978-0134474021 Chapter 15 Solutions Manual Part 1

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CHAPTER 15

THE HUMAN RESOURCES MANAGEMENT/PAYROLL CYCLE

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

15.1 Should CPA firms continue to use time sheets for their employees? Why or why not?

This should prompt discussion about how to account for employees’ efforts. CPAs are

considered knowledge workers. A large part of the value they provide comes from

Indeed, the more expertise someone has, the less time it may take them solve a problem.

The result may be that if firms used time sheets to determine billable time (which can be

Some experts also note that it takes time to complete time sheets and that this increases

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?

This question should generate some debate. The issue is the trade-off between

In the “information era” the value of a company’s employee knowledge base is

Some companies, such as Dow Chemical and Skandia, have attempted to formally

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Ch. 15: The Human Resources Management/Payroll Cycle

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.

Formal reports on employee performance are not intended to replace direct observation,

How could formal reports supplement and enhance what the supervisors learn by

direct observation?

Well-designed reports provide quantitative summary measures of aspects of employee

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:

1. Not working or working less productively than if the employees were working onsite.

2. Security risks, such as the employee not proactively maintaining proper antivirus and

3. Inappropriate use of company hardware (e.g., gambling, visiting pornographic

4. An increased risk of loss of confidentiality and privacy if sensitive data is stored on

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.

In addition, a company could require that telecommuting employees login their

company’s network and store all work related files on the company’s network and not on

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Accounting Information Systems

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?

A separate payroll account limits the organization’s exposure to only the amount of cash

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?

Other types of changes include name changes (usually due to change in marital status),

What controls should be implemented to ensure the accuracy and validity of such

changes?

Allow employees to make these changes through a web-based application available on

Strict access controls should be implemented to protect the master database.

A detective control is to separately notify the employee of changes that were made and

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Ch. 15: The Human Resources Management/Payroll Cycle

SUGGESTED ANSWERS TO THE PROBLEMS

15.1 Match the terms in the left column with the appropriate definition from the right

column.

1. _e__ Payroll service bureau a. A list of each employee’s gross pay, payroll deductions,

and net pay in a multicolumn format.

2. _h__ Payroll clearing account b. Used to record the activities performed by a salaried

professional for various clients.

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Accounting Information Systems

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.

•Use strong multifactor authentication techniques to restrict access to the payroll

•Have the personnel department maintain a record count of the number of

Require positive identification of recipients as each paycheck is distributed. This

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.

Use a limit check during data entry to check the hours-worked field for each

d. A computer operator used an online terminal to increase her own salary.

•Use passwords and an access control matrix to restrict access to authorized

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Ch. 15: The Human Resources Management/Payroll Cycle

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.

Implement a policy prohibiting supervisors from picking up or distributing

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.

Use biometric controls to record time in and time out

Observe (in person or by video surveillance) time clock activity to uncover

Collect detailed job time data and prior to payroll processing reconcile it with

data

g. A programmer obtained the payroll master file and increased his salary.

•Implement physical access controls such as a file library function to prevent

•Implement authentication and authorization controls such as user ID’s, passwords,

•Have supervisors review reports of all changes to payroll master data to detect

•Have the the personnel department maintain a batch total of all salaries and check

h. Some time cards were lost during payroll preparation; consequently, when

paychecks were distributed, several employees complained about not being paid.

•Prepare a record count of job time records before they are submitted for

•Reconcile job time records to employee clock cards

•Print a payroll register report with the paychecks. The total number of employees

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Accounting Information Systems

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.

Use internal and external file labels to identify the contents and expiration date of

Train computer operators to carefully examine external file labels before file

j. The organization was fined $5000 for making a late quarterly payroll tax

payment to the IRS.

Use IRS Publication Circular E, which provides instructions for making required

Set up a quarterly “tickler” or reminder message to the cashier about making the

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Ch. 15: The Human Resources Management/Payroll Cycle

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. (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.

3. Are the employees who perform each of the following

payroll functions independent of the other five functions?

personnel and approval of payroll changes

preparation of payroll data

approval of payroll

signing of paychecks

distribution of paychecks

reconciliation of payroll account

3. Fraud; theft of paychecks.

4. Are changes in standard data on which payroll is based

(hires, separations, salary changes, promotions, deduction

and withholding changes, etc.) promptly input to the

system to process payroll?

4. Errors in future payroll;

possible fines and penalties.

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.

8. Is access to payroll master data restricted to authorized

employees?

8. Unauthorized changes in pay

rates or creation of fictitious

employees.

9. Are paychecks approved by reviewing the payroll register

before payroll checks are issued?

9. Fraudulent paychecks.

10. Is a separate checking account used for payroll? 10. Greater risk of paycheck

forgery; harder to reconcile

payroll.

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Accounting Information Systems

11. Is the payroll bank account reconciled to the general

ledger by someone not involved in payroll or paycheck

distribution?

11. Failure to detect errors

12. Are payroll bank reconciliations properly approved and

differences promptly followed up?

12. Failure to detect and correct

problems.

13. Is the custody and follow-up of unclaimed salary checks

assigned to a responsible official?

13. Theft of paychecks. Failure to

detect fake employees.

14. Are differences reported by employees followed up on a

timely basis by persons not involved in payroll

preparation?

14. Cover-up of fraud.

15. Are there procedures (e.g., tickler files) to assure proper

and timely payment of withholdings to appropriate

bodies and to file required information returns?

15. Fines and/or penalties.

16. Are employee compensation records reconciled to

control accounts?

16. Inaccurate records; failure to

detect and correct errors.

17. Is access to personnel and payroll records, checks,

forms, signature plates, etc. limited?

17. Fraudulent payroll.

18. Is payroll master data encrypted both in storage and

during transmission over the Internet?

18. Unauthorized disclosure of

sensitive information.

19. Is payroll master data regularly backed up? 19. Loss of data.

20. Are credentials of job applicants verified? 20. Hiring larcenous or

unqualified employees.

21. Are hiring, firing, and performance evaluation processes

performed in accordance with applicable laws and such

practices documented?

21. Possible violations of

employment laws.

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Ch. 15: The Human Resources Management/Payroll Cycle

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.

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Accounting Information Systems

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

4. Blank time cards are readily available. An employee could have another employee fill out

5. Weekly time cards are not collected until

Time cards could be altered over the weekend with

6 Employees are automatically removed

A sick employee or one on vacation could be

7. The factory supervisor distributes pay

The supervisor can conveniently keep the pay

8. Payroll account reconciled by chief

Have someone else reconcile the payroll bank

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