Page 324 - Accounting Information Systems

CHAPTE R 6 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures 295

of service. Depending on usage, some vehicles reach job? In what way, if at all, does Figure 6-13 need to
this point sooner than others. When a vehicle reaches be altered to reflect these adjustments?
80,000 miles, the supervisor is authorized to use it in d. How does the auditor verify the numbers that the
trade for a new replacement vehicle or to sell it pri- fixed asset department calculates at the end of the
vately. Employees of the company are given the first period?
option to bid on the retired vehicles. Upon disposal of
the vehicle, the supervisor submits a disposal report to 12. PAYROLL PROCEDURES
the fixed asset department, which writes off the asset.
When employees arrive for work at Harlan Manufactur-
Required ing, they punch their time cards at a time clock in an
Discuss the potential for abuse and fraud in this system. unsupervised area. Mary, the time-keeping clerk, tries
Describe the controls that should be implemented to to keep track of the employees but is often distracted by
reduce the risks. other things. Every Friday, she submits the time cards
to Marsha, the payroll clerk.
Marsha copies all time cards and files the copies in
10. FIXED ASSET FLOWCHART
the employees’ folders. She uses employee wage
ANALYSIS records and tax tables to calculate the net pay for each
Discuss the risks depicted by the fixed asset system flow- employee. She sends a copy of the payroll register to
chart for Problem 10. Describe the internal control the accounts payable department and files a copy in the
improvements to the system that are needed to reduce payroll department. She updates the employee records
these risks. with the earnings and prepares the payroll summary and
sends it to the cash disbursements department along
with the paychecks.
11. FIXED ASSET SYSTEM After receiving the payroll summary, John, an
The treatment of fixed asset accounting also includes accounts payable clerk, authorizes the cash disburse-
accounting for mineral reserves, such as oil and gas, ments department to prepare paychecks. John then
coal, gold, diamonds, and silver. These costs must be updates the cash disbursements journal. The treasurer
capitalized and depleted over the estimated useful life signs the paychecks and gives them to the supervisors,
of the asset. The depletion method used is the units of who distribute them to the employees. Finally, both the
production method. An example of a source document accounts payable and cash disbursements departments
for an oil and gas exploration firm is presented in the send a summary of transactions to the general ledger
figure for Problem 11. The time to drill a well from start department.
to completion may vary from 3 to 18 months, depend-
Required
ing on the location. Further, the costs to drill two or
a. Analyze the internal control weaknesses in the sys-
more wells may be difficult to separate. For example,
tem. Model your response according to the six cate-
the second well may be easier to drill because more is
gories of physical control activities specified in the
known about the conditions of the field or reservoir, SAS 78/COSO control model.
and the second well may be drilled to help extract the
b. Make recommendations for improving the system.
same reserves more quickly or efficiently.
Solving this problem may require additional research
beyond the readings in the chapter. 13. FIXED ASSET SYSTEM
Required Fittipaldi Company recently purchased a patent for a ra-
a. In Figure 6-11, the source documents for the fixed dar detection device for $8 million. This radar detection
asset accounting system come from the receiving device has been proven to detect three times better than
department and the accounts payable department. any existing radar detector on the market. Fittipaldi
For an oil and gas firm, from where would you expects four years to pass before any competitor can
expect the source documents come? devise a technology to beat its device.
b. Assume that a second well is drilled to help extract
the reserves from the field. How would you allocate Required
the drilling costs? a. Why does the $8 million represent an asset? Should
c. The number of reserves to be extracted is an esti- the fixed asset department be responsible for its
mate. These estimates are constantly being revised. accounting?
How does this affect the fixed asset department’s b. Where would the source documents come from?