Page 303 - Accounting Information Systems

274 PART II Transaction Cycles and Business Processes

Update General Ledger
The general ledger function receives the labor distribution summary from cost accounting, the disburse-
ment voucher from AP, and the journal voucher from cash disbursements. With this information, the gen-
eral ledger clerk makes the following accounting entries:

From the Labor Distribution Summary
DR CR
Work-in-Process (Direct labor) XXX.XX
Factory Overhead (Indirect labor) XXX.XX
Wages Payable XXX.XX
From Disbursement Voucher
DR CR
Wages Payable XXX.XX
Cash XXX.XX
Federal Income Tax Withholdings XXX.XX
Payable
State Income Tax Withholdings Payable XXX.XX
FICA Income Tax Withholdings Payable XXX.XX
Group Insurance Premiums Payable XXX.XX
Pension Fund Withholdings Payable XXX.XX
Union Dues Payable XXX.XX

The debits and credits from these entries must equal. If they do not, there is an error in the calculation
of either labor distribution charges or payroll. When the equality has been verified, the clerk files the
voucher and labor distribution summary.

PAYROLL CONTROLS
Transaction Authorization
A form of payroll fraud involves submitting time cards for employees who no longer work for the firm.
To prevent this, the personnel action form helps payroll keep the employee records current. This docu-
ment describes additions, deletions, and other changes to the employee file and acts as an important au-
thorization control to ensure that only the time cards of current and valid employees are processed.

Segregation of Duties
The time-keeping function and the personnel function should be separated. The personnel function pro-
vides payroll with pay rate information for authorized hourly employees. Typically, an organization will
offer a range of valid pay rates based on experience, job classification, seniority, and merit. If the produc-
tion (time-keeping) department provided this information, an employee might submit a higher rate and
perpetrate a fraud.
For purposes of operational efficiency, the payroll function performs several tasks. Some of these are
in contradiction with basic internal control objectives. For example, the payroll function has both asset
custody (employee paychecks) and record-keeping responsibility (employee payroll records). This is the
equivalent in the general purchases system of assigning AP and cash disbursement responsibility to the
1
same person. Segregating key aspects of the payroll transaction between AP and cash disbursement
functions returns control to the process. AP reviews the work done by payroll (payroll register)
and approves payment. Cash disbursements then writes the check to cover the total payroll. None of the
employee paychecks is a negotiable instrument until the payroll check is deposited into the imprest
account.

1 This opens the opportunity for the person to create a false liability to himself (or an agent), approve payment, and write the check.