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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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