Accounting System and Auditing Introductory Introduction
Added on 2020-01-15
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FINANCIAL SYSTEM AND AUDITING1
Table of ContentsINTRODUCTION................................................................................................................................3TASK 1.................................................................................................................................................3Objectives and uses of different accounting records........................................................................3Fundamental accounting concepts and its importance.....................................................................4Factors affecting accounting system.................................................................................................5TASK 2.................................................................................................................................................5Different components of business risk.............................................................................................5Analyse business control system......................................................................................................6Risk of fraud and suggesting methods for detecting fraudulent activities........................................7TASK 3.................................................................................................................................................8Plan an audit with scope, materiality and risk..................................................................................8Appropriate audit test procedure for risky industries.......................................................................8Record an audit process of a proposed plan.....................................................................................9TASK 4...............................................................................................................................................10Types of draft report and preparation of unqualified report...........................................................10Draft a suitable management letter of statutory audit.....................................................................11CONCLUSION..................................................................................................................................12REFERENCES...................................................................................................................................132
INTRODUCTIONIn every organization regardless their sizes, accountant are responsible to keep a detailed trackrecord of their financial transactions, known as financial accounting. It must be noted that businessaccounts are prepared by using standard set of guidelines which comprises especially incomestatement and balance sheet. The purpose of this assignment is to address various accountingconcepts and principles which are the basis of financial accounting and reporting system. Moreover,it also emphasizes on the causes of fraud and suggests the ways to reduce error and the fraudulentactivities. After preparing financial statement, companies are also required to audit their accounts soas to make sure their truth and fairness. Therefore, in the report, audit procedure will be explainedalong with the auditor report. TASK 1Objectives and uses of different accounting recordsScenario states that Minty Cola Co, called Minty produces different kinds of fizzy drinks suchas cola, Lemonade and other kinds of soft drinks to meet the customer nutritional requirement. Itprepares its accounts on a timely basis to determine their operational result and financial strength aswell (Gramling, Johnstone and Rittenberg, 2012). In order to record the transactions, firm needs tomaintain proper records of their functions which are demonstrated underneath:Prime entry books: As the name implies, it is a book of original entry in which transactionsare recorded initially. For instance, sales book report about delivery of fizzy and other drinks in cashwhereas purchase book record only cash purchase transactions. On the other hand, sales come daybook includes only credit sale whilst purchase come day book reports about the credit purchase. Themain purpose of prime entry books is to maintain proper records of each and every transaction forpreparing the annual accounts in the end of year (Lunt, 2009). Ledger: It is a complete record of every component such as assets, liabilities, expenditures,revenue which have been incurred by Minty over an accounting year. These are the classifiedstatement in which each reported transactions in journal are shown in both debit and the credit side.It is mainly prepared to consolidate all the operations regarding a specific element And also use as abasis of trial balance preparation. Trial balance: It is a summarized statement of all the ledgers and it either can be preparedby total or balance method. The main objective of the constructing trial balance is to measurearithmetical accuracy in the reporting (Murthy, 2010).. It is because, if the total of both the creditand debit side matches with each other than it is a sign of accurate reporting or vice-versa. Income statement: This statement includes both the revenues and payments incurred over a3
specified duration. For instance, sales, purchase, direct and indirect payments i.e. rent, stationery,lighting, taxes, dividend etc. are reported in this statement. The main purpose of it is to determinethe net profitability in the terms of profitability or loss. Balance sheet: It is a summarized statement of the assets (current and fixed) as well asliabilities (short-term and long-term) together with the owner’s equity. It is prepared by Minty todetermine their financial position by identifying liquidity, solvency and efficiency at the end ofevery accounting year (Ramachandran, 2011). Fundamental accounting concepts and its importanceMinty needs to prepare its income statement and balance sheet by taking into account all theincome, revenues, assets and liabilities as well. Accountant is required to prepare such statement bycomplying with several basic concepts that are demonstrated below:Accrual: This principle states that all the business transactions must be recorded at the timeof their occurrence rather than their actual receipts and payment in cash. Therefore, as per this rule,Minty’s statement of comprehensive income will include both the cash and credit income andexpenditures occurred during a fixed period (Basu, 2006). Going concern: Every entrepreneur needs to believe that their business operations will becontinuing for an infinite period. It is important because it allows the Minty Cola Co. to depreciateand amortize their fixed assets over its useful life. Business entity: This concept reveals that business transactions must be recorded separatelyfrom such activities and operations which are associated with the owner. It assumes thatentrepreneur and organization both are separate from each other, and therefore, money that is put bythe owner will be reported as capital while their withdrawal for personal use will be presented as thedrawing. Historical cost: This principle states that Minty Cola must record their non-current assets atthe original cost in the balance sheet. In other words, the price at which fixed assets like property,building and plant and machinery has been acquired from the market is called as the historical costand entity need to record transactions at this value rather than the inflated price (Busch, 2012). Consistency: According to this, one adopted principle or concept will be followedcontinuously in the upcoming years, unless change in the principle brings improvements in thefinancial reporting. Prudence: This concept demonstrates that each and every business operation must berecognized at their real value without any overestimation or underestimation. So that, Minty’smonetary statement can represent true and accurate position of its performance. 4
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