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Topic 3:
Accounting System and Control
Coverage
3.1 Development of Accounting System
    Factors
    Procedures:
    Principles, Phases, Computerised/manu
    al...
Factors
What are the factors that influenced the
  development of an accounting system
  within a business entity?
- Size ...
What are the outputs?

 Summary of all the transactions –
 financial statements
 Quality of outputs:
 Relevant, reliable, ...
Qualitative characteristics
Understandable:
 Accounting information is produced to
 fulfill the needs of users. The
 under...
Qualitative characteristics…cont.
Relevant and Reliable

1)Relevant means information that is
  related to a particular de...
Qualitative
characteristics…cont.
This criterion depends on the following:
i. Predictive value – Information must have
   ...
Qualitative
characteristics…cont.
2) Reliability of accounting information
    depends on:
i. Neutral – the information is...
Qualitative
characteristics…cont.
 Comparability: Information that
 enables users to compare it with the
 same industry fr...
Limitations
i. Cost benefit: The quality of information
    issued is constrained by cost. The
    higher the quality to b...
Analysis      Phases in the
                  development
                 of accounting
                       system
   ...
Analysis
 Planning and identifying information
 needs of internal and external users
 Sources of such information
 The rec...
Design

 Specify systems requirements more
 precisely
 Where data would be captured
 The required processing
 Where the ou...
Implementation

  Install new / revised systems (e.g.
  hardware & software)
  Making the system fully
  operational
  Use...
Evaluation

  Assess the progress and status of
  new systems
  Monitoring effectiveness and
  correcting any weaknesses.
...
Computerised Accounting
Information Systems
Basic Features
  Built-in programs performing
  journalising, posting and prep...
Computerised Accounting
Information Systems (cont’d)
Advantages
 Ability to process large number of
 transactions quickly....
Computerised Accounting
Information Systems (cont’d)
Disadvantages
  Use of inappropriate and/or
  incompatible software a...
Chart of Accounts
                    A listing of all accounts and associated
                    account numbers for a b...
Accounts Classification

 Accounts are classified according to
 common characteristics:
 assets, liabilities, capital, rev...
Types of assets
 Current assets (short-term) – cash and
 other assets that may be reasonably be
 expected to be realised i...
Intangible assets – do not have any
physical features. They present legal
rights and relationships beneficial to
their own...
Current liabilities (short-term) –
liabilities that will due within short time
(usually one year or less) and that are
to ...
Capital - the owner’s equity in the
business
Revenue – the gross increase in
capital attributable to business
activities
E...
Control in Accounting

 Detailed procedures adopted by the
 management to control the operation
 of a business
 Means of c...
Purposes
 To control the operation of business
 To provide reasonable assurance those
 specific objectives will be achieve...
Types of Internal Control

 Administrative Control
   Procedures and records that assist
   management in achieving busine...
Internal Control
 Internal control consists all the
 processes used by management to
 achieve effective and efficient
 ope...
Principles of Internal Control

1. Establishment of responsibility.
2. Segregation of duties.
3. Documentation procedures....
Principles of Internal Control
(cont’d)

1. Establishment of responsibility
     Assignment of responsibility to specific
...
Principles of Internal Control
(cont’d)

3. Documentation procedures
     All documents generated by the
     business to ...
Principles of Internal Control
(cont’d)

4. Physical, mechanical and electronic
  controls
     Use of safes and safety de...
Principles of Internal Control
(cont’d)

5. Independent internal verification
     Checking procedures to ensure
     segr...
Internal Audit

 An independent appraisal activity
 established within an organisation as
 a service to the organisation
 ...
Internal Audit: Objective
 To assists members of the
 organisation in the effective discharge
 of their responsibilities
 ...
Responsibilities

 Encompassing the examination and
 evaluation of the adequacy and
 effectiveness of the organisation’s
 ...
Scopes
 Reviewing the reliability and integrity of
 financial and operating information and the
 means used to identify, m...
Reviewing the means of safeguarding
assets as appropriate, verifying the
existence of such assets
Appraising the economy a...
Internal audit vs external audit
            Internal                 External

Auditor     Full-time employees of   Indep...
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Topic 3 Accounting System And Control

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Topic 3 Accounting System And Control

  1. 1. Topic 3: Accounting System and Control
  2. 2. Coverage 3.1 Development of Accounting System Factors Procedures: Principles, Phases, Computerised/manu al Charts of accounts and accounts classification 3.2 Control in Accounting Purpose Characteristics Audit: internal and external
  3. 3. Factors What are the factors that influenced the development of an accounting system within a business entity? - Size of business - The volume of transactions - Branches/ subsidiaries - Types of business activities
  4. 4. What are the outputs? Summary of all the transactions – financial statements Quality of outputs: Relevant, reliable, understandable, timely, comparable
  5. 5. Qualitative characteristics Understandable: Accounting information is produced to fulfill the needs of users. The understanding of the financial statements information is an essential criteria. Therefore, those parties interested in the financial statements should learn how to use it so that information provided is understood and helpful in making decision.
  6. 6. Qualitative characteristics…cont. Relevant and Reliable 1)Relevant means information that is related to a particular decision, that is it can affect a decision made. For example, information on the net assets and profitability are relevant for bankers to decide whether loan should be approved to a particular business.
  7. 7. Qualitative characteristics…cont. This criterion depends on the following: i. Predictive value – Information must have predictive value to make it relevant. Taking the previous example (bank), the information provided enable the bank to predict whether the business is capable of paying back the debts. ii. Feedback value – this means the information that can help decide whether a past decision can be confirmed or altered. iii. Timeliness – Accounting information is obtained before any decision is made.
  8. 8. Qualitative characteristics…cont. 2) Reliability of accounting information depends on: i. Neutral – the information is prepared objectively i.e. without any influence. ii. Verifiable – information provided can be verified by other parties. iii. Give the true picture – the information must reflect a true picture of the items presented.
  9. 9. Qualitative characteristics…cont. Comparability: Information that enables users to compare it with the same industry from other entities. Consistency: The use of accounting method must be consistent from one period to period.
  10. 10. Limitations i. Cost benefit: The quality of information issued is constrained by cost. The higher the quality to be attained, the higher its cost. ii. Materiality: This means information that affects decision making. Immaterial information should be excluded. iii. Conservatisms: This means, the estimation chosen should have the probability to overstate the assets or profit.
  11. 11. Analysis Phases in the development of accounting system Design Implementation Evaluation
  12. 12. Analysis Planning and identifying information needs of internal and external users Sources of such information The records and procedures for collecting and reporting the data Analysed present system – strengths and weaknesses Proposed new/ revised system
  13. 13. Design Specify systems requirements more precisely Where data would be captured The required processing Where the output would be used
  14. 14. Implementation Install new / revised systems (e.g. hardware & software) Making the system fully operational User manual Training users/personnel
  15. 15. Evaluation Assess the progress and status of new systems Monitoring effectiveness and correcting any weaknesses. e.g. General acceptance by users, Cost and benefit
  16. 16. Computerised Accounting Information Systems Basic Features Built-in programs performing journalising, posting and preparation of trial balance and reports. Use of modules: general ledger, inventory, accounts receivable, accounts payable. Data entered in one module automatically updates information in other modules. General ledger and accounting reports
  17. 17. Computerised Accounting Information Systems (cont’d) Advantages Ability to process large number of transactions quickly. Automatic posting of transactions. Error reduction. Fast response time. Flexible and fast report production.
  18. 18. Computerised Accounting Information Systems (cont’d) Disadvantages Use of inappropriate and/or incompatible software and hardware. Need for reliable back-up procedures. Lack of computer system skills. Computer viruses and hackers. Fraud.
  19. 19. Chart of Accounts A listing of all accounts and associated account numbers for a business WONG PTY LTD – Chart of Accounts Assets Liabilities Equity Revenues Expenses No. Account title No. Account title No. Account title No. Account title No. Account title 100 Cash 200 Accounts Payable 300 Share Capital 400 Service Revenue 500 Salaries Expense 104 Accounts Receivable 210 Interest Payable 300 Retained Profits 405 Commissions 505 Supplies Expense 105 Commissions Receivable 213 Revenue Received 320 Dividends Revenue 510 Rent Expense 110 Advertising Supplies in Advance 330 Profit and Loss 515 Insurance Expense 112 Prepaid Insurance 215 Salaries Payable Summary 518 Interest Expense 130 Office Equipment 230 Bank Loan 520 Depreciation Expense 131 Acc. Depreciation – Office Equipment
  20. 20. Accounts Classification Accounts are classified according to common characteristics: assets, liabilities, capital, revenue and expenses Definitions of assets: Things of value which are possessed by a business Resources that will bring benefits to the organisation
  21. 21. Types of assets Current assets (short-term) – cash and other assets that may be reasonably be expected to be realised in cash/ sold/ consumed within a year or less through the normal operations of the business Non-current / long-term / fixed/ property, plant & machinery – tangible assets used in the business that are of a permanent or relatively fixed nature. Usually span of life is more than 1 year.
  22. 22. Intangible assets – do not have any physical features. They present legal rights and relationships beneficial to their owners. E.g. patents, copyrights, trademark and goodwill. Liabilities – debts owned (in term of cash, goods or services) to outsiders (creditors) and are frequently described on balance sheet by titles that include the word “payable”
  23. 23. Current liabilities (short-term) – liabilities that will due within short time (usually one year or less) and that are to be paid out of the current assets Long-term liabilities (fixed) – liabilities that will not be due for a comparatively long time (usually more than one year)
  24. 24. Capital - the owner’s equity in the business Revenue – the gross increase in capital attributable to business activities Expense – cost that have been consumed in the process of producing revenue Drawing – money taken from the business for personal use
  25. 25. Control in Accounting Detailed procedures adopted by the management to control the operation of a business Means of controlling the entity’s activities to help ensure that they accomplish the desired objectives
  26. 26. Purposes To control the operation of business To provide reasonable assurance those specific objectives will be achieved To provide physical security and management control over an entity’s cash, inventories and other assets To ensure management policies are adhered to To prevent errors and frauds To ensure the record and reports are accurate and meeting the standards
  27. 27. Types of Internal Control Administrative Control Procedures and records that assist management in achieving business objectives Accounting Control Set of procedures and records that are primarily concerned with the reliability of financial records and reports and safeguarding of assets
  28. 28. Internal Control Internal control consists all the processes used by management to achieve effective and efficient operations, compliance with laws, etc. It includes policies to: safeguard assets enhance accuracy and reliability of accounting records It is an essential part of risk management.
  29. 29. Principles of Internal Control 1. Establishment of responsibility. 2. Segregation of duties. 3. Documentation procedures. 4. Physical, mechanical and electronic controls. 5. Independent internal verification.
  30. 30. Principles of Internal Control (cont’d) 1. Establishment of responsibility Assignment of responsibility to specific individuals. Monitoring of compliance with procedures 2. Segregation of duties Responsibility for related activities assigned to different people Separation of responsibility for recording and physical custody of the asset
  31. 31. Principles of Internal Control (cont’d) 3. Documentation procedures All documents generated by the business to be pre-numbered Documents to be initialled Provides a audit trail for checking of transactions
  32. 32. Principles of Internal Control (cont’d) 4. Physical, mechanical and electronic controls Use of safes and safety deposit boxes Locked cabinets and warehouses Alarms Monitors and sensors Passwords to computer systems and programs Time clocks
  33. 33. Principles of Internal Control (cont’d) 5. Independent internal verification Checking procedures to ensure segregation of duties Monitoring by supervisors Verification by internal auditor Rotation of duties
  34. 34. Internal Audit An independent appraisal activity established within an organisation as a service to the organisation It is a control that functions by examining and evaluating the adequacy and effectiveness of other controls
  35. 35. Internal Audit: Objective To assists members of the organisation in the effective discharge of their responsibilities To accomplish this objective, the internal audit staff is expected to furnish the organisation with “analyses, appraisals, recommendatio ns, counsel and information concerning the activities reviewed”.
  36. 36. Responsibilities Encompassing the examination and evaluation of the adequacy and effectiveness of the organisation’s system of internal control and the quality of performance in carrying out assigned responsibilities
  37. 37. Scopes Reviewing the reliability and integrity of financial and operating information and the means used to identify, measure, classify and report such information Reviewing the systems established to ensure compliance with those policies, plan, procedures, laws and regulations that have a significant impact on operations and reports, and determining whether the organisation is in compliance
  38. 38. Reviewing the means of safeguarding assets as appropriate, verifying the existence of such assets Appraising the economy and efficiency with which resources are employed Reviewing operations and programs to ascertain whether results are consistent with established objectives and goals and whether the operations or programs are being carried out as planned
  39. 39. Internal audit vs external audit Internal External Auditor Full-time employees of Independent an entity practitioner Employer Companies, CPA Firms governmental unit, non profit entities Perform Compliance & Financial audit operational audit Responsible Senior management & 3rd parties to BOD -investors Licensing No Yes (CPA)

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