Examining The Effectiveness Of Accounting Systems Accounting Essay

Examining The Effectiveness Of Accounting Systems Accounting EssayThe assignment begins with an attempt to get word come forward the effective of bill carcasss within a blood line and the analysis of management control ashess of a short letter.ResearchI use a mixture of primary and secondary winding research methods to fare this assignment. I have domiciliated references at the end where necessary and utilise a variety of discussions and notes. Along with that I consulted a few websites, dilate atomic number 18 on the references.TASK 1Introduction of explanationAccounting is all about providing pecuniary and economic learning. Accounting development is economic information, it relates to the pecuniary or economic flakeivities of the melodic phrase.Accounting information shows the fiscal position of a chore. This is d wiz by the set of accounts, metrical unitd on a corpse cognize as double-entry bookkeeping.One of the first complete documentation about how to keep books of score was written by the professor of mathematics in Rome Luca Pacioli in 1494. This documentation described the double-entry system of accounting. It was adopted and still used today around the world.Users of Accounting there atomic number 18 both type of users.FDocumentsDownloadsch1_accounting_types_users.gifhttp//simplestudies.com/introduction-to-accounting.htmlTypes of accountingThere atomic number 18 two types of accounting1 fiscal accountingFinancial accounting tells us about the financial position of business organisation it is used to prep atomic number 18 financial story. This gives all the finance related information to its users and on the basis of that information a user will be able to do comparison and analyse the position of the comp all and it takes part in important decision qualification answer.2 Management accountingOn the other eliminate management accounts deals with the bud arresting, business expenses and cost analysis it is used to ma ke planning and control the business expenses.Accounting systemsComputerised accounting systemManual accounting systemThese days computerised accounting system is widely used in all type of businesses. The result of this system is more convenient and accurate then manual of arms(a) accounting system.The question arises how this system operates, this system operates by computer software system package which has to install in the computer. Accounting packages softwares which is used in these days it is used to get pay uproll packages barters ledger purchase ledger and fixed assets. There are often of accounting softwares are available one of the famous software name is off the shelf software it generates the document by getting commands by coding this software is very(prenominal) easy to use because of this software we dont choose any professional accountant who set up the account it is very convenient to use one of the example of such software is sage which is very common in these days and easy to operate and it generates the accounts information by its self by coding and another contour of software is called as point software its a customised software most of the bigger size organisations are using this software. It gives them customised entries in the books of accounts.CodingComputer operates on the bases of dose commands to performs its tasks for the accounting software coding is used to make the software more easy to usee.g. 05 for purchases15 for interest25 for profit and loss accountsUntitled sssss.jpgManual accounting systemManual accounting systems are the traditional form of maintaining a businesss accounts and records this accommodates different steps like ledgers cash in book petty cash book income statement and balance sheet which includes all the day to day transactions and sell purchase accounts this accounting system needs skills and knowledge to full involve its requirements.1.1 Effectiveness of accounting system within a businessI nformation generated from the accounting system can be effective in decision making process sale and purchase of assets and in investments. Quality and benefits of accounting system is evaluated from the performance evaluation, privileged control and proper records of transactions.Effectiveness of accounting information is calculate on sentence management which have a broad effect on accounting systems effectiveness, there for the accounting records should be maintain on time and with accuracy of accounting information it have a great impact on the effectiveness of accounting system.Generally accounting information system provide the information about financial position on daily and weekly basis the effectiveness of accounting system not only depend upon the pop the question of such system it also depend on the contingency factors ( factors like culture ascertaining of organisation and outer atmosphere) accounting information is said to be effective when the information is com plete and according to the system users effectiveness of accounting system is subject to many researches from a long time.Accounting information is unremarkably divided into two categories (1) the information that facilitate decision making (2) Information that influence decision making.1.2 Accounting recordsAll of the documents and books includes in the preparation of accounting records includes journal, ledger, canvassion balance, cash books, invoices or any document which second in to make accounts.In accounting records a bike is used which is called as accounting cycle it determines the steps of financial statement.ACCOUNTING CYCLEFDocumentsDownloadsaccounting-cycle4.jpghttp//basiccollegeaccounting.com/what-is-an-accounting-cycle-and-the-steps-involved/Purpose and use of accounting recordsAll accounting records are very efficacious and had a great value for its respective business without a proper accounting records it is very difficult to run a business successfully.The p urpose of maintaining accounting records to evaluate how such(prenominal) capital and assets a business have and also maintain the records of creditors and debtors or buyers and sellers by the respect of that records a user can have a unmortgaged eye on the business and watch the losses and profits in the business whether the business doing well or not and on the basis of that records business can take decisions whether business have to invest or take out all the investments or run the business as it is these record help to make more accurate and satisfied decision making which help to make business more profit and also used for calculating task liability and give the information to the investors who are willing to buy the shares of that company.Accounting theorysAccounting concepts is very important, it is used to support the application of the straightforward and fairish view, and accounting has adopted certain concepts which help to ensure that accounting information is pre sented accurately and consistently.(1) Going concern it is assumed that the business entity for which accounts are being prepared is resoluteness and variable, and the business will continue its operations for the foreseeable future. This has important implications for the valuation of assets and liabilities.(2) Accruals concept revenue and expenses are taken account of when they occur and not when the cash is received or paid out.(3) Prudence concept revenue and profits are included in the balance sheet only when they are effected and liabilities are included when there is a reasonable possibility of incurring them it is also called conservation concept. Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (they are provided for in the accounts as soon as there is a reasonable chance that such costs will be incurred in the future.(4) Consistency concept once an entity has chosen an accounti ng method, it should continue to use the aforementioned(prenominal) method, except for a solid reason to change. Any change in the accounting method must be disclosed. Transactions and valuation methods are do by the same way from course to year, or period to period. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.(5) Entity concept accounting records reflect the financial activities of a specific business or organization, and not of its owners or employees.(6) Matching concept transactions affecting both revenues and expenses should be recognized in the same accounting period.(7) Materiality concept relatively minor events may be ignored, but the major ones should be fully disclosed.(8) credit concept any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is s nonagenarian or the liability is paid off (discharged).(9) Money measurement concept accounti ng process records only those activities that can be expressed in monetary terms (with some exceptions, as in cost-accounting).(10) Separate entity concept Business is the part entity from its owner.(11)Relevance concept This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?)1.3 Factors Affecting Accounting SystemThere are lots of factors which affect the accounting system the major factor are which affect the organisation is the (1) nature of business and (2)size of organisation and 3the structure of the organization if the organization is a multinational company then the accounting system of that organisation is on a very high level and very complex and they have separate department for all the accounting related work if a small company going to increase its size then they should have to change the accounting method and adopt the new method because of large amount of transactions are also taken place in the business on which the old method can no longer apply, and the other factor which affect the accounting system the change in IAS if in IAS some new rules are coming in then the business have to adopt that rule and adopt in the business and make there strategy according to it.2.1 Business take chancesBusiness gambleiness cannot be eliminated but must be managed by companies. There are several ways to minimize the business assay by proper planning.Determining Business Risk Developing the Business Risk ModelIt is important for an organization to identify the business risks that exist in the environment in which it operates. To identify those risks, organizations must look at their external environments. impertinent business risks are economic, political, social, environmental, technological, and other external conditions.An organization cannot fully understa nd its business risks unless it also understands its business objectives, strategies, and processes.Interrelationships between business objectives, strategies, processes, and business riskhttp//www.clir.org/pubs/ pass overs/pub90/appendix1.htmlTypes of riskOperational risksOperational risks are associated with your business running(a) and administrative surgical operations. These includerecruitmentsupply chaintransportationaccounting controlsIT systemsregulations come on compositionBusiness should examine these operations, prioritise the risks and make necessary provisions.Financial RiskFinancial risk is the risk made by equity holders by using of firms debt. If the company raises capital by borrowing money, I t must pay back with the interest charges. This increases the degree of dubiety about the company and it must have enough income to pay back that amount in the future obligingness riskCompliance risk is the possibility that the business will not comply with laws and regulati ons in the jurisdictions where it operates or that the organization will break any lawfully contract. Noncompliance can be dangerous, or it can result from being unaware or local legal requirements.Response to riskA business can take any given risk.Accept risk if the risk of loss is minimum then only accept the risk and carry on business according to it.Reduce risk reducing the risk by better planning and strategiesAvoid risk do not enter into that kind of business in which there is some bigger riskTransfer risk companies can also transfer the risk by taking damages policy.2.2 Describe and evaluate the control systemThe environment in which business operates and the system it adopts is a process, affected by an entitys board of directors, management and other personnel, knowing to provide assurance regarding to the success of objectives in the following countryseffectiveness and efficiency of operations,reliability of financial insurance coverage, andCompliance with applicable laws and regulations.IAS315 gives us an understanding of the entity and its environment and assessing the risk of business and control system of business.ISA identify the five elements of control system,The control environmentRisk legal opinionInformation and communication maneuver activitiesMonitoring visit environmentControl environment is that in which control system operates. Control environment is defined by the business management. Control environment forming a base for control activities, risk assessment, monitoring, awareness and action of those changed with governance and management. The control environment is the most important component because it sets the tone for the organization. Factors of the control environment include employees integrity, the organizations consignment to competence, managements philosophy and operating style, and the attention and direction of the board of directors and its inspect committee.Risk assessmentRisk assessment analyse the identifica tion, analysis, and management of uncertainty in business facing the organization. Risk assessment is relevant to the financial reporting and organization operational objectives. The management have to carry out a risk assessment from attendee which provides information with confidence that company system will not have any error in them.Information systemInformation system is the system that processes the information within an organization it includes processing the information and the procedure to initiate record and report on financial statement both manual and computerised.Control activitiesControl activities include the policies and procedures maintained by the management of an organization to find risk. E.g. Control activity is a policy requiring the approval by the board of directors for all purchases exceeded from an estimating amount. Control activities are the important element of internal control, this provide satisfaction to prevent wrong decision from occurring.Monitori ngMonitoring refers to the assessment of the superior of internal control. Monitoring activities provide information about potential and actual breakdowns in a control system that could make it difficult for an organization to light upon its goals.2.3 snake oilFraud is an well-read mistake by the management, employs or third parties for illegal financial advantages. Or if we talk about an error its an unintentional mistake.Fraud is difficult to be identifying because it is done by complete planning and care so the internal audit is conduct to get wind the dissimulator.THE DIFFERENCE BETWEEN FRAUDSAND misunderstandingThe distinguishing factor between fraud and error is that action which results in a misstatement of the financial statements it is intentional or unintentional. The term fraud is a broad legal concept, but the attendee is concerned with fraud that causes a material mistake in the financial statements. ISA 240 (Redrafted) defines fraud as An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. AndSAS 99 defines fraud as an intentional act that results in a material misstatement in financial statementshttp//en.wikipedia.org/wiki/Statement_on_Auditing_Standards_No._99_Consideration_of_FraudTypes of fraudThere are many types of fraud which relates to a business.Ghost employMiscasting of payrolls, theft unclaimed wages,Collusion external partiesTeeming and leadingAltering cheques and inflating expense claimStealing assetsIssuing false creditor notesFailing to record all gross revenuePrevention of FraudFraud is preventing by implementing the rules and laws in the business some of the points are written below which is very useful for the business to prevent the business from fraud.A good internal control systemContinuous supervision of all employeesSurprise audit visitsThrough personal procedureDetection of f raud in the businessMaintaining key control procedure reduce the risk of fraud occurring and increases the risk of detection control over cash transaction are more important this is the main area in which mostly frauds are happen.Cash receiptsKeep eye on all transactions which are placing in the business. Divide the duties between different functions, in other words more than a person. There are following point which is very useful to detect the fraud.Receipts by postSafeguard to prevent interception of mail between receipts and opening.Appoint person to supervise mailsProtection of cash and chequesControl over cash sales and collectionRestriction of receipts receivedEvidenceClearance of cash officer and registerInvestigation of cash computer memory and surplusesPaying into bankDaily bankingMake up and comparison of paying in slips and receiptsBanking receipts recordCondition and eventsParticular financial reporting pressure in an entityInadequate working capital due to declining p rofit or too rapid expansionIncreases sales on credit this area should be check to find out if anything is going wrong is that department.Unusual transactionIf unusual transaction is take place especially at year end that gives any significant effect on earnings.Complex transaction or accounting treatment.Task 33.1 listenersDuties, rights and liabilityWhat is an audit?An audit is an campaigning of a companys financial statements prepared by the directors of the company. Its purpose is to give the company shareholders an independent, professional and informed opinion on the financial statements It has been prepared according to the Companies Acts, any other relevant legislation and relevant accounting standards. It gives a true and fair view of the condition of the company on financial statement.Who is an auditor?An auditor is an independent professional person who is qualified to audit a companys financial statements.What does an audit involve?In carrying out an audit, an auditor will usually rate the data of the financial statements that have some errors. check the transactions record, account balances and disclosures. Give suggestions on companys accounting policies are reasonable. Test that the companys internal controls are effective. lay aside management letter if any problems discovered during the audit and advise on how to deal with that. write and issue the auditors report to the members of the company.What are the duties of auditors?Duty to provide an audit reportThe main duty of auditors is to report to the shareholders on whether in their opinion the companys financial statements give a true and fair view. They may give A qualified opinion this says that the financial statements give a true and fair view of the companys state of affairs except for certain stated circumstances. A disavowal of opinion this shows that the auditor is unable to give an opinion whether the financial statements gives a true and fair view or not. An adverse opinion it says that the financial statements do not give a true and fair view.What are the rights of auditors?Auditors have the right to Access the books and accounts of the company and its subsidiaries Access information and explanations from the companys directors and employees. be notified of company customary meetings and address the meetings. explain in general meeting the circumstances of any condition to remove them as auditor.Liabilities of auditorGive a true and fair view on financial statement and deliver the right information to the general public and shareholders to prevent them from loss3.2 Internal and external auditThe External Auditorthe external auditor tests the transactions record that takes part in thefinancialstatements.Theinternal AuditorThe internal auditor, on the other hand, deals with its major operations, risk management and internal controls.The Main DifferencesThere are many key differences between internal and external audit.The external auditor is an externa l contractor how does not belongs to the organization, company hire the he auditor for auditing firms. The external auditor seeks to provide an opinion on whether the accounts show a true and fair view.Whereas internal audit forms an opinion on the adequacy and effectiveness of systems of risk management andinternal control, many of which are outside the mainaccountingsystems.The 3 Key Models of boldness Activities Involves Internal and External Audit3 Key Models of Organization Activities involves Internal Vs External AuditorDifference and Similarities of Internal Auditor Vs. External Auditor here is alist ofInternalAudit VersusExternal Audit in detailInternal Auditor Vs External Auditorhttp//accounting-financial-tax.com/2008/08/differences-and-similarities-of-internal-auditor-v-external-auditor/3.3 Planning of auditingIn auditing of any organisation, auditor has to consider certain things before audit.First is settingIn any audit should be to determine its background and the au ditors general approach.Audit strategyAuditor has to make some strategy for the auditing and place it with auditing documents which defines the major areas on which auditor has to take extra care and the difficulties associate with audit and the auditing clients points of concerns.Documents accounting systemAuditor has to collect all those documents associated with audit e.g. financial statement, transactions record, receipts, and other related documents. Auditor need these documents to analyse it and find all the aspects of transactions to find out whether the financial statement have any error or not or is there any possibility of fraud is there or not and whether it gives a true and fair view or not.System and internal controlsAt this stage the objective is to determine the flow of documents and the facts related to the documents and the operational system in the organisation. At this level auditor has to find the facts related to documents and the documents flow in the departmen ts including sales, purchases, cash and stock and accounts personal. This is the good way to find out the rough estimate of system, after that which will be converted into formal record.Audit RiskJust like risks in business some risks are also relates with the auditing.Audit risk is defined asAudit risk is the risk that that auditor may give an inappropriate opinion on the financial statementComponents of audit riskAudit risk has three componentsInherent riskInherent risk is the risk that auditor may be misstated because of escape of knowledge and insufficient information available for it. Auditor has to use their professional practice and available knowledge about the item to asses inherent risk if no such information is available then the inherent risk is high.Control riskControl risk is the risk that organisation control system break aways to detect the material misstatement. And the financial statement do not prepare according to the IAS.Detection riskDetection risk is the ris k that auditor will fail to detect the material misstatement of accounting system. Detection risk relates to the knowledge, practice and the experience of the auditor.MaterialityMateriality is relates to the financial statement, it is an expression of the relative importance of a peculiar(prenominal) matter on the mean of financial statement as a whole or as an individual. A matter is material if its omission or misstatement could influence the economic decision of the users which basis on that financial statement. Materiality depends on the size operations of organization.ISA 320 tells the auditor to consider materiality and its relation with risk at the time of conducting an audit.3.4 Audit testing and usesIn developing overall audit plan, auditors uses five types of audit tests to find out whether financial statement are truly stated or not.Procedures to Obtain an UnderstandingAuditors perform this by a system called walkthrough to obtain understanding it applies on the transact ions and entire process is operated like this.Tests of Controlsprocedure used to obtaining an understanding about internal control, it contains followings evidencesMake inquires of client personalExamine documents, records and reportsObserve control activitiesReform client procedureTest of Control is used to determine whether the control system is effective or not and usually involves a testing of transaction.Substantive Tests of TransactionsProcedures designed to test for dollar misstatements of financial statement balances.Analytical ProceduresTo indicate possible misstatementsTo reduce tests of details of balancesTests of Details of BalancesFocus on ending G/L balancesIt is used to find out whether the balance of the financial statement is accurate.3.5 Records Auditing processAuditProcessFlowchart.gifhttp//www.window.state.tx.us/taxinfo/audit/auditfun/5procedures.htmAudit testIn the large company with sophisticated internal control and low inherent risk therefore auditor perform extensive test and it relies on the client internal control to reduce substitutive test because of the emphasis on test of control and analytical procedure, this audit can be done comparable in inexpensive. This audit likely represents the mix of evidences used in integrated audit of public company financial statements and internal control over financial reporting.TASK44.1 Purpose of Audit ReportAudit report is that report in which external auditor express their opinion about the true and fair view of the financial statement of the organisation.The audit report is make for the shareholders, management or directors and also for general public. There are two key differences between the report to shareholders and to report for the management.The shareholders report is to show whether the financial statement shows a true and fair viewAnd the private report for the management and directors which contain comments and recommendations on the financial statementContents of audit reportAudit or report on financial statement contains clear opinion based on the assessment of record. Audit report draw on a complete pattern which gives the clear view to its users. The main contents of audit report as follow.Untitled contents.JPG4.2 Different qualifications in reportThere are two types of reports one is unqualified or unmodified report and the second is qualified or modified report.1 An unqualified audit report gives assurance to its users and gives true and fair of the financial statement and there is no material mistakes are in it. An unqualified report extract by laws and rule under companies act 1985. Which contain followings?Proper accounting recordsAll information and explanationsDetails of directors benefitsParticulars of loans and other transactions2 Qualified reportOn the qualified report auditor give two types of opinions.Matters that affect the auditors opinionMatter that do not affect the auditors opinionMatters that affect the auditors opinionAuditor may not be give appropriate opinion because of some circumstances like insufficient material of financial statement. And others factors are as follow.There is any limitation of scope in auditors work. It may be material or pervasiveDisagreement with management it may be material or pervasiveThese two factors further divide into two branches.A limitation of scope may lead to disclaimer of opinion. A disclaimer opinion should be expressed when the limitation of scope is so material or pervasive when auditor do not obtain any evidence related to that to express his opinion on the financial statement.Disagreement may leads to adverse opinion. It should be expressed when effect of disagreement is material and pervasive when some misleading or incomplete information in the financial statement.Matters that do not affect the auditors opinionIn some circumstances auditor may give unqualified opinion because of the uncompleted information in the financial statement in this case auditor write a paragraph is called as emphasis of matter describing a fundamental uncertainty and then give an opinion on that.4.3 Management letterMANAGMENT LETTERThe Board of Directors, ABC COAlpha Co Limited, certified accountants15 Essex path 29 High Street,London, EC1N 2HB