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Chapter 10 – Expenditure Processes and Controls – Payroll
and Fixed Assets
Instructor Manual
➢ Introduction To Payroll And Fixed Asset Processes. The chapter addresses the
acquisition and maintenance of valuable resources used in a business, namely,
human resources and capital resources. Specifically, the processes involve: (1)
paying wages and salaries to employees (payroll), and (2) accounting for property,
plant and equipment (fixed assets). Payroll processes include the polices and
➢ Payroll Processes. The payroll process is initiated when employees are hired by
the company. The hiring of employees is typically considered a non-routine process.
Accordingly, members of management are required to specifically approve all
employees hired by the company. The Human Resources department is
responsible for maintaining records for each job and each employee within the
Once an employee’s personnel file is complete and the term of employment has
begun, routine activities take place regarding payroll processing. A time sheet is the
record of hours worked for an employee for a specific payroll period. At the end of
each pay period, employees submit completed time sheets to their departmental
supervisors for approval. Once time sheets have been approved, they are
forwarded to the payroll department, where the computation is performed to
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➢ Controls And Risks Of Payroll Processes.
o Authorization Of Transactions. Departmental supervisors must be certain that
all time sheets represent actual time worked by currently active employees.
Employee personnel files should contain evidence of proper authorization for
various payroll amounts. Included in the files should be approval for pay rate
o Segregation Of Duties. Payroll functions such as authorizing, timekeeping,
record keeping, and custody of the paychecks should all be separated.
Authorizing new employee hiring and maintaining personnel files in HR, should
be separate from the payroll time reporting and record keeping functions,
o Adequate Records And Documents. Personnel files and the payroll register
are the fundamental records in the payroll process. There are numerous forms
and reports that must be filed at designated times throughout the year with
o Security Of Assets And Documents. Access to personnel files and payroll
records should be limited to designated persons. Electronic controls and
physical controls should be in place to ensure the confidentiality of payroll
o Independent Checks And Reconciliations. The number of hours reported on
time sheets should be reconciled to the payroll register, and time sheets may be
reconciled with production reports. The payroll register should be reconciled to
the general ledger on a regular basis. Someone separate from the payroll
processing functions should reconcile the bank statement for the payroll cash
account on a monthly basis.
o Cost/Benefit Considerations. The more employees a company has and the
more frequently it pays its employees, the more important it becomes to
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➢ IT Systems Of Payroll Processes. Even the smallest companies may find it
worthwhile to enhance their payroll processing with computerized systems. Routine
payroll processing occurs at specified time intervals – on weekly, bi-weekly, or
monthly pay dates. Because of this infrequency, and the sequential nature of the
payroll process, many companies find that batch processing is well-suited for payroll
activities. The timekeeper can accumulate all time sheets and enter them in the
computer system in batches. An alternative to manual batch accumulations is the
use of electronic timekeeping devices, such as time clocks or badge readers. These
systems accumulate data throughout the time period and automatically calculate
➢ Fixed Asset Processes. A fixed assets pool can include vehicles, office equipment
and computers, machinery and production equipment, furniture, and real estate
(such as land and buildings). For many companies, the investment in fixed assets is
often the largest asset reported on the balance sheet. Companies continually add to
or replace items in their fixed assets pool as the old items become used, worn, or
outdated. Due to this frequency of change, it is important that clear accounting
records exist so that the status of fixed assets accounts can be determined at any
point during their useful life.
o Fixed Assets Acquisition. Acquisitions of fixed assets are carried out in much
the same way as inventory purchases described in Chapter 9. Two notable
differences here are the placement of the acquired assets in the user department
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initiated at this time, in the same manner as for the expenditure process. In
addition, a fixed asset subsidiary ledger will be prepared so that a detailed listing
of the company’s fixed assets is available.
o Fixed Assets Continuance. The fixed assets continuance phase refers to the
processes of maintaining accurate and up-to-date records regarding all fixed
o Fixed Assets Disposal. When an asset becomes old, outdated, inefficient or
damaged, the company should dispose of it and adjust its records accordingly.
Disposing of an asset may include selling or exchanging it, discarding it (throwing
it away), or donating it to another party who may be able to use it. There are four
subsidiary ledger; and (4) gains or losses are computed.
➢ Controls And Risks Of Fixed Asset Processes.
o Authorization Of Transactions. Designated members of management should
be assigned responsibility for authorizing the purchase of new fixed assets, as
o Segregation Of Duties. Custody of fixed assets needs to be separate from the
related record keeping. Adequate segregation of duties reduces the risk of
undetected errors or fraud by requiring separate employees to handle the
different transactions that occur in each phase of the asset’s life. Ideally, those
o Adequate Records And Documents. Fixed asset subsidiary ledgers are used
to control the physical custody, cost, and accumulated depreciation of fixed
assets. Like the expenditures process for inventory purchases, fixed asset
purchases should be supported by a purchase requisition, PO, receiving report
and vendor invoice. Fixed asset tags may be used to account for the numerical
sequence of items acquired. Management should prepare and follow a capital
budget.
o Security Of Assets And Documents. Adequate supervision is an important
control concerning the security of fixed assets because fixed assets tend to be
located throughout the company where many employees could have access to
o Independent Checks And Reconciliations. Actual fixed asset expenditures
should be compared with the capital budget, and additional approval should be
required if budgets are exceeded. In addition, periodic counts of fixed assets
o Cost/Benefit Considerations. Additional factors that indicate the need for
strong internal controls over fixed asset processes include large quantities of
fixed assets, large quantities of fixed asset changes (such as additions, transfers,
➢ IT Systems Of Fixed Asset Processes. Due to the abundance of fixed asset data,
the time-consuming and tedious requirements for tracking changes, and the intricacy
of the tax laws, most companies can justify the investment in computerized systems
dedicated to fixed asset accounting. IT systems have evolved into simple,
customized applications that may be integrated with other accounting software.
These fixed assets applications automate the processes of creating and maintaining
➢ Ethical Issues Related To Payroll And Fixed Assets. The payroll system is the
target of several types of fraud schemes. The most common means of defrauding a
company involves dishonest employees’ falsification of time sheets in an effort to
receive excess compensation. Misuse of sick days or vacation days results in
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paycheck who does not actually work for the company. It is often initiated by the
unethical conduct of someone within the company’s payroll function. Bogus
documentation is typically created in order to circumvent the company’s internal
controls and carry out these types of fraud.
➢ Corporate Governance In Payroll And Fixed Assets. Payroll funds and fixed
assets do not belong to managers of the organization. Managers are stewards, or
temporary managers of those funds. Corporate governance policies and procedures
must be in place to insure that funds are expended only to benefit the organization