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. 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. What are the outputs?
Summary of all the transactions –
financial statements
Quality of outputs:
Relevant, reliable, understandable,
timely, comparable
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. 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. 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. 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.
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. Analysis Phases in the
development
of accounting
system
Design
Implementation
Evaluation
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. Design
Specify systems requirements more
precisely
Where data would be captured
The required processing
Where the output would be used
14. Implementation
Install new / revised systems (e.g.
hardware & software)
Making the system fully
operational
User manual
Training users/personnel
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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)
