Task 1: Importance of effective accounting systems within a business
Task 2: Management control system of a business
Task 3: Planning and conduct of an audit assignment
Task 4: Audit Report
The accounting records can be defined as ‘All books and documentation related with preparing financial statements or accounting records that enable financial audits and reviews (Bowsher, 2003). The accounting records comprise records related with financial transactions, journals, ledgers, assets and liabilities apart from other documents like checks and invoices.’
The two main books of accounts that capture the accounting process include Journal and Ledger. Both journal and ledger facilitate the commitments of maintaining accurate record of all financial transaction. In fact the process of writing the transaction is similar in nature they serve to cater to different role with various function and purpose of their won in context to the books of accounts.
In accounting records a journal can be defined as process of book keeping that record all financial transaction with the help of book, spread sheet, and/or accounting package. It documents all financial transaction related with the business. This information is recorded from receipts, invoices, sales tickets, cash register tapes and other sources of data that depicts financial transaction. The Journal helps in capturing the business transaction in a chronological manner that is helpful for business (Bowsher, 2003). Before the advent of Computer the company used the physical log book that has multiple columns for maintaining the journal entries. The present business uses the computer and financial software packages to record the financial transaction. This can be assigned to particular ledger with the help of chart of accounts number provided by the software. It supports the preparation of profit and loss account, financial account and other financial documents. The main purpose and use of Journal include
A ledger can be defined as the log book that is physical or software and spread sheet that is in computer facilitating recording of financial transaction. A general ledger includes the summary of all financial transaction maintained in subsidiary ledger. This is basically recording of transaction based on accounting classification. One of the dissimilarities drawn between journal and ledger is how they serve the accounting process (Garrison and Noreen, 2008). The journal represents the primary book of accounts where all the transaction is maintained in the initial stage. This is defined as an original entry in the accounting process. This is followed by the ledger entry based on accounting classification that facilitate analysis and decision making. The order in which the entries are recorded in journal and ledger differ from each other. The main purpose and use of ledger include
Both journal and ledger help in making financial reports namely balance sheet of the company, income and expenses statement, and profit and loss accounts. Each transaction is identified as debtor and creditors in the journal entry (Garrison and Noreen, 2008). When it is further entered in the ledger it signify the amount of money to gained as revenue or to be given as expenses or incorporated as profit or loss. As such it is used for decision making by the company.
The fundamental accounting concepts explain the basic accounting process that forms the backbone of all accounting records. All the advanced accounting process used by the company is based on the fundamental accounting (Albrecht and Skousen,2002). In other work it explains the success and failure of an organization. The six accounting concepts practiced by business entity are assessed below
This accounting concept promotes the fact that the company intends to continue the business and has sufficient resources to do so. The importance of Going concern concept is the company needs to follow the standard accounting practices and an external auditors inspect the financial statement on yearly basis to decide if the company is going concern or not.
This accounting concept is based on the fact that the business organization and the owner of the business are two separate entities (Albrecht and Skousen,2002).. The importance of the business entity concept is that it separates the business profits and liability separate from the personal liability of the owner.
The financial statements of a company are prepared based on accrual system concept. It signifies the income and expenditure of the company pertaining to a specific time period and defined in terms of cash. The importance of accrual system concept is that it states the cash flow and its implication on the financial position with relevance to the accounting period. As such the company can calculate the total income earned within that period. It also helps to identify the accrued income earned during that period.
This concept is essential at the time of preparation of financial statement. In case of any doubt related with the preparing this statement, it will be taken as the loss of time. The importance of prudence concept is that it checks the over estimation of revenue and under estimation of expenditure by the accountant (Windal, 2003). As such it enables the process of deriving actual financial result for particular accounting period.
This concept emphasise the importance of using the same techniques to measure accounting process by the company. The importance of consistency concept is that it helps in avoiding any type of error, discrepancies and misguidance. As such it brings consistency in the accounting process.
The concept emphasise the importance of keeping away all immaterial and impractical facts from the accounting processs (Windal, 2003). The importance of materiality concept is it saves time energy and money and helps in achieving actual results. As such it reduces the risk of external auditors.
There are various factors influencing the nature and structure of accounting and they are evaluated below
The manual accounting system depends on the journal entry that records the initial transaction and ledger entry that record the classified entry. The accountant preparing the ledger based on manual accounting system needs to use the ‘T’ table. It include column for running debtors, creditors, balance and remaining balance of debt or credit (Gowans, Hughes and Newby, 2004). It has no impact on starting balance of the accounts. It is time consuming process for an accountant.
The computer accounting system is the modern and updated accounting system using the software package. The computer accounting system emphasise on the starting balance of every account along with the months to date total transaction. It facilitates the recording of every fiscal period related with individual accounts (Gowans, Hughes and Newby, 2004). The starting balance and running balance are attuned in the computer accounting to calculate the ending balance for the accounting period. The computer accounting system is time saving and enable to track information easily.
Economic growth impacts every business big, small and medium. In this context the capability (absorbing problem) and human resource of the company helps to make better use of growth opportunity. If the capability of the company in terms of financial resources is good it can take advantage of growth or handle economic recession (Kieso, Weygandt, and Warfield, 2012).The nature and structure of accounting process is influenced by economic growth that leads to more business resulting in more financial transaction. On the other hand the economic recession can impact the business activity thereby requiring simple structure of accounting.
Different company adopt different accounting system based on the nature and structure of the business and complexity of the financial transaction. The small company will have different accounting structure compared to the medium and big business. But every industry has a standard accounting standard (Mascarenhas & Sienkiewicz, 2004). The computer accounting using ERP software has a definite structure. The manufacturing industry has a different accounting compared to service industry.
The nature and structure of accounting is directly related with perception of the management and how transparent and standard they intend to make the accounting system of the company (Kieso, Weygandt, and Warfield, 2012). Many big companies incorporate global accounting standard making it more system oriented and error free. It enables better decision making by providing quality financial information.
As most of the company are computerized accounting system and some of them are even using the SAP or ERP package the level of skills and training is an important factor influencing the nature and structure of accounting system adopted by the company (Mascarenhas & Sienkiewicz, 2004). Under such circumstance the nature and structure of accounting process is more in accordance with the global practice.
The effectiveness of the accounting system is influenced by the proper implementation of the accounting process with easy structure and regular monitoring of the system to find any deviation and more in tune with the nature of business. The result of poor implementation is ineffective accounting system and poor decision making process.
Business risk can be defined as the possibility of not receiving return on investment (ROI) and it is an essential part of every business. There are various external factors that are beyond the control of the business increasing the business risk. It is essential to handle the business risk effectively (Pickett, 2006). The probability of loss related with operation and environment namely competition, economic condition and technology that can impact the business. The operational risk along with the financial risk like debt and credit lead to increasing business risk. The five components of business risk are examined below
The various risks related with product include designing product and service that are not serving the need of the customer resulting in loss for a company both professionally and economically. Similarly producing cheap products or not providing value for money increases business risk for the company (Pickett, 2006). As such the company should undertake market survey and product testing to understand the customer needs to design better product and reduce product risk.
The various risk related with market is related lack of proper distribution impacting the customer and demand in the market. The market risk is also related with negative publicity of the company in the market impacting the stock price of the company (Russell, 2000). The competition reducing the price can also lead to market risk. The company can reduce market risk by effective market information management and media relation.
Finance risk is related with fault of interest payment or loan payment by the company. When the credit customers of the company default payment on time and it impacts the payment schedule of the company towards supplier, vendor and banks. When loans from banks, excessive credit are used to support operation by the company it leads to increasing the financial risk (Russell, 2000). In this context the public limited company have the scope to use the stock sales to finance the operation but again excessive release of stock can impact earnings and investment in stocks. This can be reduced by effective credit management and financial planning by the company.
The execution of planned strategy effectively is a big challenge for the company and it can be related with the product, market and finance. The company may have a great idea related with product but if it is not supported by effective product development plan. It can be related with raw material, stock management, labour cost, operation cost and marketing cost leading to increasing execution risk (Spira, 2002). It will increase cost of the product and reduce the profit margin thereby leading to execution risk. The company needs to implement the strategy with proper coordination between production, marketing and fiancé to reduce execution risk.
Internal control is strategic measures undertaken by the company with a view to manage the system, structure, staff, and information effectively. It is a strategy designed by the company to reduce fraud that leads to auditing issues (Spira, 2002). The main objective of internal control system is detecting wrong doing within the company and takes the corrective measures. The process of analyzing the control system in place in business the steps taken include
The two major type of control system used by the company are examined below
In this the company promotes the concept of precaution that aims at preventing the business risk by avoiding wrong action on the part of employees and management. In this controlling system irregularities and errors are taken care in the initial stage of the activity so that they are identified and corrected as precaution.
Detective control system is applied with a view to control the risk already identified. It is done with the help of risk management policy, hedging, reports and action guidelines (Todman, 2005). The detective control system is designed on the basis of the past risk analysis. In addition it also focuses on the modification and correction of the existing risk policy for betterment.
If the company misrepresent the financial information and furnish wrong financial report to the stakeholders of the company it is defined as fraud. Such fraud conducted by the company is considered as unlawful work done intentionally and it is a criminal offence (Todman, 2005). The manipulation done with the financial report can be detected by the auditors during the audit and this is called the risk of fraud. If the auditing process is effective then it increases the risk of fraud. The attributes related with effective auditors and the risk of fraud are mentioned below
The company can detect the fraud happening in the financial department by adopting different fraud control methods. Some of the methods are discussed below.
The most effective method used to detect fraud occurring in the company is the process control method. This aims at making the process transparent and systematic thereby leaving no space for committing fraud (Verschoor, 2008). In addition the regular audit undertaken by the company also ensures detecting any fraud immediately. Apart from this the regular inspection by the manager and monthly financial review also helps to any detect any fraud.
The proactive control method focuses on timely identification of fraud and error thereby increasing the risk of fraud. It is done by regular assessment of data for a specific period of time. In the process of evaluating the financial data and information the company gets an insight into the relationship between people and events and how the data is manipulated resulting in the fraud, thereby helping to identify the anomaly and variance (Verschoor, 2008). The proactive control method helps in identifying the fraud within the company on time so that the corrective actions can also be taken on time.
Whistle blower online is system available in the internet supporting detection of fraud. The company can use the whistle blower online to identify and report any fraud conducted by any employee of the organization and report the same in a secured manner (Windal, 2003). It is direct hotline connecting the fraud detection department with the top management of the company so that the confidentiality of the information is maintained. It is an effective method of fraud detection and completely system oriented process.
The planning of an audit is directly related with the overall financial report and operational report that are provided by the business entity and this pertains to a defined accounting period and the report related with that period (Windal, 2003). It is with the help of gathering sufficient evidence that an auditors conduct the audit of the company by inspecting all the financial and operational report and reviewing if they follow the auditing policies and procedures. The audit planning is done with reference to scope, materiality and risk for a manufacturing company
The scope, materiality and risk related with the audit planning are related with the financial report and data that are provided by the management of the company at the end of the accounting period. It is also related with the framework adopted by the company in maintain the financial report of the company. The other important factor related with the planning of an audit includes if the company followed the standard that is defined for the industry and the auditor considers this in context to the scope, materiality and risk (Yates, 2004). The planning of an audit also include the reporting requirement objective that emphasis on the deadline orientation and regular communication with the top management of the company who are responsible of the corporate governance of ethical practice of the company
An effective audit planning comprise of the major factor that explain the significance of the business entity with reference to the materiality, the fundamental characteristic of the financial report which can act as major threat based on the misrepresentation of the material. The detection of the material signify the financial transaction related with the company and the proper posting of the transaction along with checking the account balances in context to the business transaction (Yates, 2004). With a view to study the effectiveness of the internal control system of purchase account it was extensively tested and the weakness identified and presented to the management of the company.
The efficient planning of audit has positive impact on the business. With reference to the scope, materiality and risk the auditors is responsible to make the internal audit department take care of
With reference to the scope, materiality and risk the internal audit and external audit differs and it is explained in the table
|
Internal Audit |
External Audit |
|
It is part of the company and integrated with the accounting department. |
It is outside the company and integrate with the financial association. |
|
Internal audit is responsible auditing the company. |
External audit is responsible for auditing the internal audit report for accuracy. |
|
The internal audit benefits the management at different level of the company. |
The external audit benefit is board members, shareholders and administrators. |
|
It is used for taking financial decision. |
It is used for evaluating the internal audit report. |
|
The scope of internal audit is related with assessing all segment of the business. |
The scope of external audit is related with assessing the public entity. |
The audit test can be defined as the test undertaken by the auditors with due authorization of the top management of the company and prescribed in the accounting and auditing policy of the company. The main objective behind the internal audit and external audit undertaken by the company is related with maintaining the accuracy of the financial statement prepared and presented by the accounting department of the company (Blanco, 2001). The financial report highlights the performance of the company financially and the importance of this financial report is immense as this plays a crucial role in encouraging the existing investors to increase the investment and attract new investors. As such it is essential to provide fair and accurate information to the investors and other stakeholder interested in the business of the company. In this context it is the duty of the auditors to identify and use appropriate audit test so that the interest and investment of various stakeholder are safeguarded.
It is essential for an auditors to conduct audit test when it is observed that the internal audit control are not operating effectively or when it is found that substantive procedures in itself is not able to provide enough suitable evidence during the assertion stage. The test of control identify three area of testing and they are
The material misstatements at the assertion stage are identified with the help of substantive testing (Blanco, 2001). It comprises of testing of details in context ot the classes of transactions, balances and disclosure of accounts and substantive procedures of accounting. It includes
The productive association between internal audit and external audit leads to interactive working enriching the audit process of the company (Braiotta, 2004). The audit process is special activity and conducting an audit process in an appropriate manner follows three distinct stages and they are recorded below
In context to the audit process the narrative notes give step by step explanation of the audited business entity’s main operation and systems. The main objective of narrative notes is to describe the major activities of control (Braiotta, 2004). The required information for making narrative notes is collected by reviewing the procedures manuals and other system documentation. The personal interview is also conducted to get information.
The working papers helps the auditors to make the audit management effective with the help of automation software and auto audit management by overcoming the personal error of the auditor and increasing the efficiency (Chandler, 2003). The working helps the auditors in making plan for annual audit, audit findings, risk assessment and management report.
The graphical representation of information through the flow of activities is known as the flowcharts in the audit process. It facilitates the operation by enabling the visualization of the audit process (Chandler, 2003). It assists the auditor in evaluating operation, identifying inefficiencies in process and controlling weakness. It is recognized as one of the valuable tool that helps the auditor to process documents.
Title – Audit of financial statements
Addressee – The Audit committee
The current audit is conducted with the objective of examining the financial statement of manufacturing company with a view to identify if the company is following the prescribed auditing policies and procedures and the financial information is accurate (Engel, 2005). The audit process conducted includes risk assessment, process deviation and conclusion along with the recommendation.
The main role and responsibility of the directors of the company include incorporating the standard audit of the industry in the company and prescribing the appropriate accounting policies based on the industry standard and ensuring all the accounting policies are implemented by the finance department (Engel, 2005). On the other hand the role and responsibility of the auditors comprise of conducting proper audit of the financial statement and record and providing unbiased opinion based on audit result and any changes that has happened in context to the key performance indicator.
The opinion of auditors is based on the result of the audit conducted and it includes the recognition process, management feedback, and employee feedback and data analysis (Frase, 2000). Opinion provided by the auditors in context to what is identified in context to the organizational profile, quality and capability of the management, experience of the employees and the result of the analysis and assessment.
The result of the audit supports the fact that the financial statement of the company is in accordance with the prescribed auditing standards, organization policies and regulation. However the performance of the company in current accounting period compared to the earlier accounting period exhibit deteriorations from the year 2013 to 2014 in terms of profitability, asset management and capital reserve (Frase, 2000). The suggestion given to the management for improving the above mentioned attributes are as below.
Signature and Date
Statutory audit can be defined as the process of reviewing accuracy or appropriateness of financial records of an organisation and this process of review is required legally (Kremer, 2009). In other words, statutory audit can be referred as the audit that is prescribed by statute or law.
The main purpose of a statutory audit is to determine whether fair and precise demonstration of financial position is done on the part of an organisation and this is done through prompt examination of information such as financial transactions, book keeping records and bank balances.
The main objectives of statutory audit are to
Statutory audit can be performed on the part of a qualified accounting firm with the main goal of assessment of an organizations financial position (McMillan, 2006). The main objective of a statutory auditor is to make sure that the audited organisation issues accurate financial statements and keep compliance with UK GAAP.
The process of statutory Audit encompass
The steps involved in the process of statutory auditing are as follows
Conclusion
From the above generated information regarding statutory audit, it is clear that statutory audit is that type of audit which is prescribed by statute or law of a country. Statutory audit is a very efficient mechanism of ensuring that financial statements have been prepared and presented in a true and fair manner (Wyld and Ginman, 2013). This in turn aids in depicting whether or not a company has represented accurate and appropriate affairs of its business. In this regard, the main activities that fall under statutory audit are assessments of financials, accounts and financial risks.
References
Albrecht, W. and Skousen, K. (2002). Accounting concepts & applications. Cincinnati, Ohio: South-Western.
Blanco, J. (2001) Business fraud. Huntington, WV: Humanomics Pub.
Bowsher, C. (2003) Financial management. [Washington, D.C.]: The Office.
Braiotta, L. (2004) The audit committee handbook. New York: Wiley.
Chandler, P. (2003) Trust accounts. London: Butterworth & Co.
Engel, G. (2005) Financial audits. Washington, DC: U.S. Government Accountability Office.
Frase, L. (2000) The curriculum management audit. Lanham, Md.: Scarecrow Press.
Garrison, R. and Noreen, E. (2008). Managerial accounting. Burr Ridge, Ill.: Irwin.
Gowans, R., Hughes, G. and Newby, G. (2004). Accounting records & reports. Collingwood, Vic.: VCTA Pub.
Kieso, D., Weygandt, J. and Warfield, T. (2012). Intermediate accounting. Hoboken, NJ: Wiley.
Kremer, B. (2009). Audit. Luxembourg: Casino Luxembourg.
Mascarenhas, A. & Sienkiewicz, T. (2004) Accounts and audit of pension schemes. London: Butterworths.
McMillan, E. (2006). The audit. Churchton, MD: Harwood Pub.
Pickett, K. (2006) Audit planning. Hoboken, N.J.: Wiley.
Russell, J. (2000) The quality audit handbook. Milwaukee, Wis.: ASQ Quality Press.
Shiner, L. (2006). Analysis and recommendations for the accounting system of the nature conservancy. Berkeley: University of California.
Spira, L. (2002) The audit committee. Boston: Kluwer Academic.
Todman, F. (2005). Wall street accounting. New York: The Ronald Press Company.
Verschoor, C. (2008) Audit committee essentials. Hoboken, N.J.: John Wiley & Sons, Inc.
Windal, F. (2003). The accounting concept of realization. East Lansing: Bureau of Business and Economic Research, Graduate School of Business Administration, Michigan State University.
Wyld, R. and Ginman, P. (2013). Statutory audit requirements. London: Institute of Chartered Accountants in England and Wales
Yates, J. (2004). Control through communication. Baltimore: Johns Hopkins University Press.
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