SUMMARY OF STUDY OBJECTIVES

An introduction to payroll and fixed asset processes. Payroll and fixed asset processes are different from other expenditures in two ways. First, they tend to have fewer transactions than the process of purchasing raw materials. Second, each of these processes has both routine and nonroutine aspects. Payroll has routine processes for weekly, biweekly, or monthly payroll activities, but there are also nonroutine processes for hiring, terminating, or changing the status of employees. Fixed asset processes are routine for depreciating fixed assets, but nonroutine for approving the purchase and disposal of fixed assets.

Payroll processes. Employees must first be hired through the human resources department. The routine accounting processes for maintaining valid employees is the collection, review, and approval of time cards; the calculation of payroll based on pay rates, hours, and deductions; the preparation, approval, and signing of paychecks; a transfer of sufficient funds to the payroll account; distribution of paychecks; and updating payroll and general ledger records.

Risks and controls in payroll processes. Payroll processes involve large sums of cash and the potential for erroneous or inflated timekeeping. Proper controls are necessary to protect the cash and to ensure accurate and complete payroll records. These internal controls can be categorized into authorization, segregation, adequate records and documents, security of assets and documents, and independent checks.

IT systems of payroll processes. Payroll requires routine mathematical calculations and the storing of a large volume of data regarding employees, deductions, vacation days, sick days, and other data. These characteristics of payroll make it a good fit for IT systems. IT systems can include payroll and human resources software, automated timekeeping through bar codes or ID badges, Internet-based time-keeping, and electronic transfer of funds. Some organizations outsource payroll to a payroll processing firm that uses IT systems to provide efficient and cost-effective payroll services.

Fixed asset processes. Many of the processes to purchase fixed assets are similar to those processes to purchase raw materials. The differences in processes occur in the authorization of the purchase, the continuance of the fixed asset after purchase, and the disposal of fixed assets. Authorization is usually specific and based on investment analysis and comparison with the capital budget. Fixed asset continuance requires maintenance of a fixed asset subsidiary ledger for changes in location of fixed assets, ongoing costs to enhance or maintain the assets, and updating of depreciation records. Disposal of fixed assets requires specific approval and record keeping to remove fixed assets from the records and to recognize any gain or loss.

Risks and controls in fixed asset processes. Some of the risks and controls of fixed assets are similar to risks and controls for raw materials purchases. The major differences are that the authorization is more formal and specific for fixed asset acquisitions and the physical security of fixed assets requires more widespread supervision. Segregation of duties, records and documents, and independent checks are very similar to those for raw materials purchases.

IT systems of fixed asset processes. The efficiency and effectiveness of accounting for fixed assets can be greatly improved through the use of specialized asset management software. Such software simplifies the record keeping regarding location and description of fixed assets, depreciation and maintenance records, audit trail, and linkages to the general ledger.

Ethical issues related to payroll and fixed assets processes. Payroll is subject to much unethical employee manipulation such as inflation of hours worked, falsification of overtime or commission records, overstatement of job-related expenses, and creation of ghost employees. Fixed asset information is more likely to be manipulated by management to unethically enhance the financial statements. Often, this occurs when management misclassifies expenses as fixed asset purchases.

Corporate governance in payroll and fixed assets processes. Because payroll funds and fixed assets are particularly susceptible to theft, business organizations must be careful to maintain effective corporate governance systems with respect to these processes. In addition to the need for strong management oversight, internal controls, and ethical practices, corporate managers must recognize their responsibility to be good stewards of the assets underlying the payroll and fixed assets processes.

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