Internal Controls and Accounting Systems

Question: Write an essay on Internal Controls and Accounting Systems. Answer: Description of purpose and organisation of accounting functions within the organisation: An accounting function helps an organisation to provide accounting services along with the financial support to the organisation to which it belongs. Accounting functions records the accounting transactions such as accounts payable and accounts receivable, inventories, payrolls and all other aspects of financial transactions (Miller and Power 2013). The purpose of accounting function and its relationships with other functions within the organisation are as follows; Accounts receivable and payable: The accounts payable aspects of accounting functions record the goods and services, which an organisation receives, and the payments it owes. The accounting functions keeps records of each accounts that is payable in the form of liability and accounts receivable in the form of assets. Payroll: The payroll elements of accounting functions within an organisation ensure that the organisation makes fair and equitable payment to its workforce, which should consists of bonus, commissions and benefits (Deegan 2013). The purpose of accounting functions is to keep a watch on government tax as well as union dues. Inventory: The purpose of accounting functions is ensuring that the cost of inventory, raw materials, and administrative overheads does not negatively fluctuate cash flows. The accounting functions ensure that a balance is maintained between high level of inventories to overcome the companys cost and expenses. Explanation of business financial information systems: Purpose of Statement Profit and loss account: The purpose of profit and loss account is to provide the overview of the organisations profitability over a specific period. Statement of Profit and loss accounts is oriented towards summarization of income and revenues. The key objective behind profit and loss statement is that it allows the management to take vital decisions and to examine the organisation existing situation, and making changes as and when desired (Coates et al. 2012). The statement determines that weather the organisation generated any profit during an accounting period or it has experienced any loss during the course of business cycle. Purpose of Statement of Cash Flow: The main purpose of statement of cash flows is as follows Anticipation of future cash: The statement of cash flows provides an organisation to understand how it can manage cash and helps to anticipates the effect of existing cash receipts and cash disbursement on future cash flow of the business operations. Information about the non-cash investing and financing activities: Business firms engage in various investing and financing activities, which does not, involves the utilization of cash (Dumont and Schmit 2014). Hence, statement of cash flow enables the users to recognise the non-cash investing and financing activities which creates significant impact on the future cash flows of the business entity. Explains the changes in cash: statement of cash flows illustrates the main reason behind the change in the organisation cash and cash equivalents during a particular financial period by enumerating the details of cash, which is generated after the performance of specific operating, investing and financial activities of a business entity. Purpose of statement of financial position: The main purpose for statement of financial position is to determine the organisation financial standings as because such statements make evident the amount of money due and arrear. The purpose of the statement of financial position is to summarise the assets information and the amount of debts or liabilities a business organisation owes (Oliver 2014.). The purpose of statement of financial position is to subtract the company liabilities from the amount of assets and obtain the stakeholders equity. Explanation of accounting systems by organisational structure: The accounting systems are affected by organisation structure systems and procedures in following ways: Quality of information: When an organisation is devotes quality time and attention it develops and maintains accurate accounting systems, which helps in determining the relevancy of the companys operations. Hence, the structure of an organisation is affected by the quality of inputs, which is employed by the managerial accounting. Timeliness of information: Another factor that determines the accounting systems is the usefulness and timeliness of information, which is provided to the organisation. Hence, it must be ensured that timely and proactive response helps in effective planning. Availability of resources: It is observed that no matter the efficiency of information obtain by the business it can only be put into use unless it has the needed resources to fund the strategic projects and gain an insight to implement any strategic changes. An organisation will only be able to yield sufficient outcomes only when it employs right personnel and resources. External regulations effecting accounting practices: External regulations affecting the accounting practice are as follows Taxation regulations: The tax regulations effecting the policies and procedures of an organisation such as value added tax returns, format of invoice, rates of taxations applied and the amount of corporation tax paid. Company Law: The companies act requires a company to make the financial statements to be audited and the audited statements are to be drawn up in a set of format before sending the statement to the stakeholders. Large Organisation is required to send complete version of these statements to the organisation where it can be made available for the access of public and stakeholders (Baldwin et al. 2012). Law relating to late payment: As set out in the act late payment of commercial debts allows the suppliers with the opportunity to charge interest on the late payment of invoices. Hence, the above stated external regulation creates a impacts on the users caused by external regulations on the organisations policies and procedures. 2. Understanding the importance and use of internal controls: Identification of external regulation in accounting practices: The external regulations affecting the accounting practices are as follows; Preserving and retaining the financial documents such as purchase and sales invoice, bank reconciliation statement, records of payroll for a period of not less than six years. Safely disposing off the records after the expiry of mandatory period of six years Quick and safe disposal of information which is of confidential nature such for example credit cards details sent in mail orders Setting, monitoring and enforcing accounting and auditing standards Promoting high standard of external regulation within the organisation for corporate governance Causes and types of fraud: Fraud can be defined as the intentional act on the part of employees so that they can gain an unfair and illegal advantage. Causes of fraud: The main causes of fraud are as follows Dishonesty: It is noteworthy to denote that the main cause of fraud is dishonesty and it usually arises due to personality and cultural factors. Motivation: According to Young and Peng (2013), fraud often arises due to motivation, which means that there are certain kinds of needs which are unsatisfied and the employees commit fraud on non-satisfaction of such needs. Opportunity: As stated by Clikeman (2013), some frauds arises due to opportunity which represents that whenever an employee gets an opportunity or chance he performs the act of fraud. Types of fraud: There are certain kinds of frauds, which are listed below; Theft of property or tangible cash or information such as copying or selling the information database of company to the rival company Falsification of records so that the property or the amount of money is passed to the wrong person Collusion: This type of fraud represents setting up an employee or someone else outside the organisation. For instance sending up of false invoice to supplier regarding fabricated transactions that never happened and authorising the person outside the organisation. Impact of fraud: Impact of fraud can relate to the financial position of the organisation. Fraud can result in major loss of organisation financial and liquidity position along with affecting the profitability of the organisation. Therefore, according to Clikeman (2013) the impact of fraud is insignificant as it effects the employees pension and other major activities of the organisation. Methods of detecting frauds: Frauds can be detected by an experienced manager or simply by observing through the experience. Methods that can be used to detect fraud in accounting systems are as follows; Employees acting suspiciously and always looking to shift and hide the paperwork of the organisation Employees spending beyond the income level than they are actually paid. Employees having grudge against the organisation where they have not been considered for promotion due to the political or ethical issues Employees who are always known to be running out of money or struggling due to high mortgage debts Employees who are working long hours and taking less than the given amount of holidays and leave so that they can commit any activity of fraud when there is no one to look into the suspicious act and uncover the act of criminal activity (Pierson et al. 2013). Types of control for ensuring compliance: Types of controls that can be put into place to ensure compliance with statutory organisation requirements are as follows: Automotive compliance measures: One of the elements of ensuring compliance is to identify weak internal controls. Perhaps a better way of improving that control is to measure and automate them whenever it is possible by the organisation. With the help of automation it is easy to eliminate human errors and loss of documentations. Documentation of efforts: One of the best ways to ensure compliance in an organisation is the maintaining corporate responsibility. Duties should be segregated and management should provide documented policies that help in outlining the responsibilities of employees (Simons 2013). Collaboration and coordination: To preserve continuous success and growth it is mandatory that different departments work together and communicate regarding the procedure of compliance requirements. It is best advised to involve Information technology in organisation compliance systems. Evaluation of security measures: Encouraging people on regular basis helps to brainstorm about the hypothetical ways in which information could be compromised and appropriate measures can be taken so that the security measures are not breached. The best way of security evaluation is documenting the security procedures and on revaluating them on regular basis. Internal control systems accounting functions: Internal control systems support accounting functions in following ways: Safeguarding of assets: Internal control systems help in ensuring that the businesss physical and monetary assets are protected from possible frauds, theft and error. Preventing detection of fraud and error: Internal control systems help in quick location and identification of errors and fraud when they take place. Ensuring completeness: The internal accounting procedures support accounting systems by ensuring completeness in all the records and transactions that are included in the reports of business (Skaife et al. 2012). Accuracy: Internal control supports accounting functions by ensuring accuracy in amounts that are recorded and correctness of accounts. Validity: It ensures that the invoices generated must be related to work performed or products received and the business entity has incurred the liability properly. 3. Evaluate the accounting systems and identify the areas for improvement: Identification of organisation accounting systems: An accounting systems consists of the following hardware and software such as Accounting framework: Accounting framework consist of the set of principles such as coding and grouping of the configuration of accounting Front-end interface: This is defined as the connecting link or a dialogue between the user and data base oriented software, which enables the user to communicate with the back end database. Back end database: This is identified as one the information storage data systems which is concealed from the users and take action according to the requirements of the users to the extent where the users are authorised to access. Data processing: it is a series of actions that are taken to alter the statistics into decision which is constructive for information Reporting systems: This is regarded as an incorporated set of objects, which helps in constituting report. Review of record keeping systems: The record keeping systems meet the organisational requirements in the following ways: Governance and accountability: Accountability can be crucial for a responsible government. In order to meet the records of the organisation it is mandatory to ensure that the procedure for accountability is well managed. According to Demski (2013) accountability ensures integrity and authenticity through time and maintaining records enables the employees to remain accountable to the managers. Hence, accountability is critical to a responsible government that allows permission to the managers to account for the heads of government in order to represent the interest of the society. Controlling payroll: In several organisations, payrolls are manipulated with non-existing employees who draw salary in the name of others. Therefore, the files of personnel should be the primary source of evidence that a person should exists in reality. An integrated accounting system helps in grading appropriate salary along with the additional benefits which have been properly authorised. Entries in the appropriate database can be checked against the authorised sources so that it can ensure that the actual payment is made to the person who is present in the organisation. Financial management: A good record keeping is useful for clear and accountable financial management. Without having actual records of actual expenditure, the procedure of budget preparation becomes useless proper accounting systems are employed in the organisation. An integrated accounting system helps the organisation to facilitate appropriate method of budgeting and enables debt management so that the records of borrowing are completely preserved. Identification of weakness and impact of operation of the organisation: Identification of weakness of the organisation: Security administration functions does not seems to be following best practices Reconciliation of accounting systems is not being done on regular timely basis It is understood that the policies and procedures for monitoring accounts are not always in place Integration of financial accounting systems has not been achieved (Cavka et al. 2015).. Impact on the operations of the organisations: Inadequate electronic security could lead to unauthorised access which can lead to loss of data. Poor monitoring controls allow some errors to go unnoticed which comprising of data accuracy and validity along with the increase in the risk of loss and corruption. Without the help of proper controls, organisations do not have the assurance of payments for goods and services that have been received. Bypassing the electronic framework maximises the risk of data valuation which remains unchecked due to the prevailing factor of duplicate information. Identification of potential areas of fraud: Identification of potential areas of fraud arising out of accounting systems and their potential risks are as follows; 0Employees abusing their position: It is noticed that many frauds takes place in the profit and loss accounts where the expenses are overstated or income not representing the actual figure. Frauds here consists of few pounds or fiddle expenses where nobody checks the notes received from supplier such as invoices consisting of higher quantities of prices of goods than those delivered or agreed. Suppliers taking advantage: It is observed that if an organisation has poor procedures of checking supplies the suppliers takes undue advantage. Falsification of cheques: If an employer hands his chequebooks to the book keeper in hurry to sign an invoice, the book keeper will fill up the line of payee before sending out the cheque (Cooper et al 2013). Ultimately, the year ending figures of business might not look good and the investigations identifies missing invoices that the book keeper has been making these cheques payable to himself. Theft of confidential information: There could be theft of financial information such as the list of customers intellectual property rights and industrial process from disgruntled employees. Hence, these are the potential areas of frauds which lead to risk in the operations of the organisations. 4. Conduct and ethical evaluation of accounting systems Evaluation of accounting systems against ethical principles: Evaluation of accounting systems consists of ethics, which is involved, in the financial reporting activities of an organisation. Generally, accepted accounting principles define the ethical practices and principles of accounting systems. Nature of work: It is noteworthy to denote that accountants, auditors and accounting clerks must maintain a high ethical standard when dealing with the financial data. It is understood that major part of financial data within a business entity are regarded as highly confidential and are only available for few peoples access (Boatright 2013). This demands the accountants, auditors and clerks to determine the nature of secrecy of information and deploy ethical standards while conversing about transactions outside the organisation. Internal controls: Internal controls can be referred to as one of the ways through which an accounting systems ethics are protected by separating the functions of internal users from the organisation. Internal controls systems do not even require reporting of financial reports because the organisation privately ensures that the statements of financial reports are accurate and it is still a part of ethical accounting systems. Accurate information: Another ethical issues concerning within an accounting systems consists of validating the procedure of data entry accurately into the accounting systems. It is evident that humans makes mistake, all the financial transactions must be thoroughly verified, and hard copy should be maintained for back up of documentations. Therefore, errors that occur must be corrected and adjusted in order to provide a complete audit trial. It is the duty of the auditors to ensure that all the transactions are recorded from beginning till the end with appropriate documentation for supporting back up of recorded transactions. Identification of possible breach of professional ethics: Possible or actual breach of professional ethics: The principle of integrity imposes an obligation on all professional accountants to maintain professional ethics in professional business. Integrity also ensures that fair and truthfulness should be maintained however, there is certain possible or actual breach concerning professional ethics; Containing a materially false or misleading statement is considered to have performed breach of professional ethics Containing statements or information which is furnished recklessly is said to have performed breach of professional ethics Falsification of financial statements and mis-stating the financial data is act of possible breach Wilfully omitting and obscuring the information which is required to be included where such omission and obscurity would be misleading If a professional accountant provides a modified financial report by omitting the matters of financial importance is considered to have committed breach of professional ethics (Alleyne et al. 2014). 5. Sustainability evaluation of accounting systems Evaluation of accounting systems against sustainable practice: Evaluation of accounting systems is based on the following principles of sustainability, which are as follows Three dimensional sustainability accounting: Traditionally financial accounting systems keeps the records of the financially related stocks maintains the flows of the organisation in the forms of profit and loss account and statement of financial position (Ball et al 2012). Sustainability accounting makes the effort to provide extra information through three dimension sustainability accounting; Timing: Under this dimension, the information can be provided with the help of snapshot during the phase of stock of goods and services over a period of time arising from inventories. Place of impact: This dimensions takes into account the impact located in accounts. It generally locates weather the impact is located either internally of outside the reporting boundaries. Type of impact: The type of impact that is identified under this dimension can be either environmental or economical. Internal accounting sustainability: The principle of accounting summarizes internal monetary flows, which is associated with the performance of the economic, social and environmental dimensions. Cost and benefits that are already included in the reporting of financial accounts and are rearranged to illustrate the beforehand hidden savings. The principle of accounting sustainability states that the information that is extracted from the current accounting systems and re-presented to demonstrate the related aspects of the current expense patters are inter connected with the associated financial benefits or costs occurred, External principles of sustainability accounting: It is to be understood that internal principles of sustainability deals with the financial flow of cash which are beforehand on the somewhere in the aspects of financial accounts. On the other hand, external principles of sustainability accounting are concerned with the cost and benefit externally which are not presently accounted for by the organisation. It is observed under this accounting that social and environmental cost and benefits might be either recorded on someone else financial statement or it is not recorded at all (Gond et al. 2012). External benefits consist of community amusement of university facilities such as movie theatre, library and swimming pools so as to maintain the absorption of biological diversity. Sustainability principles of balance sheet accounting: As mentioned earlier that the above two principles deals with the flow of cash and cost benefit from the internal and external aspects of profit and loss accounts. These flows can also be converted into changes in inventories. However, the value of stocks that will be represented should be less developed aspects of accounting principles. The current practice shows that balance sheet already considers the internal generation of stocks. For instance, the quality of accounting represents the overall valuation of stocks in order to recognise the inward and outward flow of cash. Hence, the intangible assets are considered as the internal stocks on which an organisation may want to place money and incorporate the traditional cost accounts to assist its decision making procedures. Identification of areas of improvement: The identified areas for improvement under sustainability accounting are as follows; External benchmarking functions: As mentioned earlier that, benchmarking can be considered as directional insights into the functions of individual such as finance, human resource and IT. On the other hand, the sub functions consists of accounts payable which shows that specific illustrations can be made to the cost configuration and process than general across the board cost reduction functions. It is to be understood that the procedure is apparent and purposeful. Therefore, the data obtained from benchmark is very helpful in convincing the managers with the purposeful accountability, which identifies that cost cutting methods is needed (De Waal 2013). Quantitative assessment of value drivers: Acquiring an understanding of the internal buyer seller relationships amid numerous areas of functions quantitative assessment provides the managers to determine how individual functions can be enhanced by providing value beyond mere efficiencies. Qualitative interviews of stakeholders: Holding discussions with the organisation important share holders results in better understanding of organisational intricacies that can provide added insights into the probable management through buy-in and enforcing challenges within the organisation. Review of the targeted operational levers: One the areas for improvement has been recognized supervisors should look into the development levers that have already been put into practice to what extent and what else can be done to improve the overall design and structure of the organisation. 6. Making recommendation to improve accounting Recommendations for changes in accounting systems: Recommendations to changes in the accounting systems are as follows; Harmonisation of accounting process with the help of the international financial organisation incurs the reformation of budget through the help of modernization of accounting systems. Implementing fund accounting also underlies new and improved method of employing accounting framework so that the assets, liabilities, revenues and expenditures are identified through the help of separate budgeting procedures. Consolidation of data is another method of maintaining accrual and cash basis of accounting. It has become obligatory in many organisations however, implementing such measures helps in changing the accounting systems. Implementation of Financial management information system is becoming obligatory in the management of budgetary entities. Identifying the effects of changes on users: One of the important aspects effecting the changes on users of financial information is the effect on profitability. Another effect which can be seen due the effect of changes is the decision making process and improvement of the prevailing and timely information arising from accounting information systems. Qualitative and quantitative characteristics of accounting information consist of comparability and timeliness of decision making along with the consequences which will affect the profitability of the organisation (Demski et al 2013). Changes in the accounting systems enables real accounting systems to meet the needs of the decision makers by providing summary of accounting reports for the purpose of business management and control. Importance of training: Even though the accountants receives training in collage regarding the practice of accounting methods, practices and procedures they might not have the familiarity with a specific accounting systems of a particular organisations. Providing manual training for accounting systems helps the user to use input screens and complex interfaces, which requires the personnel to understand the systems of accounting. Training helps the individual to know and understand the use of specific accounting data. Most the accounting systems do not allows the non-financial users to access any accounting information. Thus, training enables the individuals to understand the use of accounting systems through for proper handling of information. Preparation of cost benefits analysis: Cost benefit analysis is considered as one of the common tools for business planning which involves comparing the likely cost and the benefits of the potential projects to choose those that generate high amount of net benefit. Cost benefit analysis consist of following Simplicity: Cost benefit analysis is helpful for the business firms as they simplify the complexities in business decision. Different business projects might consist of vast types of projects and expenses but cost benefit analysis helps in making cost simple for the purpose of comparison of projects (Ferwerda 2014). Objectivity: Another benefit of cost benefit analysis is that it provides the business with the objectivity of projections of cost. Business owners who have invested a huge sum of money in a certain projects determine the purpose of the projects through cost benefit analysis. 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