Tuesday, February 28, 2017

HND Assignment on financial systems and auditing

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Contents

 

Introduction

An organization has to maintain different types of accounts for different types of purposes. For mantling the accounts, an organization also has to follow some accounting principles. After mantling the accounts books, these books also needs to be audited to make sure that proper procedures have been taken and there is no fraud and error in the books that have been already kept. On the other hand, the report for the audited accounts also has to be shown to the top level management and the legal authority. So, this assignment will deal with different accounts and their application and how they are to be audited.

 Task 1

1.1    Explain the purposes and uses of different accounting records

For different kinds of needs an organization has to maintain different kinds of accounting books. Though different organization keeps different types of books, still there are some books which are generally maintained by pretty much all organizations. Some of them are as follows:
1.      Journals
2.       Ledger
3.      Cash books
4.      Trial balance
The purposes and uses of the journals: generally journals are the primary books of the accounting books. It is the place where transactions are firstly recorded with maintaining the debit and credit of the transactions. There are different kinds of journals for different types of needs. They are as follow as:
1.      Sales journals are maintained to record the transaction related with on credit sales
2.      Purchase journals is maintained to record on credit purchases
3.      Sales return journals are maintained to record sales return related transaction
4.      Purchase return journals are maintained to record the purchase return related transactions
Purposes and uses of the ledger: ledger is the secondary book in the process of accounting .making or recording journals are not mandatory but maintaining the ledger is mandatory. By maintaining the ledger we know the balance of particular accounts. The main purposes of the ledger are as follow as:
1.      Ledger helps to   find out the balance of an account
2.      Ledger is used to record or maintain trial balances
3.      By maintaining ledger we know the     exact amount balance an account has after a certain amount of time.
Purposes and uses of cash books: generally it is said that cash books are mixed of both journals and the ledgers. Cash books are kept to know the balance of cash after a certain amount of time. Cash books can be classified into two types: cash receivable and cash payment. In cash books only those transactions are recorded which are in cash. The main purposes of cash books are:
1.      By managing the cash books we know the net cash balance of the organization
2.      Cash books shows us the amount of cash inflow and cash outflows after a certain amount of time
Purposes and uses of trial balances: trial balance is the combination of the balance of ledger. Trial balance is prepared to testify the mathematical accuracy of the accounting systems that have been recorded. It justify whether an appropriate methods have been taken in the previous stages. If there is ay error in the previous stages, the two sides of the trial balances will not be same. So, it helps to find out the errors in the accounting systems.

1.2    Assess the importance and the meaning of the fundamental accounting concepts


For maintaining of the accounting systems effectively and efficiently, accounting systems of an organization have to follow some fundamental accounting concepts .some of them are as follow as:
·           – Accruals
·           – Going concern
·           – Historical cost
·           – Prudence
·           – Consistency

Accruals: the fundamental   principal of accruals principal is revenue and costs are recognised as they are earned or incurred, are matched with one another, and are dealt with in the profit and loss account to which they relate, irrespective of the period of receipt or payment.(CIMA, 2000, p.9). According to these concepts, sales and cost accrued in the financial years are recorded and the expenses that occurred in advance area deducted from the current year’s expenses on the other hand the revue that is due for this accounting year is also included in the accounting period.
  Going concern:   according to the going concern principal a business organization will carry on its operational activates for a foreseeable future. According to this principal accounting times are divided into different accounting periods.
Historical cost: according to this principal assets are recorded at the cost price in the balance sheets that means the price in which it is purchased. Even though the market price fluctuates with different times, the price will always be recorded in the cost price.
Prudence: prudence is another important principal of accounting. According to the prudence concepts, the revenues and the profits are not anticipated. Revenues and the profits are only recorded when we get certainty but on the other hand expenses are recorded even though there is less chance of happening, according to this principal provision is made for the losses and the expenses whether there is any chances of loses and expenses.
Consistency: according to this principal, companies should choose the suitable accounting method and have to follow this method consistently unless the changes are better and reflects the fair view of the financial statements. According to this principal the change and its effect on profits should be disclosed in the financial statements.

1.3    Evaluate the factors that influence the nature and structure of the accounting system of the organization


As different organizations may follow different accounting principal according to its needs there are always some factors which directly or indirectly influences the accounting systems of an organization. Some of them are explained as follow as:
1.      Complexity of the organization: complexity of the organization directly influences the accounting structure of the organizations. For example the sole proprietorship may not nor does not need to prepare all the complex accounting books on the other hand the limited companies must have to maintain them. This is also directly related with cost management of the organization.
2.      Cost of the systems: generally management of the accounting systems comes with the huge amount of costing. All the small organizations can’t bear this cost. So they only maintain the accounting books which is must have to be kept.
3.      Size of the organization : size of the organization in terms of the profit making and the resources directly or indirectly  influences the structure of the accounting systems in an organization
4.      Training: for managing the classified and the complex accounting books, the employees of the organization also needs training for them. Those organization which does not have this facilities can’t maintain the procedures to managing the all accounting books.
5.      Availability of Resources: No matter how good the information your business obtains through management accounting, you won't be able to use these insights to implement strategic change unless your company has the financial resources to fund strategic projects. No matter how clear or ambitious the plans are that you make based on management accounting systems, they won't yield results if you don't have sufficient personnel.
6.      Timeliness of Information: A management accounting system that is maintained daily or weekly will provide more useful information than one that is six months out of date. Timeliness affects management accounting systems by providing feedback quickly enough for proactive responses and effective planning.
7.      Effective Feedback: Effective feedback for management accounting relies on creating standards and company culture geared toward gathering relevant information. Create log sheets to track the information you most want to know, such as how many hours employees devote to specific types of tasks or how much product is wasted at the end of each day.
8.      Quality of Information: When you devote sufficient time and attention to creating and maintaining an accounting system, the information it provides will be accurate and genuinely relevant to company operations. Managerial accounting systems are affected by the quality of their inputs. A chart of accounts that breaks down company activities into categories that fully reflect your operation will provide more useful information than a generic template

Task 2


2.1    Identify the different components of business risk associated with strategic move of an organization

In day to day business activities, a business organization has to go through different types of risk and uncertainties. Generally risks are the possibilities of the business failure or losses. There are different types of risk a business organization have to deal with. The main components of the business risks are as follow as:  
 Market risk:  market risk can simply be summed up by saying that the introduction of the new and innovative ideas in the market. Market risk includes focusing on the wrong market segment or failure to understand the needs of the customers. Market risks may also include the failure to understand the technological changes in the market or may be failure to adopt an innovative pricing strategy for the product.
Financial risk: financial risk is the most common risk when we discuss about the business risk. The financial risk mostly originates from the increase and decrees of the interest rate of the business organization. It may also originate from failure to have optimum level of operating capital. A change of the interest rate directly affects the entire business mechanism of an organization. For example cost of capital is directly affected by the change in the interest rate; on the other hand failure to maintain optimum level of operating capital also hinders day to day activities of the business organization.
Operational risk: operational risk generally originates from the daily activities of an business organization. When dealing with business risk operational activities may not be gone as the way we expected to go on.
Economical risk: economical risk is that risk which originates from the change in the economic condition of a particular country. It may originate from the change in the monetary policy or may be originate from the change in the budgetary changes in the country. This is one of the most important components of the business risks.
Unsystematic risks: Unsystematic risk is due to the influence of internal factors prevailing within an organization. Such factors are normally controllable from an organization's point of view. It is a micro in nature as it affects only a particular organization. It can be planned, so that necessary actions can be taken by the organization to mitigate (reduce the effect of) the risk
Systematic Risk: Systematic risk is due to the influence of external factors on an organization. Such factors are normally uncontrollable from an organization's point of view. It is a macro in nature as it affects a large number of organizations operating under a similar stream or same domain. It cannot be planned by the organization.
Purchasing power or inflationary risk: Purchasing power risk is also known as inflation risk. It is so, since it emanates (originates) from the fact that it affects a purchasing power adversely. It is not desirable to invest in securities during an inflationary period

2.2    Critically analyze the control system in place in a business for the purpose of identification of fraud


Fraud is the unlawful and intentional misrepresentation with the intent to deceive by causing actual and potential loss (CIMA, 2000) so we can define fraud as the unlawful and unfair advantages through the unfair or unlawful way. For the identification of the fraud in the business organization we may take the internal control system of the organization more seriously.
Internal control systems are the policies and the procedure which is designed to ensure things like reliability, compliance and assurance. The main objectives of the internal control system of an organization include:
1.      Proper documentation of the accounting records
2.      Segregation of the duties
3.      Proper authorization of the management
4.      Accuracy and adequacy of the records maintained
A key component of the internal control for the payroll includes:
·         Internal controls system tract the activities of the employee like attendee and departure times
·         In term of the pay check , it needs higher authorities approval and need to be proper documentation
key components of the internal controls for the purchase includes :
·         Maintaining the monthly cash management
·         Managing the bank reconciliations books
·         Documentations of the all transactions
Some of the strategies for fraud identification are as follow as:
Implementing Internal Controls: Internal controls are the plans and/or programs implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce the risk of fraud from occurring. For example, a retail store has one cash register employee, one salesperson, and one manage
Making Employees Aware:  Awareness affects all employees everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this. Honest employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or theft.
Proper Documentation: it is another internal control that can help reduce fraud. Consider the example above; if sales receipts and preparation of the bank deposit are documented in the books, the business owner can look at the documentation daily or weekly to verify that the receipts were deposited into the bank. In addition, make sure all checks, purchase orders and invoices are numbered consecutively.
Monitoring Vacation Balances: You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for a period of time. It is also a good idea to rotate employees to various jobs within a company.
Hiring Experts: Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are certified in Financial Forensics (CFF) can help you in establishing antifraud policies and procedures. These professionals can provide a wide range of services from complete internal control audits and forensic analysis to general and basic consultations

2.3 Evaluate the risk of fraud within a business suggesting methods for detection of fraud


Fraud detection is the identification of actual or potential fraud within an organization. It relies upon the implementation of appropriate systems and processes to spot the early warning signs of fraud.
Fraud detection usually includes a combination of the following techniques:
• Proactive (eg. risk assessments) and reactive (eg. responding to reports of fraud).
• Manual (eg. spot audits) and automated
(eg. specialist data-mining software).
It should form part of an organization’s overall anti-fraud strategy covering the prevention, detection and investigation of fraud. All businesses are vulnerable to fraud. However, the fraud risk varies according to the nature and size of the business and the sector in which it operates
Effective fraud detection saves money and protects businesses and their employees, shareholders and customers. Promoting the organization’s detection activities can also act as a deterrent to would-be fraudsters.
Other benefits include:
·         Identification of vulnerable employees at risk to fraud
·         Reduced costs associated with fraud
·         Refined organizational controls
·         Improved financial and operational results
·         Improved shareholder confidence and market position.
Some of the methods used by the organizations for detecting the fraud area as follow as:
1.          Building a profile of potential frauds: Develop fraud risk profiles as part of an overall risk assessment and include necessary stakeholders and decision makers. You’re not likely to make friends throughout the organization by conducting this on your own.
2.      Test transactional data for possible indicators of fraud
3.      Improve controls by implementing continuous auditing and monitoring
4.      Communicate the monitoring activity throughout the organization
5.      Provide management with immediate notification when things are going wrong.
6.      Fix any broken controls immediately
7.      Expand the scope and repeat


Task 3


3.1 Plan an audit with reference to scope, materiality and risk



When we make an audit for specific payroll systems of the organization we have to consider these following things:
1.      Auditors have substantive knowledge about the payroll systems of the business.
2.      Have decent knowledge about the nature of the business
3.      The probability of the risk in the payroll systems
4.      The  effectiveness of the internal control system of the business organizations
After considering these factors now we have follow three important things which are audit scope, materiality and the risk related to the audit. These are explained below:
Audit scope: generally audit scope defines the boundary and limits or the extends of auditors related to the audit related work. It defines the   psychical relation or the duration of the audit activities or includes the activities that need to be performed. For the given problem in the case, we can say that to audit the payroll system of the organization the scope of the audit will include the entire payroll systems and the related department. It activities will include checking the documentation of the payrolls systems of the organizations. The policies and the procedure includes the testing the internal control system related to the payroll system of the organizations. 
 Audit materiality:  in this sectors we will determine whether the payroll system of the given organization is materially misstated    or not. if there is any materially misstatement in the payroll system of the organization , the auditors have to inform the authority about the misstatement in the payroll system so that the rectification process could be taken immediately. After auditing the payroll system, we have to find out all the financial misstatement in the payroll system and combine them into one.
Audit risk:   audit risk is the risk that an auditor will issue an unqualified opinion on materially misstated financial statements. There are two risk in the audit which are as follow as : 
1.      Inherent risk
2.      Control risk
Inherent risk: Inherent risk is the probability that material misstatements have occurred in transactions entering the accounting system used to prepare financial statements.
Control risk: Control risk is the probability that the client's internal control system will fail to detect material misstatements. Control risk should not be assessed so low that complete reliance is on controls and no other audit work is performed.

3.2    Identify and explain the use appropriate audit tests

For making an appropriate audit test for the given organization, we have to go three major audit test which are as follow as:
1.      Test  of control
2.      Substantive test
3.      Test of compliance
Test of control:  in test of control procedure we will take a look on the effectiveness of the internal control of the payroll system of the organization. In this process we will also take a look into the documentation of the different related documents of the payroll systems.  And then the effectiveness of the internal control of the organization is taken into action to evaluate its effectivenss.it also includes the design and implementation of the internal control of the organization.

Substantive test:  substantive test includes the direct verification of fraud in the financial statement related to the transactions and account balances. Substantive test includes two things:
1.      Analytical procedures
2.      Test of details

Analytical procedures include comparison of the financial information regards to the following: 
·         Financial budget
·         Prior information
·         Data related with financial statements
Test of details includes trend analysis and the ratio analysis to find out the fraud of the financial statements.
Substantive procedures are checks of detail to verify different assertions in the financial statements for example inspecting the existence of a fixed asset say motor vehicle is a substantive procedure to ascertain existence.
Analytical procedures is part of the fives sources of evidence used in substantive procedures under the mnemonic (AEIOU) and Tests of control except that analytical procedures cannot be used as a source of evidence to test whether internal controls are working in a client organization.
There are 7 audit procedures includes observation, inquiries, inspection, performance, recalculation, confirmation, analytical procedure.
The first four are belongs to test of control, the last three are part of substantive procedures. So analytical procedure is also test the reasonableness of items in FS. It is use of ratios and trend analysis in order to enable the auditor to develop certain expectations as how the figures in FS will look like

3.3 Record the audit process in an appropriate manner


To make an appropriate audit test we need to follow the following steps in an organization:
1.      Planning
2.       Field work (Evidence Gathering)
3.      Findings
4.      Report writing
5.      Audit Follow – up
Planning: In this stage we will decide in advance what we need to do to make an audit successful one. It also includes appointment of the audit team and making the audit scope and area where we need to focus on. In this stage objectives are set to find out the possible fraud and error in the audit stages. This is the very preliminary stages of the audit process.
Field work:   In this stage appropriate steps have to be taken to collect the appropriate evidence for the audit work. Documents of the accounts of the organization are evaluated to make sure that they are maintained following up the standards. In the field work following things got priority:
·         Concentration on transaction testing and informal communication.
·         Determine and evaluate whether internal controls are operating properly and in the manner described by management.
 Findings: there are different kinds of evidence which needs to be looked in. Some of them are physical, documentary, testimonial and analytical. When we take information as evidence it has to follow 3 main criteria of evidence which are as follow as:
·         It has to be sufficient enough
·         It has to come from a reliable sources
·         It should have a substantive utility in term of the usefulness
·         It has to be relevant to the audit work.
Reporting: after getting done with the audit work, the findings have to report to the respective authority of the organizations. Generally audit report includes the opinions regarding the internal control of the organization and the suggestion regarding the finding of the fraud and the errors in the audit report.
Audit follows up: it is the last stage of the audit process .it is also named as the recommendation. The main objectives of the audit follow up are to evaluate and justify the audit recommendation of the audit reports.

Task 4

4.1    Prepare draft audit report


A sample audit report is created here:

4.2    Draft suitable management letters in relation to a statutory audit


Conclusions


So, throughout the assignment we have seen how important it is for any organization to keep the accounts for having an effective accounting procedure. Maintaining all the necessary books with relation to the general accounting principal is a must for nay organization. On the other hand the books that have been kept also should be audited and the audit reports have to be submitted to the management authority for the audit follow up.
On the first part of the assignment we have seen how important it is to maintain the basic accounting books which help to keep the record of the daily and timely basis transaction of the organization. On the other hand we have also noticed how important it is to maintain the basic principles of the accounting when keeping and analyzing the books. If we don’t follow the basic standards of the accounting, audios of the accounting may find it and may create mass amount of problem for the accountings system. On the other hand we have also noticed the auditors have to go through different types of risk in the accounting systems of the organization. To find out the possible fraud in the system, different strategies have to be followed. On the other hand the internal audit systems have to make strong to find out the possible. After auditing the entire systems the audit reports have to be sent out to the higher authority for the further rectification.

References


1.      ACCA, Audit and assurance, course notes. BPP learning media.
2.      2008 Prentice Hall Business Publishing,  Auditing 12th ed, Arens/Beasley/Elder
3.      Mills, K (2014) The Basics of Internal Auditing: Institute of internal auditors
4.      Arens, et al (2006) Auditing. 11th Ed: prentice hall business publishing
6.      Edward, A (n. d) Audit Planning With Analytical Procedures, Risk, and Materiality Available at: http://www.bing.com/ search?q=factors+to+be+considered+in+audit+planning pt&qs=n&form=QBRE&pq=factors+to+be+considered+in+au dit+planning+ppt&sc=0-42&sp=-1&sk

7.      Messiear et.al. (2008). Auditing and Assurance services: A systematic approach. 6th Edition. McGraw-Hill.

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