CHAPTER 15
THE HUMAN RESOURCES MANAGEMENT/PAYROLL CYCLE
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
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 inf9+6ormation 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.)
Payroll and HRM systems are separate in many companies because integration was
generally not feasible using early data processing technology. Also, different events
generate data and two different professions were interested in using the data. As a result,
many companies (and their employees) became accustomed to having payroll data
Many companies maintain separate payroll and HRM information systems due to
the following reason:
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?
Other threats are:
What controls can mitigate the risk of these threats?
The solutions to these potential threats primarily involve monitoring and the use of
security controls discussed in chapter 8. For example, software exists to enable
companies to monitor employees, including what they do on the Internet.
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?
SUGGESTED ANSWERS TO THE PROBLEMS
15.1 Match the terms in the left column with the appropriate definition from the right column.
2. _h__ Payroll clearing account b. Used to record the activities performed by a salaried
professional for various clients.
employee.
4. _a__ Payroll register d. An organization that processes payroll and provides
other HRM services.
6. _b__ Time sheet f. A list of all the deductions for each employee.
g. A document given to each employee that shows gross
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.
•Have the personnel department maintain a hash total of employee wage rates
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.
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. (CPA Exam, adapted)
Question Y/N Threat if control missing
1. Are payroll changes (hires, separations, salary changes,
overtime, bonuses, promotions, etc.) properly authorized
and approved?
1. Unauthorized pay raises and
fictitious employees.
2. Are discretionary payroll deductions and withholdings
authorized in writing by employees?
2. Errors; employee lawsuits;
penalties if tax code violated.
and withholding changes, etc.) promptly input to the
system to process payroll?
5. Is gross pay determined by using authorized salary rates
and time and attendance records?
5. Over/under payment of
employees.
6. Are clerical operations in payroll preparation verified? 6. Errors not detected.
7. Is payroll preparation and recording reviewed by
supervisors or internal audit personnel?
7. Errors not detected and
corrected.
practices documented?
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.
Weakness Threat
1. Factory supervisor hires all job applicants
The factory supervisor could hire fictitious
2. Factory supervisor verbally informs
No documentation on pay raises could lead to
hires
4. Blank time cards are readily available. An employee could have another employee fill out
a time card when they were late or not even at
b. Suggest ways to improve the Kowal Manufacturing Company’s internal controls
over hiring and payroll processing. (CPA Examination, adapted)
1. A system of advice forms should be installed so that new hires, terminations, rate
2. Before applicants are hired, their backgrounds should be investigated by
contacting references to determine that they are honest and have no undesirable
personal characteristics.