Hapter 15: Pearson Education, Inc

C HAPTER 15
The Human Resources

Management / Payroll Cycle
2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart
1 of 36
INTRODUCTION
Questions to be addressed in this chapter
include:
What are the basic business activities and
data processing operations that are
performed in the human resources
management (HRM)/payroll cycle?
What are the major threats and the controls
that can mitigate those threats?
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INTRODUCTION
Employees are an organizations most valuable
assets:
Their knowledge and skills affect quality and quantity
of goods and services.
Labor costs are a major expense in generating
revenues and a key cost driver.
The traditional AIS has not measured or reported

on the status of a companys human resources:
Financial statements do not regard employees as
assets.
Under GAAP, the value of human services is not
measured until they have been consumed.
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INTRODUCTION
The most important tasks performed in the
HRM/payroll cycle are:
Recruiting and hiring new employees
Training
Job assignment
Compensation (payroll)
Performance evaluation
Discharge of employees (voluntarily or
involuntarily)
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INTRODUCTION
There are five major sources of input to the
payroll system:
HRM department provides information about
hirings, terminations, and pay-rate changes.
Employees provide changes in discretionary
deductions (e.g., optional life insurance).
Various departments provide data about the
actual hours worked by employees.
Government agencies provide tax rates and
regulatory instructions.
Insurance companies and other organizations
provide instructions for calculating and remitting
various withholdings.
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INTRODUCTION
Principal outputs of the payroll system are
checks:
Employees receive individual paychecks.
A payroll check is sent to the bank to transfer funds
from the companys regular account to its payroll
account.
Checks are issued to government agencies,
insurance companies, etc., to remit employee and
employer taxes, insurance premiums, union dues,
etc.
The payroll system also produces a variety of

reports.
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PAYROLL CYCLE ACTIVITIES

The five basic activities in the payroll cycle:
1.
2.
3.
4.
5.
Update payroll master data

Validate time and attendance data
Prepare payroll
Disburse payroll
Disburse taxes and miscellaneous
deductions
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1. UPDATE PAYROLL MASTER FILE

The HRM department provides information on new
hires, terminations, changes in pay rates, and
changes in discretionary withholdings.
Appropriate edit checks, such as validity checks on
employee number and reasonableness tests are
applied to all change transactions.
Changes must be entered in a timely manner and
reflected in the next pay period.
Records of terminated employees should not be
deleted immediately as some year-end reports (e.g.,
W-2s) require data on compensation for all
employees during the year.
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1. UPDATE PAYROLL MASTER FILE
The payroll department also receives

notification of changes in tax rates and
other payroll deductions from
government agencies, insurers,
unions, etc.
These changes occur periodically.
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Update Master File Threats

1. Unauthorized changes to payroll master
data
2. Inaccurate updating of payroll master
data
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Update Master File Controls

1a. Segregation of duties: HRM department
updates master data, but only payroll
department issues paychecks
1b. Access controls
2a. Data processing integrity controls
2b. Regular review of all changes to master
payroll data
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2. VALIDATE TIME AND ATTENDANCE

DATA
Some employees are paid on an hourly basis.
Some employees earn a fixed salary, e.g.,
managers and professional staff.
Sales staff are often paid on a straight commission
or base salary plus commission.
Increasingly, laborers may be paid partly on
productivity.
Some management and employees may receive
stock to motivate them to cut costs and improve
service.
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DATA
The payroll system needs to link to the
revenue cycle and other cycles to calculate
these payments.
Its also important to design bonus schemes
with realistic, attainable goals that:
Can be measured
Are congruent with corporate objectives
Are monitored by management for continued
appropriateness
Are legal
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DATA
How can information technology help?
Collecting time and attendance data
electronically, e.g.:
Badge readers
Electronic time clocks
Data entered on terminals
Touch-tone telephone logs
Using edit checks to verify accuracy and

reasonableness when the data are entered.
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Validation Threats
1. Inaccurate time and attendance data
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Validation Controls
1a. Source data automation for data capture
1b. Biometric authentication
1c. Segregation of duties (reconciliation of
job-time tickets to time cards)
1d. Supervisory review
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3. PREPARE PAYROLL
The employees department provides
data about hours worked.
A supervisor confirms the data.
Pay rate information is obtained from
the payroll master file.
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3. PREPARE PAYROLL
Procedures:
The payroll transaction file is sorted by
employee number (same sequence as master
file).
For each transaction, the payroll master file is
read for pay rates, etc., and gross pay is
calculated.
Hourly Employees: Gross pay = (hours worked x
wage rate) + Overtime + Bonuses
Salaried Employees: Gross pay = annual salary x
fraction of year worked
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3. PREPARE PAYROLL
Payroll deductions are summed and
subtracted from gross pay to obtain net
pay. There are two types of deductions:
Payroll tax withholdings
Voluntary deductions
Year-to-date totals for gross pay,

deductions, and net pay are calculated,
and the master file is updated. Cumulative
records are important because:
Social Security and other deductions cease or
decline at certain levels.
The information will be needed for tax reports.
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3. PREPARE PAYROLL
The following are printed:
Paychecks for employees--often accompanied by
an earnings statement, which lists pay detail,
current and year-to-date.
A payroll register which lists each employees
gross pay, deductions, and net pay in a multicolumn format:
Is used to authorize the transfer of funds to the
companys payroll bank account.
May be accompanied by a deduction register,
listing miscellaneous voluntary deductions for each
employee.
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Prepare Payroll Threats

1. Errors in processing payroll
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Prepare Payroll Controls

1a. Data processing integrity controls: batch totals,
cross-footing of the payroll register, use of a
payroll clearing account and a zero-balance check
1b. Supervisory review of payroll register and other
reports
1c. Issuing earnings statements to employees
1d. Review of IRS guidelines to ensure proper
classification of workers as either employees or
independent contractors
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4. DISBURSE PAYROLL
Most employees are paid either by:
Check
Direct deposit
In some industries, such as
construction, cash payments may still
be made, but does not provide good
documentation
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4. DISBURSE PAYROLL
Procedures:
When paychecks have been prepared, the
payroll register is sent to accounts payable for
review and approval.
A disbursement voucher is prepared to
authorize transfer of funds from checking to
the payroll bank account.
For control purposes, checks should not be drawn on the
companys regular bank account
A separate account is created for this purpose
Limits the companys loss exposure
Makes it easier to reconcile payroll and detect paycheck
forgeries
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4. DISBURSE PAYROLL
The approved disbursement voucher and payroll register are sent to the
cashier. The cashier:
Reviews the documents.

Prepares and signs the payroll check to transfer the funds.
Reviews, signs, and distributes employee paychecks (which
separates authorization and recording from distribution of
checks).
Re-deposits unclaimed checks in the companys bank
account.
Sends a list of these paychecks to internal audit for
investigation.
Returns the payroll register to payroll department, where it is
filed with time cards and job time tickets.
Sends the disbursement voucher to accounting clerk to
update general ledger.
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4. DISBURSE PAYROLL
Efficiency Opportunity: Direct Deposit
Direct deposit can improve efficiency and
reduce costs of payroll processing
Employee receives a copy of the check and an
earnings statement
Each bank receives a record of the payroll deposits for
that bank via EDI. The record includes:
Employee number
Social Security number
Bank account number
Net pay amount
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Disburse Payroll Threats

1. Theft or fraudulent distribution of
paychecks
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Disburse Payroll Controls

1a. Restriction of physical access to blank payroll checks and
the check signature machine
1b. Restriction of access to the EFT system
1c. Prenumbering and periodically accounting for all payroll
checks and review of all EFT direct deposit transactions
1d. Require proper supporting documentation for all paychecks
1e. Use of a separate checking account for payroll, maintained
as an imprest fund
1f. Segregation of duties (cashier versus accounts payable;
check distribution from hiring/firing; independent
reconciliation of the payroll checking account)
1g. Restriction of access to payroll master database
1h. Verification of identity of all employees receiving paychecks
1i. Re-depositing unclaimed paychecks and investigating cause
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5. DISBURSE PAYROLL TAXES AND

MISCELLANEOUS DEDUCTIONS
The employer pays some payroll taxes
and employee benefits directly
The employer withholds federal and state
taxes from employee paycheck, along with
Medicare tax, and the employees share of
Social Security.
May also withhold voluntary deductions such
as union dues, United Way contributions,
credit union savings, retirement contributions,
etc.
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In addition, the employer pays:
A matching amount of Social Security
Federal and state unemployment taxes
The employer share of health, disability, and
life insurance premiums, as well as pension
contributions
Some companies offer flexible benefit

plans, sometimes called cafeteria-style
benefit plans.
These plans offer a menu of options.
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The company must periodically prepare
checks or EFT to pay tax and other
liabilities.
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Disburse Taxes and Deduction Threats

1. Failure to make required payments
2. Untimely payments
3. Inaccurate payments
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Disburse Taxes and Deductions Controls
1 and 2. Configuration of system to make

required payments using current
instructions from IRS (Publication Circular
E)
3a. Processing integrity controls
3b. Supervisory review of reports
3c. Employee review of earnings statement
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OUTSOURCING OPTIONS
Many entities outsource payroll and HRM
to:
Payroll service bureaus
Maintain the payroll master file and perform payroll
processing activities
Professional employer organizations (PEOs)

Perform the services of the payroll service bureau
Also administer and design employee benefit plans
Generally more expensive than payroll service
bureaus
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OUTSOURCING OPTIONS
When organizations outsource payroll
processing, they send the service bureau
or PEO at the end of each period:
Personnel changes
Employee time and attendance data
The service bureau or PEO then:

Prepares paychecks, earnings statements,
and a payroll register
Periodically produces tax documents
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OUTSOURCING OPTIONS
Outsourcing is especially attractive to small and
mid-size businesses because:
Its often cheaper for smaller companies
The bureau or PEO may provide a wider range of
benefits
It frees up the companys computer resources for
other areas
However, companies must carefully monitor

service quality to ensure that these systems
integrate HRM and payroll data in a manner that
supports effective management of employees.
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C HAPTER 15

The Human Resources

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

The traditional AIS has not measured or reported

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

The payroll system also produces a variety of

PAYROLL CYCLE ACTIVITIES

Update payroll master data

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

1. UPDATE PAYROLL MASTER FILE

1. UPDATE PAYROLL MASTER FILE

The payroll department also receives

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Update Master File Threats

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Update Master File Controls

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

2. VALIDATE TIME AND ATTENDANCE

2. VALIDATE TIME AND ATTENDANCE

2. VALIDATE TIME AND ATTENDANCE

Using edit checks to verify accuracy and

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Year-to-date totals for gross pay,

Prepare Payroll Threats

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Prepare Payroll Controls

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Reviews the documents.

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Disburse Payroll Threats

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Disburse Payroll Controls

5. DISBURSE PAYROLL TAXES AND

5. DISBURSE PAYROLL TAXES AND

Some companies offer flexible benefit

5. DISBURSE PAYROLL TAXES AND

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Disburse Taxes and Deduction Threats

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Disburse Taxes and Deductions Controls

1 and 2. Configuration of system to make

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

Professional employer organizations (PEOs)

2012 Pearson Education, Inc. Accounting Information Systems, Romney/Steinbart

The service bureau or PEO then:

However, companies must carefully monitor

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