Accounting Information Systems
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 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.)
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,
Reasons for integrating the personnel and HRM systems include the following:
• Integration will improve decision-making by providing access to more of the relevant
data needed for monitoring employee development.
• It is logical, since both systems are organized around the same entity: the employee.
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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
“subjectivity” in measuring the value of a company’s investment in the knowledge and
skills of its employees versus the usefulness of at least attempting to explicitly measure
those assets.
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
performance that are believed to be important to the achievement of the organization’s
Accounting Information Systems
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
patch management practices or not protecting and/or backing up their data
adequately.
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.
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
deposited into the payroll account.
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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
the organization’s intranet. The application should include processing integrity checks to
prevent invalid entries.
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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.
3. _g__ Earnings statement
c. Used to record time worked by an hourly-wage
4. _a__ Payroll register
d. An organization that processes payroll and provides
other HRM services.
current pay period and for the year-to-date.
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.
• 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
master data to authorized personnel in the HR department..
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
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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
personnel.
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
paychecks. Instead, have the payroll department distribute all 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.
• Use biometric controls to record time in and time out
g. A programmer obtained the payroll master file and increased his salary.
• Implement physical access controls such as a file library function to prevent
programmers from having unsupervised access to production databases
Ch. 15: The Human Resources Management/Payroll Cycle
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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
processing and compare record count subsequent to data entry against the number
of paychecks prepared.
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
all active files
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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
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
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.
verified?
supervisors or internal audit personnel?
corrected.
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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
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
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.
unqualified employees.
21. Are hiring, firing, and performance evaluation
laws and such practices documented?
21. Possible violations of
employment laws.
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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
a. Identify weaknesses in current procedures, and explain the threats that they may
allow to occur.
Weakness
1. Factory supervisor hires all job
applicants and forwards their W-4
form to the payroll clerk.
Accounting Information Systems
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rates
4. Blank time cards are readily
available.
checks.
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
3. The supply of blank time cards should be removed. At the beginning of each
4. The foreman should collect the time cards at the end of the week, approve them,
5. The payroll checks should be distributed to the workers by a responsible person
other than the foreman. Unclaimed checks should be sent to internal audit until
claimed by the worker.
In addition, the following changes should be made because the problem does not state
that these procedures are being followed:
• If the Company has a cost system that requires the workers to prepare production
Ch. 15: The Human Resources Management/Payroll Cycle
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Accounting Information Systems
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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.
• The payroll department manager performs all the other activities depicted in
Figure 15-10
• The payroll master file is backed up weekly, after payroll processing is finished.
(CMA Examination, adapted)
Ch. 15: The Human Resources Management/Payroll Cycle
a. Identify and describe at least three weaknesses in Arlington Industries’ payroll
process.
• The payroll processing system at Arlington Industries violates the principle of
segregation of duties. The same individual verifies time cards, inputs payroll
information into the master file, prints the checks, machine-signs the checks,
distributes the checks, and prepares the payroll journal entry.
b. Identify and describe at least two different areas in Arlington’s payroll
processing system where controls are satisfactory.
• The personnel department determines the wage rate and initiates the setup of
payroll records, which is a good example of segregation of duties.
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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.
Note: Disable data validation on the hours worked column in order to input erroneous
data.
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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.)
Rule 1: Payrates must be between $6.75 and $14.00.
• Step 1: Select the relevant range of cells
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Ch. 15: The Human Resources Management/Payroll Cycle
Rule 2: Hours worked must be between 0 and 40