topic 3-accounting systems & control
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Topic 3: Accounting System and Control
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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
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Definition
Accounting systems collect and process
data from transactions and events,
organise tem in useful reports, and
communicate results to decision ma$ers.
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%actors in development of accounting
systemat are te factors tat influenced te
development of an accounting system
'itin a (usiness entity)
* Si+e of (usiness
* Te volume of transactions
* rances! su(sidiaries
* Types of (usiness activities
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at are te desired outputs)
Summary of all te transactions -
financial statements
uality of outputs:/elevant, relia(le, understanda(le, timely,
compara(le
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ualitative caracteristics.
Relevant and Reliable
1)Relevant means information tat isrelated to a particular decision, 'ic'ill affect te decision process.
%or e#ample, information on te net
assets and profita(ility are relevant for(an$ers to decide 'eter loan sould(e approved to a particular (usiness.
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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.
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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$ing decision.
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ualitative caracteristics0cont.
Comparability: nformation tat ena(les
users to compare it 'it te same industry
from oter entities.
Consistency: Te use of accounting
metod must (e consistent from one
period to period.
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8imitationsi. Cost (enefit * te 9uality of information
issued is constrained (y cost. Te iger
te 9uality to (e attained, te iger its
cost.
ii. ateriality* information tat 'ill affectdecision ma$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.
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Principles of accounting system
Control - sould ave internal control measures/elevance - report useful, understanda(le,
timely & pertinent info for effective decision
ma$ingCompati(ility - conform to (usiness;s activities,
personnel, structure & uni9ueness
%le#i(ility - a(le to ad5ust to cangesCost*(enefit - (enefits sould out'eig costs
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Analysis
Implementation
Evaluation
Design
Phases in the
developmentof accounting
system
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Analysis
Planning and identifying informationneeds of internal and e#ternal users
dentify sources of suc information
Te records and procedures for collectingand reporting te data
Analysed present system - strengts and
'ea$nessesProposed ne'! revised system
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Design
Specify system re9uirements more
precisely
ere data 'ould (e captured
Te re9uired processing
ere te output 'ould (e used
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mplementation
nstall ne' ! revised systems 2e.g.
ard'are & soft'are
a$ing te system fully operational
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=valuation
Assess te progress and status of ne'
systems
onitoring effectiveness and correcting
any 'ea$nesses.
e.g. 7eneral acceptance (y users, Cost and
(enefit
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Computerised Accounting
nformation Systemsasic %eaturesuilt*in programs performing ournalising, posting
and preparation of trial balance and reports.
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Computerised Accounting
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.
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Computerised Accounting
nformation Systems 2cont;d
Disadvantages
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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
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Accounts Classification
Accounts are classified according to
common caracteristics:
assets,lia(ilities,
capital,
revenue,and e#penses
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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
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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.
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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?
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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
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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$en from te
(usiness for personal use
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Control in Accounting
Detailed procedures adopted (y te
management to control te operation of a
(usiness
eans of controlling te entity;s activities
to elp ensure tat tey accomplis te
desired o(5ectives
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Purposes
To control te operation of (usinessTo provide reasona(le assurance tose specific
o(5ectives 'ill (e acieved
To provide pysical security and management
control over an entity;s cas, inventories and
oter assets
To ensure management policies are adered to
To prevent errors and fraudsTo ensure te record and reports are accurate
and meeting te standards
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Types of nternal Control
Administrative ControlProcedures and records tat assist
management in acieving (usiness o(5ectives
Accounting ControlSet of procedures and records tat are primarily
concerned 'it te relia(ility of financial records
and reports and safeguarding of assets
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nternal Control
nternal control consists all teprocesses used (y management to
acieve effective and efficient
operations, compliance 'it la's, etc.
t includes policies to:safeguard assets
enhance accuracy and reliability of
accounting records
t is an essential part of ris$ management.
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Principles of nternal Control
1. =sta(lisment of responsi(ility.
". Segregation of duties.
3. Documentation procedures.@. Pysical, mecanical and electronic
controls.
. ndependent internal verification.
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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
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Principles of nternal Control 2cont;d
3. Documentation procedures All documents generated (y te (usiness to (e
pre*num(ered
Documents to (e initialled
Provides an audit trail for cec$ing of
transactions
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Principles of nternal Control 2cont;d
@. Pysical, mecanical and electroniccontrols
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Principles of nternal Control 2cont;d
. ndependent internal verificationCec$ing procedures to ensure segregation of
duties
onitoring (y supervisors
6erification (y internal auditor
/otation of duties
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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
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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?.
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/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
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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
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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
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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