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CHAPTER 15
THE HUMAN RESOURCES MANAGEMENT AND PAYROLL CYCLE
Instructor’s Manual
Learning Objectives:
1. Describe the major business activities and related information
2. Explain the key decisions to be made in the HRM/payroll cycle,
and identify the information required to make those decisions.
Introduction
The human resources management (HRM)/payroll cycle is a recurring set
of business activities and related data processing operations
associated with effectively managing employee workforce. The more
important tasks include:
2. Training
4. Compensation (payroll)
6. Discharge of employees due to voluntary or involuntary
termination
Tasks 1 and 6 are performed once and tasks 2 through 5 are performed
repeatedly.
This chapter focuses primarily on the payroll system.
Overview
The HRM provides information on hirings, terminations, and pay-rate
changes due to pay raises and promotions.
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Some believe that the value of employees’ skills and knowledge is
several times greater than the value of a company’s tangible assets.
However, accounting and the AIS have not traditionally measured or
reported this value of the employees.
Experts estimate that the cost of replacing employees is 1.5 times
greater then that of an employees annual salary.
For example, consider two companies with 1,500 employees earning
on the average $40,000.
One company has an employee turnover rate of 20 percent and the
other only 5 percent.
The company with the 20 percent rate would need to replace
Employee morale is also important. A Gallup survey found that an
employee’s attitude affects profitability.
The survey found that there are four key attitudes:
1. Employees believe they have the opportunity to do
what they do best.
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4. They understand the connection between their jobs
and the company’s mission.
Focus 15-1 on page 439 describes the value of understanding
employee jobs and attitudes.
Senior executives are now spending time in the trenches to
better understand job duties and pressures.
Figure 15-2 on page 437 provides the integration of Payroll and HRM
functions in a typical ERP system.
Payroll Cycle Activities
Figure 15-4 on page 442 shows the seven basic activities performed in
the payroll cycle:
2. Update tax rates and deductions.
4. Prepare payroll.
6. Calculate employer paid benefits and taxes.
7. Disburse payroll taxes and miscellaneous deductions.
Payroll is an AIS application that is processed in the batch mode.
Update Payroll Master File
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Updating the payroll master file includes changes such as 1) new hires,
2) terminations, 3) changes in pay rates, and 4) changes in
discretionary withholdings (circle 1.0 in Figure 15-4).
Update Tax Rates and Deductions
This update is shown in circle 2.0 in Figure 15-4. These type of
changes occur infrequently.
Validate Time and Attendance Data
This validation is shown in circle 3.0 in Figure 15-4.
Pay Schemes
Employees who earn a fixed salary seldom record their labor
efforts on a time card. Instead, their supervisors monitor their
presence on the job.
Focus 15-2 on page 445 explains that accountants should be
involved in reviewing a company’s compensation practices.
The FASB issued new rules requiring that stock options be
Efficiency Opportunities Using Information Technology
Payroll processing can be made more efficient by collecting
employee time and attendance data electronically instead of on
paper documents.
Prepare Payroll
The fourth step in the payroll cycle is preparing payroll (circle 4.0
in Figure 15-4.
Procedures
2. The sorted time-data file is then used to prepare
employee paychecks.
4. Once net pay is obtained, the year-to-date fields for
5. Finally, the payroll register and employee paychecks are
printed.
The payroll register is a report that lists each
employee’s gross pay, payroll deductions, and net pay.
Figure 15-8 on page 447 provides an example of both
reports.
Employee paychecks also typically include an earnings statement,
which lists the amount of gross pay, deductions, and net pay for
the current period and year-to-date totals.
Disburse Payroll
The next step is actual disbursement of paychecks to employees (circle
5.0 in Figure 15-4). Most employees are paid by either check or direct
deposit.
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The following procedures are followed:
2. A disbursement voucher is then prepared to authorize the
transfer of funds from the company’s general checking
account to its payroll bank account.
3. The disbursement voucher and payroll register are then sent
to the cashier.
Efficiency Opportunity: Direct Deposit
Direct deposit is one way to improve the efficiency and reduce the
costs of payroll processing.
Calculate Employer-Paid Benefits and Taxes
The employer pays some payroll taxes and employee benefits directly
(circle 6.0 in Figure 15-4).
The IRS Circular E, Employer’s Tax Guide, provides detailed
instructions about employer’s obligations for withholding and remitting
payroll taxes, and for filing reports.
Disburse Payroll Taxes and Miscellaneous Deductions
The final activity in the payroll process is paying the payroll tax
liabilities and the other voluntary deductions of each employee (circle
7.0 in figure 15-4).
Companies either prepare checks or use electronic funds transfer to pay
the taxes and deductions.
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Outsourcing Options: Payroll Service Bureaus and Professional
Employer Organizations
In an effort to reduce costs, many organizations are outsourcing their
payroll and HRM functions.
When organizations outsource payroll processing, they send time and
attendance data along with information about personnel changes to the
payroll service bureau or PEO at the end of each pay period.
Payroll service bureaus and PEOs are especially attractive to small and
midsize businesses for the following reasons:
1. Reduced costs
Multiple Choice 1
Tasks performed in the HRM/payroll cycle that are performed repeatedly
include:
a. training
b. recruiting
c. compensation
d. A and C
e. B and C
Multiple Choice 2
Experts have determined that the cost of replacing employees is 1.5
times that of an employee’s annual salary. Company A and B both have
Multiple Choice 3
The third step in the payroll cycle is
a. validating time and attendance data
b. updating the payroll master file
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c. updating information about tax rates and other withholdings
d. calculating employer paid benefits and taxes
Multiple Choice 4
Employee paychecks are signed by the
a. custodian
Multiple Choice 5
The report that lists each employee’s gross pay, payroll deductions,
and net pay is the
a. payroll voucher
Multiple Choice 6
Once payroll checks have been prepared, the payroll register is sent to
the accounts payable department for review and approval. What is the
next step?
a. The disbursement voucher and payroll register are sent to the
cashier.
Key Decisions and Information Needs
The payroll system must be designed to collect and integrate cost data
with other types of HR information to enable management to make the
following kinds of decisions:
1. Future workforce staffing needs
▪ How many employees are needed in the next five years to
accomplish the organization’s strategic plans?
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2. Employee performance
▪ Which employees should be promoted or receive pay raises?
▪ Who should be discharged?
3. Employee morale
▪ What is the overall level of employee morale and job
satisfaction?
4. Payroll processing efficiency and effectiveness
▪ How frequently should employees be paid?
Internally and externally generated information is needed to make these
decisions.
Access to current, accurate information about employee skills and
knowledge can also provide an organization with strategic benefits.
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A well-designed HRM database also can be used to reduce recruiting
costs.
Multiple Choice 7
The questions asked for the future workforce staffing needs decision
includes:
a. How many employees are needed in the next 5 years to accomplish
the organization’s strategic plans?
Control Objectives, Threats, and Procedures
A second major function of the AIS in the HRM/payroll cycle is to
provide adequate internal controls to ensure meeting the following
objectives:
2. All recorded payroll transactions are valid.
4. All payroll transactions are accurately recorded.
6. Assets (both cash and data) are safeguarded from loss or theft.
7. HRM/payroll cycle activities are performed efficiently and
effectively.
Simple, easy-to-complete documents with clear instructions facilitate
the accurate and efficient recording of payroll transactions.
Learning Objective Three
Identify the major threats in the HRM/payroll
cycle, and evaluate the adequacy of various
internal control procedures for dealing with
them.
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Prenumbering all documents facilitates checking that all transactions
have been recorded.
Restricting access to programs that create documents and, if paper
documents are still used, to blank documents reduces the risk of
unauthorized transactions.
Table 15-1 on page 439 lists the major threats in the HRM/payroll cycle
and the applicable control procedures.
Employment Practices
The objective of the HRM function is to efficiently hire, develop,
retain, and dismiss employees.
Threat 1—Hiring Unqualified or Larcenous Employees
Hiring unqualified employees can increase production expenses, and
hiring a larcenous employee can result in theft of assets.
Threat 2—Violation of Employment Law
The government imposes stiff penalties on firms that violate provisions
of employment law.
Payroll Processing
Threat 3—Unauthorized Changes to the Payroll Master File
Unauthorized changes to the payroll master file can result in increased
Proper segregation of duties is the key control procedure for dealing
with this threat.
Controlling access to the payroll system is also important. The system
should be programmed to compare user IDs and passwords with an access
control matrix that:
1. Defines what actions each employee is allowed to perform
Threat 4—Inaccurate Time Data
Automation can reduce the risk of unintentional inaccuracies.
The data entry program should include the following edit checks:
1. Field checks for numeric data in the employee-number and hours
worked fields
Proper segregation of duties can reduce the risk of intentional
accuracies.
Time clock data, used for calculating payroll, also should be
reconciled to the job time ticket data.
Threat 5—Inaccurate Processing of Payroll
Three types of control procedures address the threat of payroll errors:
1. Batch totals should be calculated at the time of data entry
and then checked against comparable totals calculated during
each stage of processing.
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▪ No bogus time cards were entered during processing.
2. Cross-footing the payroll register
3. A payroll clearing account
The payroll clearing account is a general ledger account that is
used in a two-step process to check the accuracy and completeness
of recording payroll costs and their subsequent allocation to
appropriate cost centers.
The recordings for each pay period include:
Then when direct and indirect labor is used in manufacturing the
recording is:
The amount credited to the payroll account should be equal to the
initial debit to the payroll account. This internal check is
called a zero-balance check.
Companies hire temporary employees or outside help to get around
a hiring freeze.
Threat 6—Theft or Fraudulent Distribution of Paychecks
Another major threat is the theft of paychecks or the issuance of
paychecks to fictitious or terminated employees.
The controls related to other cash disbursements, discussed in
Chapter 11, also apply to payroll:
2. All payroll checks should be sequentially prenumbered
and periodically accounted for.
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A separate payroll bank account provides additional protection
against forgery or alteration.
General Controls
As for other disbursements, there are two general threats: 1) the loss,
alteration, or unauthorized disclosure of data and 2) poor performance.
Threat 7—Loss, Alteration, or Unauthorized Disclosure of Data
Backup and disaster-recovery procedures provide the best controls for
reducing the risk of payroll data loss.
Threat 8—Poor Performance
Preparing and reviewing performance reports is an effective means of
addressing the threat of poor performance.
Multiple Choice 8
What control facilitates the accurate and efficient recording of
payroll transactions?
a. appropriate application controls, such as validity checks
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Multiple Choice 9
The __________ is used to check numeric data and the __________ is used
to check the hours-worked field.
a. field check; validity check
Multiple Choice 10
The zero-balance check is a means used to
a. verify whether net pay is equal to gross pay minus deductions
b. verify whether the credits to the payroll control account are
equal to the debits to the payroll control account
c. verify whether total debits and credits in the payroll register
are equal
d. none of the above
