Test bank of accounting information systems by hall ch06

Chapter 6—The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures TRUE/FALSE Time cards are used by cost accounting to allocate direct labor charges to work in process ANS: F The personnel department authorizes changes in employee pay rates ANS: T Most payroll systems for mid-size firms use real-time data processing ANS: F To improve internal control, paychecks should be distributed by the employee's supervisor ANS: F Employee paychecks should be drawn against a special checking account ANS: T Because a time clock is used, no supervision is required when employees enter and leave the work place ANS: F Inventory control performs the formal record keeping function for fixed assets ANS: F The depreciation schedule shows when assets are fully depreciated ANS: T Authorization to dispose of fixed assets should be issued by the user of the asset ANS: F 10 Work-in-process records are updated by payroll personnel ANS: F 11 Ideally, payroll checks are written on a special bank account used only for payroll ANS: T 12 The supervisor is the best person to determine the existence of a “phantom employee” and should distribute paychecks ANS: F 13 Payroll processing can be automated easily because accounting for payroll is very simple ANS: F 14 Timekeeping is part of the personnel function ANS: F 15 Fixed asset accounting systems include cost allocation and matching procedures that are not part of routine expenditure systems ANS: T 16 Asset maintenance involves only the recording of depreciation charges Physical improvements are always expensed ANS: F 17 Fixed Asset Systems must keep track of the physical location of each asset to promote accountability ANS: T 18 Time cards capture the total time an individual worker spends on each production job ANS: F 19 Accounting conventions and IRS rules sometime specify the depreciation parameters to be used ANS: T 20 The fixed asset disposal report authorizes the user department to dispose of a fixed asset ANS: F MULTIPLE CHOICE The document that captures the total amount of time that individual workers spend on each production job is called a a time card b job ticket c personnel action form d labor distribution form ANS: B An important reconciliation in the payroll system is a general ledger compares the labor distribution summary from cost accounting to the disbursement voucher from accounts payable b personnel compares the number of employees authorized to receive a paycheck to the number of paychecks prepared c production compares the number of hours reported on job tickets to the number of hours reported on time cards d payroll compares the labor distribution summary to the hours reported on time cards ANS: A Which internal control is not an important part of the payroll system? a Supervisors verify the accuracy of employee time cards b Paychecks are distributed by an independent paymaster c Accounts payable verifies the accuracy of the payroll register before transferring payroll funds to the general checking accounting d General ledger reconciles the labor distribution summary and the payroll disbursement voucher ANS: C Which transaction is not processed in the Fixed Asset System? a purchase of building b improvement of equipment c purchase of raw materials d sale of company van ANS: C Depreciation a is calculated by the department that uses the fixed asset b allocates the cost of the asset over its useful life c is recorded weekly d results in book value approximating fair market value ANS: B Depreciation records include all of the following information about fixed assets except a the economic benefit of purchasing the asset b the cost of the asset c the depreciation method being used d the location of the asset ANS: A Which control is not a part of the Fixed Asset System? a formal analysis of the purchase request b review of the assumptions used in the capital budgeting model c development of an economic order quantity model d estimates of anticipated cost savings ANS: C Objectives of the Fixed Asset System not include a authorizing the acquisition of fixed assets b recording depreciation expense c computing gain and/or loss on disposal of fixed assets d maintaining a record of the fair market value of all fixed assets ANS: D Which of the following is not a characteristic of the Fixed Asset System? a Acquisitions are routine transactions requiring general authorization b Retirements are reported on an authorized disposal report form c Acquisition cost is allocated over the expected life of the asset d Transfer of fixed assets among departments is recorded in the fixed asset subsidiary ledger ANS: A 10 In the payroll subsystem, which function should distribute paychecks? a personnel b timekeeping c paymaster d payroll ANS: C 11 Where does the responsibility lie for reconciling the labor distribution summary and the payroll disbursement voucher? a cash disbursements b cost accounting c personnel d general ledger ANS: D 12 Which of the following statements is not true? a Routine payroll processing begins with the submission of time cards b Payroll clerks must verify the hours reported on the time cards c Payroll reconciles personnel action forms with time cards and prepares paychecks d Cash disbursements signs paychecks and forwards them to the paymaster for distribution ANS: B 13 In a manufacturing firm, employees use time cards and job tickets Which of the following statements is not correct? a Job tickets are prepared by employees for each job worked on, so an employee may have more that one job ticket on a given day b An individual employee will have only one time card c The time reported on job tickets should reconcile with the time reported on time cards d Paychecks should be prepared from the job tickets ANS: D 14 Which department is responsible for approving changes in pay rates for employees? a payroll b treasurer c personnel d cash disbursements ANS: C 15 Which of the following situations represents a serious control weakness? a Timekeeping is independent of the payroll department b Paychecks are distributed by the employees immediate supervisor c Time cards are reconciled with job tickets d Personnel is responsible for updating employee records, including creation of records for new hires ANS: B 16 Why would an organization require the paymaster to deliver all unclaimed paychecks to the internal audit department? a to detect a “phantom employee” for whom a check was produced b to prevent an absent employee’s check from being lost c to avoid paying absent employees for payday d to prevent the paymaster from cashing unclaimed checks ANS: A 17 Which of the following is not a reasonable control for fixed assets? a Proper authorization is required for acquisition and disposal of fixed assets b Fixed asset records show the location of each asset c Fully depreciated assets are immediately disposed of d Depreciation policies are in writing ANS: C 18 Cost accounting updates work-in-process accounts from a time cards b the labor distribution summary c job tickets d personnel action forms ANS: C 19 Payroll uses time card data to all of the following except a prepare the payroll register b update employee payroll records c prepare the labor distribution summary d prepare paychecks ANS: C 20 Payroll checks are typically drawn on a the regular checking account b a payroll imprest account c a wages payable account d petty cash ANS: B 21 The personnel action form provides authorization control by a preventing paychecks for terminated employees b verifying pay rates for employees c informing payroll of new hires d all of the above ANS: D 22 Accounting records that provide the audit trail for payroll include all of the following except a time cards b job tickets c payroll register d accounts payable register ANS: D 23 Personnel actions forms are used to all of the following except a activate new employees b terminate employees c record hours worked d change pay rates ANS: C 24 The payroll department performs all of the following except a prepares the payroll register b distributes paychecks c updates employee payroll records d prepares paychecks ANS: B 25 The document that records the total amount of time spent on a production job is the a time card b job ticket c labor distribution summary d personnel action form ANS: C 26 A control technique that can reduce the risk of a terminated employee being paid is a a security camera viewing the time clock b the supervisor taking role during the shift c paychecks being distributed by an independent paymaster d reconciliation of time cards and job tickets ANS: C 27 Accounts payable a signs paychecks b prepares the payroll voucher c reconciles time cards and employee records d distributes paychecks to employees ANS: B 28 All of the following are processed by the Fixed Asset System except a sale of unneeded equipment b purchase of raw materials c repair of production equipment d purchase of a new plant ANS: B 29 The Fixed Asset System performs all of the following except a determines the need for new assets b maintains depreciation records c records retirement and disposal of assets d tracks the physical location of fixed assets ANS: A 30 The payroll department performs all of the following except a prepares paychecks b transfers adequate funds to the payroll imprest account c updates employee payroll records d prepares the payroll register ANS: B 31 Depreciation a assures that assets are reported at fair market value b is discretionary for many firms c allocates the cost of an asset over its useful life d is the responsibility of the department using the asset ANS: C 32 The Fixed Asset System is similar to the expenditure cycle except a fixed asset transactions are non-routine and require special authorization and controls b fixed assets are capitalized, not expensed c both a and b d none of the above ANS: C 33 Asset maintenance involves a the recording of periodic depreciation b adjusting the asset records to reflect the cost of physical improvements c keeping track of the physical location of the assets d all of the above ANS: D 34 The Fixed Asset Systems does all of the following except a records acquisition of assets b records improvements to assets c estimates the fair market value of assets in service d records the disposal of assets ANS: C 35 Asset disposal a occurs as soon as an asset is fully depreciated b requires no special authorization c automatically initiates the purchase of a replacement asset d must follow formal authorization procedures ANS: D SHORT ANSWER Describe an internal control procedure that would prevent an employee from punching the time clock for another, absent employee ANS: supervision of the time clock at the start of the shift Why should the employee’s supervisor not distribute paychecks? ANS: A form of payroll fraud involves a supervisor submitting fraudulent time cards for nonexistent employees The resulting paychecks, when returned to the supervisor are then cashed by the supervisor Describe an internal control procedure that would prevent a supervisor from stealing the unclaimed paychecks of employees who have been terminated ANS: This type of fraud can be reduced or eliminated by using a paymaster to distribute paychecks to employees in person Any uncollected paychecks are then returned to payroll Also, mail final paychecks to terminated employees Why should employee paychecks be drawn against a special checking account? ANS: A separate imprest account is established for the exact amount of the payroll based on the payroll summary When the paychecks are cashed, this account should clear leaving a zero balance Any errors in checks (additional checks or abnormal amounts) would result in a non-zero balance in the imprest account and/or some paycheck would not clear This will alert management to the problem so corrective action can be taken Why should employees clocking on and off the job be supervised ANS: A form of payroll fraud involves employees clocking the time cards of absent employees By supervising the clocking in and out process, this fraud can be reduced or eliminated What is a personnel action form? ANS: The personnel action form provides the payroll department with a list of currently active employees, so that any submission of time cards by supervisors for fictitious or ex-employees will not be processed In a manufacturing firm, employees typically fill out two different documents regarding their time worked What are they? Why are there two? ANS: The two documents are the time card and the job ticket Two are required because the time card records all the time worked by an employee during the period while the job ticket details the time by project List two types of authorization required in the Fixed Asset System ANS: authorization to purchase the asset and to dispose of the asset List four types of data that appear on a depreciation schedule ANS: item description, depreciation method, useful life, date acquired, cost, salvage value, accumulated depreciation, depreciation expense per period, book value 10 Which documents prompt the fixed asset department to create a fixed asset record? ANS: the receiving report and the disbursement voucher 11 Describe an internal control that would prevent an employee from stealing a computer and then reporting it as scrapped ANS: Supervisors must authorize the disposal of the computer Unless so authorized, the record will continue to show that the employee is responsible for the computer 12 Describe an internal control that would prevent the payment of insurance premiums on an automobile that is no longer owned by the company ANS: Perform an annual physical inventory of fixed assets and adjust the records to reflect assets no longer on hand Prepare reports about the disposal of assets 13 Describe an internal control that would prevent the charging of depreciation expense to the maintenance department for a sweeper that is now located in and used by the engineering department ANS: Prepare reports about the transfer of fixed assets Perform an annual physical inventory and note the location of assets Budget and then hold each department accountable for depreciation expense for assets located in each department 14 Describe an internal control that would prevent the acquisition of office equipment which is not needed by the firm ANS: A higher organizational level or other appropriate person authorizes fixed asset acquisitions; part of the authorization is showing that a need for the asset exists 15 What negative consequences result when fixed asset records include assets that are no longer owned by the firm? ANS: On the financial statements, assets will be overstated and depreciation expense could be overstated Assets on property tax returns will be overstated and too much tax will be paid Insurance premiums will be paid on nonexistent assets 16 Explain the purpose of each of the following documents used in the payroll system: the personnel action form, the job ticket, the time card ANS: The personnel action form is a document which identifies employees who should receive a paycheck; reflects changes in pay rates, payroll deductions, and job classifications The job ticket collects information on the time individual workers spend on each production job The time card captures the total time that an employee is at work 17 How fixed asset systems differ from the expenditure cycle? ANS: The fixed asset system processes nonroutine transactions for a wider group of users in the organization than the expenditure cycle Further, the expenditure cycle processes routine acquisitions of raw materials inventories for the production function and finished goods inventories for the sales function The expenditure cycle transactions are oftentimes automatically approved by the system, while fixed asset transaction approvals typically demand individual attention due to the uniqueness of the transactions 18 What is recorded by the asset maintenance part of the Fixed Asset System? ANS: periodic depreciation following an approved depreciation schedule and physical improvements to the asset to increase the subsidiary account and to adjust the depreciation schedule 19 How are the following carried out in the Fixed Asset System: authorization, supervision, independent verification? ANS: Independent authorization is required to acquire an asset and to formalize the depreciation schedule Supervision must be exercised over the physical assets Independent verification must confirm the location, existence, and condition of the assets 20 Which department authorizes changes to employee pay rates? ANS: The personnel department via the personnel action form ESSAY The Golf Club Company makes custom golf clubs The manufacturing supervisor interviews people who have specialized manufacturing skills, and he informs payroll when an employee is hired The employees use a time clock to record the hours they work The employees are also required to keep a record of the time they spend working on each order The supervisor approves all time cards The accountant analyzes the job tickets and prepares a labor distribution summary Payroll prepares the payroll register and paychecks The supervisor distributes the paychecks to the employees Payroll informs cash disbursement of the funds required to cover the entire payroll amount The cash disbursements clerk ensures that there are adequate funds in the company's regular checking account to cover the payroll Describe at least three internal control weaknesses; for each weakness suggest an improvement to internal control ANS: WEAKNESS: The supervisor could be creating fictitious employees The supervisor has too many incompatible duties; he hires workers, approves the time cards, and distributes the paychecks IMPROVEMENT: Segregate duties Personnel should hire employees and a paymaster should distribute paychecks WEAKNESS: Employees could be paid for time they not work; a co-worker could record an absent worker as present (punch the time clock) IMPROVEMENT: Supervise the time clock Reconcile time cards and job time tickets WEAKNESS: Payroll has authorization and transaction processing responsibilities Payroll is authorizing the disbursement to fund the entire payroll Accounts payable is not part of the system IMPROVEMENT: Segregate duties; accounts payable should verify the accuracy of the payroll register and create a disbursement voucher WEAKNESS: Payroll is funded through the general checking account IMPROVEMENT: Paychecks should be written on a separate payroll account Describe how the Fixed Asset System differs from the expenditure cycle ANS: The Fixed Asset System processes nonroutine transactions which are recorded as capital assets The receiving department delivers fixed assets to the user/manager The fixed asset department performs the record keeping function The expenditure cycle processes routine transactions which are often debited to inventory or expensed The receiving department delivers routine purchases to a central store or warehouse Inventory Control performs the record keeping function for inventory purchases Three major tasks are handled by the Fixed Asset System What is the purpose of each? What special control issues affect each? ANS: Asset acquisition handles the steps leading to the acquisition of new fixed assets: recognition of need, authorization and approval, possible capital investment analysis, and selection of supplier Because of the value of fixed assets, special approvals are needed Asset maintenance involves adjusting the subsidiary account balances for depreciation, and improvements and tracking location Control involves accountability by keeping track of the physical location of each asset Asset disposal handles the removal of assets from the subsidiary ledger when the asset is taken out of service This requires special approval and preparation of a disposal report The Baccus Corp manufactures medical equipment This is a capital intensive industry and investments in fixed assets exceed $5 million a year The minimum cost for production equipment is $75,000 When supervisors want new production machinery, they contact the plant manager The plant manager approves or denies the request based on discussions with the production supervisor, the repair and maintenance supervisor, and the quality control supervisor A purchase order is prepared by the purchasing department and sent to one of the three major suppliers of production machinery for medical equipment The equipment is delivered immediately to the production floor and put into service At the end of the month, the production supervisor informs the general ledger clerk about the receipt of the machinery The general ledger clerk establishes an asset record for the machine At the end of the year, the general ledger clerk computes straight-line depreciation based on a 10-year life with a 10 percent salvage value Depreciation expense is recorded as a direct reduction of the asset cost The repair department performs routine maintenance on all of the production equipment Occasionally the repair department rebuilds a machine to extend its useful life All of the costs associated with the repair department are charged to manufacturing overhead When a machine becomes obsolete, production employees move it to a corner of the factory floor and break it down so that parts can be used in other machines Production employees routinely remove parts for personal use Some smaller machines have disappeared completely from the factory floor The general ledger clerk takes a physical inventory every three years About 75 percent of the fixed assets can be located and identified Other assets have serial numbers that are inaccessible, so the item cannot be matched to a fixed asset record Some fixed asset records cannot be traced to an actual item Several machines that have been scrapped and are being used for spare parts were matched to fixed asset records At the last inventory, the general ledger clerk did not make any adjustments to the fixed asset records explaining that 75 percent accuracy in the fixed asset physical inventory was excellent Describe five internal control weaknesses and explain how to correct them ANS: WEAKNESS: There is no written documentation of the approval for purchase IMPROVEMENT: A formal capital investment analysis should be performed for purchases of fixed assets; the analysis should evaluate cost and benefits of the request WEAKNESS: There is no process for obtaining competitive bids IMPROVEMENT: Price bids should be obtained from the three suppliers before a purchase order is issued WEAKNESS: Fixed assets are delivered directly to the factory floor IMPROVEMENT: All purchases should go through the receiving department; the equipment should be inspected and a receiving report should be prepared WEAKNESS: The production supervisor notifies the general ledger clerk about the receipt of fixed assets IMPROVEMENT: The receiving department should send a copy of the receiving report to the fixed asset department so that fixed asset records can be updated and accountability for the asset established WEAKNESS: The general ledger clerk is maintaining fixed asset records IMPROVEMENT: The fixed asset department should maintain fixed asset records WEAKNESS: Depreciation is computed using a standard method, asset life, and salvage value IMPROVEMENT: Management should ensure that the depreciation method is appropriate The asset life and salvage value should be determined individually for each fixed asset acquisition WEAKNESS: Depreciation is recorded as a direct reduction of the asset cost IMPROVEMENT: Depreciation should be recorded in an Accumulated Depreciation account for each asset WEAKNESS: Costs to rebuild a machine is charged to manufacturing overhead IMPROVEMENT: Costs to rebuild machines should be recorded as an increase to the cost of the asset WEAKNESS: There is no authorization to scrap an obsolete machine IMPROVEMENT: Obtain written authorization from management before a machine is scrapped WEAKNESS: Employees remove equipment and equipment parts from the premises without authorization IMPROVEMENT: Employees should receive written authorization before removing parts or equipment from the factory WEAKNESS: The general ledger clerk is conducting the physical inventory and maintaining the record keeping IMPROVEMENT: The general ledger clerk should not be taking the physical inventory count Also, the physical count should occur more frequently WEAKNESS: Fixed assets cannot be matched with records IMPROVEMENT: Apply easily accessible labels to identify fixed assets WEAKNESS: Fixed assets cannot be located and are not removed from the books IMPROVEMENT: Fixed assets that cannot be located must be removed from the fixed asset records WEAKNESS: Fixed assets that are scrapped remain on the books IMPROVEMENT: Assets that are scrapped should be removed from the fixed asset records WEAKNESS: The clerk regards 75% accuracy as excellent IMPROVEMENT: Acceptance of 75% accuracy is poor Any variation should be investigated and records updated Why does the payroll process lend itself to batch processing? ANS: Payroll lends itself to batch computerization because it is processed at fixed time intervals which permits some time lag Processing the payroll file usually involves most employees each time it is processed, which is an efficient use of computer resources and can be accomplished with a single pass through the file Discuss the fundamental risk and control issues associated with fixed assets that are different from raw materials and finished goods ANS: AUTHORIZATION CONTROLS Because fixed assets are requested and employed by end-users asset acquisitions should be formal and explicitly authorized Each material transaction should be initiated by a written request from the user or department In the case of high-value items, there should be an independent approval process that evaluates the merits of the request on a cost-benefit basis SUPERVISION CONTROLS Because capital assets are widely distributed around the organization, they are more susceptible to theft and misappropriation than inventories that are secured in a warehouse Therefore, management supervision is an important element in the physical security of fixed assets Supervisors must ensure that fixed assets are being used in accordance with the organization’s policies and business practices INDEPENDENT VERIFICATION CONTROLS Periodically, the internal auditor should review the asset acquisition and approval procedures to determine the reasonableness of key factors including: the useful life of the asset, the original financial cost, proposed cost savings as a result of acquiring the asset, the discount rate used, and the capital budgeting method used in justifying decisions to buy or dispose of assets The internal auditor should verify the location, condition, and fair value of the organization’s fixed assets against the fixed asset records in the subsidiary ledger 3 The automatic depreciation charges calculated by the fixed asset system should be reviewed and verified for accuracy and completeness System errors that miscalculate depreciation can result in the material misstatement of operating expenses, reported earnings, and asset values  ... ANS: B 28 All of the following are processed by the Fixed Asset System except a sale of unneeded equipment b purchase of raw materials c repair of production equipment d purchase of a new plant... include all of the following information about fixed assets except a the economic benefit of purchasing the asset b the cost of the asset c the depreciation method being used d the location of the... gain and/or loss on disposal of fixed assets d maintaining a record of the fair market value of all fixed assets ANS: D Which of the following is not a characteristic of the Fixed Asset System?