Test bank of accounting information systems by hall ch06

Fixed asset accounting systems include cost allocation and matching procedures that are not part of routine expenditure systems.. payroll compares the labor distribution summary to the h

Chapter 6—The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

TRUE/FALSE

1 Time cards are used by cost accounting to allocate direct labor charges to work in process

ANS: F

2 The personnel department authorizes changes in employee pay rates

ANS: T

3 Most payroll systems for mid-size firms use real-time data processing

ANS: F

4 To improve internal control, paychecks should be distributed by the employee's supervisor

ANS: F

5 Employee paychecks should be drawn against a special checking account

ANS: T

6 Because a time clock is used, no supervision is required when employees enter and leave the work place

ANS: F

7 Inventory control performs the formal record keeping function for fixed assets

ANS: F

8 The depreciation schedule shows when assets are fully depreciated

ANS: T

9 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

1 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

2 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

3 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

4 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

5 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

6 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

7 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

8 Objectives of the Fixed Asset System do 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

9 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 do 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 do 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

1 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

2 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

3 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

4 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

5 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

6 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

7 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

8 List two types of authorization required in the Fixed Asset System

ANS:

authorization to purchase the asset and to dispose of the asset

9 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 do 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

1 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