Final Accounts and Financial Statements - Essay Example

FINANCIAL SYSTEMS AND AUDITING By of the of the School Task Accounting record is termed as all of the documentation or documents that are included in the preparation of financial statements as well as records which are significant and relevant to financial review or budgetary survey and audits which incorporate recording of liabilities and assets, journals, ledgers, and whatever other supporting documents such as invoices (Futter et al 2002: 151). It is very vital to maintain ledger in all accounting systems because it is used to prepare a trial balance that aids in checking the arithmetical accuracy of the books of accounting. Ledger stores information needed for preparation of financial statements and final accounts. Books of original entry, also known as prime entry books where transactions are initially recorded, such books include sales journal, sales returns journals, purchases journal, purchase returns journal, cash book and general journal. Accounting or bookkeeping assumes vital and helpful role by creating the information for giving responses to numerous questions confronted by the users of accounting information. It gives information how great or terrible the budgetary state of the business is which products or activities have been productive (Singhvi & Bodhanwala, 2006:262). Bookkeeping is vital for a business entity because of the following reasons: - i) Protecting records that are backed up by genuine and proper vouchers are good evidence in the law court. ii) Accounting record that is set on the base of even practices normally helps a business to compare results of one period with an alternate period. iii) As the business continues to grow, there is an expanded volume of business results in a huge number of transactions, and no business person is able to remember everything. With the help of accounting records, there is no need to remember various transactions (Demski, 2007:33). Fundamental concepts of accounting There are a number of accounting concepts that aids in the preparation and presentation of final accounts and financial statements. Accruals concept of accounting Apart from the cash flow statement the other accounts are always set on an accruals basis. This basis of accounting requires that the non-cash transactions be reflected in the financial statements for the period in which their effects are encountered and not in the one in which cash or money is actually received or paid. Going concern The accounts are often prepared on a going concern basis. This implies that the accounts are made on the assumption that the organization will continue to operate indefinitely or for the foreseeable future. The business has no intention to curtail their operation significantly. This concept helps a business to get long-term sources of finance or loans. It also shows the financial stability to the shareholders that will affect the prices of stock (Kolitz et al 2009:507). Consistency concept Because of many different ways of applying concepts, each entity must select the approach that gives the most reliable picture of the entity both for each and every period. According to this concept, a method adopted for accounting treatments of an item must be embraced for all subsequent occurrences of similar items. This concept ensures that records kept are relevant thus showing how much revenues and expenses are for the same time frame (Bhattacharyya, 2006:459).  Prudence Concepts When preparing financial statements, the account should be prudent. This means that an entity should plan for the worst in case something is in doubt and should ignore any possible benefit from a transaction that is not yet completed. This concept ensures that income and assets are not overstated, and liabilities as well as expenses are not understated. Its main aim is to reflect the least favorable position of a business. Business entity concept This concept requires the business to be treated separately from investors or property owners. The owner of the entity should be treated separately from the entity and any profit resulting from the business should be taken into the company’s account. This concept ensures that business activities are recorded separately from those of the creditors, owners or other businesses to avoid conflict of interest. Different factors that will influence the structure of accounting systems that is adopted by a business Computerized accounting system: In the management of an organization, it is often crucial to maintaining or keep accurate accounting records. This is not only a requirement of funding bodies but also helps to keep the entity afloat financially and legally. Smaller groups can often manage with simple book-keeping methods and systems but bigger groups of organizations that juggle with bigger sums of money as well as more complex financial transactions may ease their huge workload by using a computerized accounting system. The computerized accounting system are reasonably priced and are easy to utilize and can be used by any organization especially voluntary sector organizations (Tulsian, 2006:15-1).  Manual Accounting Systems Accounting systems are either manual or computerized. Understanding manual bookkeeping frameworks is helpful in distinguishing connections between accounting information and reports. Additionally, most computerized frameworks use standards from manual frameworks. Manual accounting and bookkeeping systems are, therefore, traditional form of keeping business accounts and records. Manual accounting and bookkeeping include keeping numerous files and ledgers such as petty cash sheets, sales and purchases journals and cash book. Despite the fact that basic manual bookkeeping systems require little skill or knowledge in accounting, they are still favored by those who have used them in the past (Finkler et al 2007:110). Factors to consider when using manual and computerized accounting system i) The ability to increase invoices or increase sales. A firm that aims at increasing sales uses computerized accounting system. ii) The need to process or incorporate VAT in accounting. A firm will use computerized accounting system to process VAT quickly. iii) Cost: how much can a business or an organization truthfully afford on the software update and support. iv) The ability to process payroll and stock control. Computerized accounting system is more able to process payroll and control stock. Task 2 Business risk is linked with the uncertainty of the future cash flows of the company, which are influenced by the company’s operations as well as the environment in which it operates (Rittenberg et al 2012:208). The greater uncertainty is caused by the fluctuation in cash flow from one time to another and therefore investors should be compensated for greatly. For instance, organizations that have a long history of stable cash stream require less compensation for business hazards or risks than organizations whose cash streams fluctuate from one quarter to the next, for example, technology companies (Kapil, 2011:249). Components of business risks: Operational risk This is a risk of loss that results from inadequate internal processes, systems, and people or from external events that incorporate legal risk. It can also be seen as the risk of loss that results from failure to comply with laws and prudent ethical standards as well as contractual obligations which include exposures to litigation from all aspects of activities of an institution. However, this definition fails to focus on reputational or strategic risks. Operational risks aim at enhancing operational risk assessment efforts by urging the industry to create methodologies and gather data or information identified with overseeing operational risk (Kapil, 2011:249). Consistence Risks Compliance risk can be characterized as the present and potential danger to profit or cash emerging from infringement of, or non-conformance with, laws, standards, endorsed practices, internal policies, and techniques, or moral standards which emerges in circumstances where the laws or principles predominating certain bank items or activities of the banks customers may be vague or unsubstantiated. The consistence risk exposes the organization to fines, payment of damages, civil money punishments, and the voiding of agreement (Rittenberg et al 2012:208). Liquidity risks This kind of risk can be defined as the present and approaching risk to income or capital emerging from a banks lack of ability to meet its liabilities without suffering unacceptable losses. It incorporates the failure to oversee unplanned reductions or changes in financing sources. Liquidity risk likewise emerges from the failure to perceive or address changes in economic situations or market conditions that influence the capacity to liquidate assets rapidly and with negligible loss in value. Importance of business risk management Business risk management helps in the identification of risk, risk evaluation, adjusting strategies and adapting techniques to manage the risk, this assist in lessening the risks by utilizing managerial strategies. Risk management can be created using ways such as risk transfers, risk reduction, and risk control. These ways prevents the risk from happening by eliminating it and by lessening the negative effects of the risk and perceiving all the outcomes and consequences a particular risk may bring (Rittenberg et al 2012:208). Fraud Risk Assessment For an organization to protect itself as well as its stakeholders effectively and efficiently from fraud, it needs to recognize fraud risk as well as the specific risks that indirectly or directly relate to it. The organization should carry out a structured fraud risk assessment that is tailored to its complexity, size, goals and industry and should be carried out and updated periodically (Kapil, 2011:249). The appraisal may be coordinated with an overall organizational risk evaluation or executed as a stand-alone exercise, however ought to incorporate risk identification, risks response and risk likelihood and significance assessment. Managing the risk of fraud The best method of managing risk of fraud is a risk-based approach. This method enables companies to target their resources at problem areas so as to improve controls and to detect them proactively. Through the help of developments in corporate governance, fraud can be managed alongside other business risks by considering it as a set of risks. To effectively and efficiently manage risk of fraud, the method requires that it be embedded in the organization’s risk, control and governance procedures. Risk-Based approach enables the organization to assess and manage the risk of fraud by assessing its overall exposure to fraud, identifying areas that are most vulnerable to risk of fraud, passing on ownership, computing the scale of fraud risk, responding to fraud risk and ascertaining the success of the fraud risk strategy (Rittenberg et al 2012:208). The assessment of organization’s vulnerability to fraud risk should be carried out during the development of any new activities, policies to ascertain new risks that need to be managed. It should be reviewed and re-assessed any time a change in policy happens. Detecting fraud risk Internal sources for detecting fraud risks include brainstorming and interviews with personnel that represent a wide range of activities within the organization (Kapil, 2011:249).. Other methods include reviewing whistleblower complaints, as well as analytical procedures. A working and proper risk of fraud identification process should include the calculation of incentives and changes to commit fraud. Workers incentive programs upon which the calculation is often based provides where the fraud is likely to occur. Task 3 Initial audit planning normally takes place before a thorough audit work commences and an auditor is required to take on a plan concerning timing, degree and nature of audit work to be performed. The plan aims at ensuring that proper attention is given to the diverse areas of the audit and identification of potential problems. In planning the audit, it is crucial to keep in mind the formal extent or scope of audit work when taking into consideration of the audit’s responsibility in the management of risk (Rittenberg et al 2012:208). Based on the results of the risk assessment, the internal audit activity should evaluate the adequacy and effectiveness of controls encompassing the organization’s governance, operations, and information systems which should include reliability and integrity of financial and operational information. Effectiveness and efficiency of operation, Safeguarding of assets, compliance with laws, regulations, and contracts are the scope of audit planning Factors to consider The auditor needs to consider these factors in planning an audit with reference to the scope, risk, and materiality • Vital environmental aspects upon which the audited entity operates • Create an understanding of the accountability relationships; • The content, form and user’s of audit suppositions, conclusions or reports; • Detail the objectives of the audit and the tests important to reach them; • Recognize key administration frameworks and controls and do a tentative appraisal to distinguish both their weaknesses and strengths; • Determine the materiality of matters; • The terms of engagement and any statutory responsibilities • The applicable statutory or legal requirements • Conditions that require special attention, for instance, possibility of fraud or material error • Accounting policies that are adopted by the client as well as changes in those policies • The effect of new auditing or accounting pronouncement on the audit • Significant audit areas that are to be reviewed • The scope and nature of audit evidence to be acquired Description of appropriate audit test An audit test is a procedure that is performed by either an internal or external auditor so as to assess the exactness of different financial statement assertions. The two basic classifications of audit tests are tests of internal controls and substantive tests. These two tests are often used in internal and external audits so as to achieve established audit objectives, as can be determined based on audit questionnaires’ results or illustrated in audit checklists. Audit tests normally are carried out on a sample basis over a current group of similar transactions. Audit test may use either statistical on non-statistical sampling techniques with a definitive objective being to acquire the most illustrative sample of the population before testing starts (Puncel,2007:7-10). Audit Process An ordinary audit has a few interrelated stages or exercises. These include (Rittenberg et al 2012:208): Opening Conference In this stage, the agency officials are made aware of the audit process and are offered an opportunity for input. The following areas are addressed during this stage: • Scope of the audit, which will incorporate the areas of program under review as well as the period of time covered; • Particular areas that the agency officials may need examining; • Systems of procedures for acquiring data and transmitting preliminary audit findings; • Establishment of suitable communication channels; • Recognition of any known improprieties that have happened; • Clarification of the needed administration representation letter that states that all records and pertinent information were made accessible to the auditors and that all important matters have been unveiled; • Discussion of equipment and office space required to carry out the audit; • Re-examination of standard reporting systems for preliminary, draft and final reports as well as the need for responses; and • Emergency preparedness procedures of the agency that audit staff need to be informed about. Audit survey The audit group or team then carries out a survey of program and organizational information before the major audit effort commences. This stage aims at developing a complete understanding of the firm as well as the areas that will be evaluated or audited (Puncel, 2007:7-10). Fieldwork Phase This stage comprises the focused audit effort and typically takes a lot of time. The everyday activities or exercises of the onsite audit team are supervised by the examiner-in-charge to guarantee that quality audit work is finished. Preliminary Audit Findings After the fieldwork phase is completed, the examiner-in-charge discusses the findings and the conclusion with suitable agency officials. The team then prepares and submits an exception report that details tentative findings that were discussed, including agency feedback. Responses to preliminary findings ought to be given, and all authentic contrasts determined. It is recommended that audit recommendations be implemented early enough so that corrective actions may be reflected in the audit report (Rittenberg et al 2012:208). The team is required to prepare and submit discussion document that summarizes all the preliminary findings that were previously included in the exception report. The document should be reviewed by agency officials before closing conference (Puncel, 2007:7-10). Closing conference The audit group will come together with agency officials to examine the audit results. This stage is a broad summary of audit results and may incorporate extra remarks from agency officials. Task 4 Audit report is often a checking of accounts that are required by law. It is often a formal opinion or disclaimer that is issued by either an independent external auditor or an internal auditor due to external or internal audit or assessment conducted on a legal entity (Puncel, 2007:7-10). Purpose of audit reports The reason for the Audit Report is to present the reasonable presentation and the consistency with the financial statements of the information that is offered in the Board of Directors Management Report and in the reports tendered to the shareholders regarding the financial statements and financial position; the reasonable presentation of the information offered in the Board of Directors Management Report regarding benefits and remuneration given to certain organization officers and whatever other commitments that are made to support them regarding their appointment, termination or change in function (Albrecht et al 2011:225). Types of audit reports There are four types of audit reports, adverse, qualified, disclaimer and unqualified report. Disclaimer report is issued when the auditor is not able to issue any opinion on the financial statements since he/she cannot gather a sufficient amount of competent evidence. This may happen because of the absence of appropriate financial records. Adverse report is issued when the financial records of the organization do not conform to GAAP. It occurs when financial records of the organization are grossly misrepresented. Qualified report is issued when financial records of the company have not been maintained in line with GAAP, but no misrepresentations are discovered (Puncel, 2007:7-10). It is written similar to unqualified reports, but it includes an additional paragraph highlighting the reasons why it is not unqualified. Unqualified report is normally issued by the auditor when financial records of the company are free from any misrepresentation. Additionally, it shows that the financial records have been maintained in line with GAAP. It is a clean report because it is the best report an organization can receive. Contents of the audit report The main contents of audit report includes title, addresses, introductory or opening paragraph, objective and scope paragraph, Signature, opinion paragraph, place of signature and report date, auditor’s view of the company’s financial statement, methodology used in audit engagement, results and findings, audit recommendations and acknowledgement. Draft template of an audit report 1. Introduction 1.1 Auditee’s name (unit audited) 1.2 Period covered under current audit 1.3 Auditee’s brief description of duties/functions 1.4 Working strength and sanctioned strength 1.5 Expenditure or budget of the auditee unit 2. Objective and Scope The objectives for the internal audit engagement were: i. ii. iii. The scope of the Internal Audit engagement included: i. ii. iii. Individual audit engagement(s) ought to distinguish the key risks of audit units and assess the ampleness and adequacy of controls intended to moderate these risks. The audit engagement ought to detail the weaknesses and strengths in operation and design of the internal control frameworks and give direction for removing deficiencies identified during the audit. 3. Methodology This part expound on the methodology that was utilized during the audit engagement such as observation, sampling, interview, Sample size utilized for checking records, types of record checked and the quantity of records checked. Furthermore, it ought to incorporate checklists (if any) used during the engagement (Puncel, 2007:7-10). 4. Results and Findings 4.1 Strengths identified during the audit engagement. 4.2 Weaknesses witnessed in the maintenance of records, functioning of the office and during the audit engagement. The remarks under these two classes ought to summarize every critical Audit observation in the order of materiality. The outline ought to be as concise as possible. Additionally, it ought to incorporate a summation of remarkable internal audit and statutory observations. 5. Opinion General opinion of Audit Team regarding the functioning of Auditee Unit 6. Audit Recommendations The audit team’s recommendations on the weaknesses observed presented in the table of highlighted print. 7. Acknowledgement This part could recognize to in summation the participation, acknowledgment of the criteria/discoveries and suggestions by the auditee (or otherwise). Management letter It identifies issues that should not be disclosed in the annual financial report, and it is addressed to the board of directors as part of auditor’s report. It represents the concerns and suggestions of the auditor noted during the audit. It confirms the accuracy or exactness of the audit. Management letter details findings and opinions of an accountant with regards to financial condition of the company, whether its fiscal controls are adequate. It also shows the mitigating circumstances that may currently affect or will affect the financial position of the company in the near future (Puncel, 2007:7-10). Contents The letter contains three classes of information. Firstly, it clearly points out general information regarding the organizations financial practices and position (Gupta, 2005:984). . Secondly, it outlines boilerplate information or data that is fundamentally the same consistently. Thirdly, the letter exhibits the auditors particular suggestions to enhance internal fiscal controls and raises any worries concerning present or future exercises or activities that will probably influence the financial position of the corporation (Futter et al 2002: 155). References Albrecht, W. S., Stice, E. K., & Stice, J. D. (2011). Financial accounting. Mason, OH, South-Western/Cengage Learning. 258 Bhattacharyya, A. K. (2006). Principles and practice of cost accounting. New-Delhi, Prentice-Hall of India. 459 Demski, J. S. 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