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
5. McGraw-Hill
(2012) available from: https://www.google.co.uk/?gfe_rd=cr&ei=crhvVPL9NOqq8weWlICYCg&gws_rd=ssl#q=audit+report
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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