Topic 3-Accounting Systems & Control

8/18/2019 Topic 3-Accounting Systems & Control

1/42

Topic 3: Accounting System and Control


2/42

Coverage

3.1 Development of Accounting SystemDefinition & factors & desired outputs

Principles, pases, procedures: computerised!

manualCarts of accounts and accounts classification

3." Control in Accounting

PurposeCaracteristics

Audit: internal and e#ternal


3/42

Definition

Accounting systems collect and process

data from transactions and events,

organise tem in useful reports, and

communicate results to decision ma$ers.


4/42

%actors in development of accounting

systemat are te factors tat influenced te

development of an accounting system

'itin a (usiness entity)

* Si+e of (usiness

* Te volume of transactions

* rances! su(sidiaries

* Types of (usiness activities


5/42

at are te desired outputs)

Summary of all te transactions -

financial statements

uality of outputs:/elevant, relia(le, understanda(le, timely,

compara(le


6/42

ualitative caracteristics.

Relevant and Reliable

1)Relevant means information tat isrelated to a particular decision, 'ic'ill affect te decision process.

%or e#ample, information on te net

assets and profita(ility are relevant for(an$ers to decide 'eter loan sould(e approved to a particular (usiness.


7/42


8/42

ualitative caracteristics0cont.

" Reliability of accounting informationdepends on:

i. 4eutral - te information is prepared

o(5ectively i.e. 'itout any influence.

ii. 6erifia(le - information provided can (everified (y oter parties.

iii. 7ive te true picture - te informationmust reflect a true picture of te itemspresented.


9/42

ualitative caracteristics0.cont.

Understandable:

Accounting information is produced to fulfillte needs of users. Te understanding of

te financial statements information is anessential criteria. Terefore, tose partiesinterested in te financial statementssould learn o' to use it so tatinformation provided is understood andelpful in ma$ing decision.


10/42

ualitative caracteristics0cont.

Comparability: nformation tat ena(les

users to compare it 'it te same industry

from oter entities.

Consistency: Te use of accounting

metod must (e consistent from one

period to period.


11/42

8imitationsi. Cost (enefit * te 9uality of information

issued is constrained (y cost. Te iger

te 9uality to (e attained, te iger its

cost.

ii. ateriality* information tat 'ill affectdecision ma$ing. mmaterial information

sould (e e#cluded.

iii. Conservatisms - use of estimation tat'ill not ave te pro(a(ility to overstate

te asset or profit.


12/42

Principles of accounting system

Control - sould ave internal control measures/elevance - report useful, understanda(le,

timely & pertinent info for effective decision

ma$ingCompati(ility - conform to (usiness;s activities,

personnel, structure & uni9ueness

%le#i(ility - a(le to ad5ust to cangesCost*(enefit - (enefits sould out'eig costs


13/42

Analysis

Implementation

Evaluation

Design

Phases in the

developmentof accounting

system


14/42

Analysis

Planning and identifying informationneeds of internal and e#ternal users

dentify sources of suc information

Te records and procedures for collectingand reporting te data

Analysed present system - strengts and

'ea$nessesProposed ne'! revised system


15/42

Design

Specify system re9uirements more

precisely

ere data 'ould (e captured

Te re9uired processing

ere te output 'ould (e used


16/42

mplementation

nstall ne' ! revised systems 2e.g.

ard'are & soft'are

a$ing te system fully operational


17/42

=valuation

Assess te progress and status of ne'

systems

onitoring effectiveness and correcting

any 'ea$nesses.

e.g. 7eneral acceptance (y users, Cost and

(enefit


18/42

Computerised Accounting

nformation Systemsasic %eaturesuilt*in programs performing ournalising, posting

and preparation of trial balance and reports.


19/42


nformation Systems 2cont;d

Advantages

A(ility to process large num(er of

transactions 9uic$ly.

Automatic posting of transactions.

=rror reduction.

%ast response time.%le#i(le and fast report production.


20/42


nformation Systems 2cont;d

Disadvantages


21/42

Cart of Accounts

A listing of all accounts and associated

account numbers for a business

WONG PTY LTD – Chart of Accounts

Assets Liabilities Equity Reenues E!"enses

No# Account title No# Account title No# Account title No# Account title No# Account title

$%% Cash &%% Accounts Payable '%% (hare Ca"ital )%% (erice Reenue *%% (alaries E!"ense

$%) Accounts Receiable &$% +nterest Payable '%% Retaine, Profits )%* Co--issions *%* (u""lies E!"ense

$%* Co--issions Receiable &$' Reenue Receie, '&% Dii,en,s Reenue *$% Rent E!"ense

$$% A,ertisin. (u""lies in A,ance ''% Profit an, Loss *$* +nsurance E!"ense

$$& Pre"ai, +nsurance &$* (alaries Payable (u--ary *$/ +nterest E!"ense$'% Office Equi"-ent &'% 0an1 Loan *&% De"reciation E!"ense

$'$ Acc# De"reciation –

Office Equi"-ent


22/42

Accounts Classification

Accounts are classified according to

common caracteristics:

assets,lia(ilities,

capital,

revenue,and e#penses


23/42

Asset

Definitions of assets:Tings of value 'ic are possessed (y a

(usiness

/esources tat 'ill (ring (enefits to teorganisation

Current assets 2sort*term - cas and

oter assets tat may (e reasona(ly (e

e#pected to (e realised in cas! sold!

consumed 'itin a year or less troug

te normal operations of te (usiness


24/42

Asset0.cont

4on*current ! long*term ! fi#ed! property, plant &macinery - tangi(le assets used in te

(usiness tat are of a permanent or relatively

fi#ed nature.


25/42

8ia(ilities

8ia(ilities - de(ts o'ned 2in term of cas,

goods or services to outsiders 2creditors

and are fre9uently descri(ed on (alance

seet (y titles tat include te 'ord>paya(le?


26/42

Current lia(ilities 2sort*term - lia(ilities

tat 'ill due 'itin sort time 2usually one

year or less and tat are to (e paid out of

te current assets

8ong*term lia(ilities 2fi#ed - lia(ilities tat

'ill not (e due for a comparatively long

time 2usually more tan one year


27/42

Capital * te o'ner;s e9uity in te(usiness

/evenue - te gross increase in capital

attri(uta(le to (usiness activities=#pense - cost tat ave (een

consumed in te process of producing

revenueDra'ing - money ta$en from te

(usiness for personal use


28/42

Control in Accounting

Detailed procedures adopted (y te

management to control te operation of a

(usiness

eans of controlling te entity;s activities

to elp ensure tat tey accomplis te

desired o(5ectives


29/42

Purposes

To control te operation of (usinessTo provide reasona(le assurance tose specific

o(5ectives 'ill (e acieved

To provide pysical security and management

control over an entity;s cas, inventories and

oter assets

To ensure management policies are adered to

To prevent errors and fraudsTo ensure te record and reports are accurate

and meeting te standards


30/42

Types of nternal Control

Administrative ControlProcedures and records tat assist

management in acieving (usiness o(5ectives

Accounting ControlSet of procedures and records tat are primarily

concerned 'it te relia(ility of financial records

and reports and safeguarding of assets


31/42

nternal Control

nternal control consists all teprocesses used (y management to

acieve effective and efficient

operations, compliance 'it la's, etc.

t includes policies to:safeguard assets

enhance accuracy and reliability of

accounting records

t is an essential part of ris$ management.


32/42

Principles of nternal Control

1. =sta(lisment of responsi(ility.

". Segregation of duties.

3. Documentation procedures.@. Pysical, mecanical and electronic

controls.

. ndependent internal verification.


33/42

Principles of nternal Control 2cont;d

1. =sta(lisment of responsi(ility Assignment of responsi(ility to specific

individuals.

onitoring of compliance 'it procedures

". Segregation of duties/esponsi(ility for related activities assigned to

different peopleSeparation of responsi(ility for recording and

pysical custody of te asset


34/42


3. Documentation procedures All documents generated (y te (usiness to (e

pre*num(ered

Documents to (e initialled

Provides an audit trail for cec$ing of

transactions


35/42


@. Pysical, mecanical and electroniccontrols


36/42


. ndependent internal verificationCec$ing procedures to ensure segregation of

duties

onitoring (y supervisors

6erification (y internal auditor

/otation of duties


37/42

nternal Audit

An independent appraisal activity

esta(lised 'itin an organisation as a

service to te organisation

t is a control tat functions (y e#amining

and evaluating te ade9uacy and

effectiveness of oter controls


38/42

nternal Audit: B(5ective

To assists mem(ers of te organisation inte effective discarge of teirresponsi(ilities

To accomplis tis o(5ective, te internalaudit staff is e#pected to furnis teorganisation 'it >analyses, appraisals,recommendations, counsel andinformation concerning te activitiesrevie'ed?.


39/42

/esponsi(ilities

=ncompassing te e#amination and

evaluation of te ade9uacy and

effectiveness of te organisation;s system

of internal control and te 9uality ofperformance in carrying out assigned

responsi(ilities


40/42

Scopes

/evie'ing te relia(ility and integrity of financial

and operating information and te means used

to identify, measure, classify and report suc

information/evie'ing te systems esta(lised to ensure

compliance 'it tose policies, plan,

procedures, la's and regulations tat ave a

significant impact on operations and reports, anddetermining 'eter te organisation is in

compliance


41/42

Revie!ing the means of safeguarding assets

as appropriate" verifying the e#istence of

such assets

Appraising te economy and efficiency 'it'ic resources are employed

/evie'ing operations and programs to ascertain

'eter results are consistent 'it esta(lised

o(5ectives and goals and 'eter te operations

or programs are (eing carried out as planned


42/42

nternal audit vs e#ternal audit

Internal E#ternal

Auditor %ull*time employees ofan entity

ndependentpractitioner

=mployer Companies,

governmental unit, nonprofit entities

CPA %irms

Perform Compliance &operational audit

%inancial audit

/esponsi(leto

Senior management &BD

3rd parties

*investors

8icensing 4o es 2CPA

Topic 3-Accounting Systems & Control

Documents

Transcript of Topic 3-Accounting Systems & Control