex
spreadsheets used for payroll.
a. Read the article “Ferret Out Spreadsheet Errors” by
Mark G. Simkin, in the Journal of Accountancy (February
2004). You can find a copy online by accessing www.aicpa.org.
b. Download the worksheet referenced in the article.
c. Enter the following erroneous data in the worksheet
you downloaded in step b:
§ Change hours worked for
Adams to 400,
§ Change hours worked for
Englert to 4, and
§ Change hours worked for
Hartford to –40.
Create a chart like that shown in Exhibit 2 of the article. Which
of the errors are easily found by the chart? What are the strengths and
limitations of creating such charts to detect errors? Print out your chart and
save your work.
d. Create the three data validation rules described in
the article (Exhibits 4–7 illustrate how to create the first rule). Print out
screen shots of how you create each rule, and save your work. (Note: The
article “Block That Spreadsheet Error” by Theo Callahan, in the Journal of Accountancy (August 2002) provides
additional examples of data validation rules.)
e. Follow the instructions for using the formula
auditing tool. Print out a screen shot showing use of the tool to circle
invalid data (yours should be similar to Exhibit 9 in the article).
f. Follow the instructions to run the “trace
precedents” audit tool. Print screen shots that show the results, and save your
work. How useful is this tool? What are its limitations, if any?
g. Enter the following data for new employees
(inserting new rows in proper order to maintain alphabetical listing of
employees):
§ · Name
= Able, payrate = 11.11, regular hours = 40, overtime hours = 5
§ · Name
= Easton, payrate = 10.00, regular hours = 40, overtime hours = 0
§ · Name
= Johnson, payrate = 12.00, regular hours = 35, overtime hours = 10
Which audit tests and validation rules change? Why? Print screen
shots, and save your work.
15.7 Excel Problem
Objective: Learn how to use the VLOOKUP function for payroll
calculations.
a. Read the article “Make Excel a Little Smarter” by
Lois S. Mahoney and Charles Kelliher in the Journal of Accountancy (July
2003). You can find a copy at www.aicpa.org.
b. Read the section titled “Data in Different Places”
and create the spreadsheet illustrated in Exhibit 6. Print a screen shot of
your work, and save your spreadsheet.
c. Create a formula that calculates total bonuses.
Also create a cell entry that indicates what that number represents. Print a
screen shot of your work, and save it.
d. Add the following data validation controls to your
spreadsheet, including explanatory error messages. Save your work.
§ · Sales
must be positive.
§ · Sales
cannot exceed 125.
§ · Amount
of bonus must be nonnegative.
§ · Amount
of bonus cannot exceed 20% of unit sales.
e. Modify your worksheet by placing the sales data and
resulting bonus on a different worksheet from the bonus table. Name your table
array, and modify the VLOOKUP function accordingly. Then add another employee:
Johnson, who sold 150 units. Print a screen shot of your new worksheet showing
the bonuses for each employee, including Johnson. Save your work.
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?
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.
b. Reconciliation of labor costs (based on job-time
ticket data) with payroll (based on time card data).
c. Direct deposit of paychecks.
d. Validity checks on Social Security numbers of all
new employees added to the payroll master file.
e. Cross-footing the payroll register.
f. Limit checks on hours worked for each time
card.
g. Use of a fingerprint scanner in order for employees
to record the time they started and the time they quit working each day.
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.
i. Establishing a separate payroll checking
account and funding it as an imprest account.
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.
k. Periodic reports of all changes to payroll database
sent to each department manager.
l. Providing employees with earnings statements every pay period.
15.10 Excel Problem
Objective: Learn how to use text and array formulas to locate
potential payroll problems.
a. Download the spreadsheet for this problem from the
course Web site.
b. In column I, under the label “Ghost Employee?”
write a function that compares the employee# in the timecards column to the
employee# in the payroll master data column and displays the message: “Timecard
employee# does not exist in master data” for any employee in the timecards
columns who is not listed in the payroll master data columns. The function
should leave the cell blank if the employee# in the timecards worksheet does
exist in the payroll master file worksheet. (Hint: Use the
ISNA and MATCH functions.)
c. In column L, titled “Invalid SSN?”
write a function to identify invalid Social Security numbers. Assume that
Social Security numbers that begin with the digit 9 or that have the digits 00
for the middle two numbers are invalid. Your function should display a message
that flags either of these two conditions or which displays nothing otherwise.
(Hint: there are text functions that examine
specific portions of a string, such as the left 3 characters, and there are
also functions that convert text to numeric values.)
d. In column P, titled “Missing Paycheck?” write a
function to check whether a timecard exists for each employee in the master
payroll data section of the worksheet. The formula should return either the
message “No paycheck created for this employee” or display nothing.
CASE 15-1 Research Report: HRM/Payroll Opportunities for CPAs
Payroll has traditionally been an accounting function and some
CPAs have provided payroll processing services to their clients. Today, CPAs
are finding additional new lucrative opportunities to provide not only payroll
processing but also various HR services. Write a brief report that compares the
provision of payroll and HR services by CPAs with that of national payroll
providers. Perform the following research to collect the data for your report:
1. 1. Read
the articles “Be an HR Resource for Your Clients,” by Michael Hayes and “Hired
Help: Finding the Right Consultant,” by Joanne Sammer, both of which were
published in the November, 2006 issue of the Journal of Accountancy.
2. 2. Contact
a local CPA firm that provides payroll and HR services and find out what types
of services they perform and what types of clients they serve.
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