The Impact of Fraud on Accounting

This assignment delves into the critical topic of fraud detection within accounting systems. It examines various types of audit tests employed to identify potential fraudulent activity, discusses the 'fraud triangle' framework used to assess risk factors, and explores the importance of effective risk management strategies in mitigating fraud. The analysis draws upon academic literature, real-world examples, and industry best practices.

Financial system and auditing
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Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
A. Explaining the purpose and use of different accounting records for Minty Cola Co. ...............3
B. Assessing the importance and meaning of different fundamental accounting concept ..............5
C. Evaluating the factors that have influence on the nature and structure of accounting system for
Minty Cola Co.................................................................................................................................5
TASK 2.................................................................................................................................................6
A. Identifying the different components of business risk which affect the operations of Minty
Cola Co............................................................................................................................................6
B. Analyzing the control system that takes place in Minty Cola Co...............................................7
C. Evaluating the risk of fraud and methods which are used by Minty Cola Co. to detect it .........7
TASK 3.................................................................................................................................................8
A. Planning an audit for Minty Cola Co. by taking into account the scope, materiality and risk...8
B. Identifying the appropriate audit test process which can be used by Minty Cola Co.................8
C. Stating the steps of audit process which is undertaken by Minty Cola Co. ...............................8
TASK 4.................................................................................................................................................9
A. Preparing a draft audit report for Minty Cola Co. .....................................................................9
B. Drafting a suitable statutory audit report for the business organization ..................................10
CONCLUSION...................................................................................................................................11
REFERENCES...................................................................................................................................12
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INTRODUCTION
Financial system is the process which is exercised by the management of organization to
exert control and accountability on the monetary aspects. In the present era, each business
organization places high level of emphasis on recording, verifying and reporting the transactions.
Through this, business unit has become able to assess their financial health and performance to the
large extent. Along with this, auditing is also one of the most effectual technique through which the
company and its stakeholders can assess quality and accuracy of the information recorded in the
financial statements. The present report is based on the case scenario of Minty Cola Co. which is
facing the problem in relation to cash and inventory aspect. In this regard, report will discuss the
accounting concepts which are followed by the firm for recording the transactions. Further, it will
shed light on various factors and types of business risk that closely influence accounting system of
the business organization. Besides this, it will also develop understanding about the audit test and
process which can be used by the organization.
TASK 1
A. Explaining the purpose and use of different accounting records for Minty Cola Co.
Accounting records imply for all the books or documentations which are undertaken by the
firm for preparing final accounts. Such documents include journal, ledger, trial balance and
financial statements. By taking into consideration all such record, Minty cola Co. can conduct and
review its financial performance in the best possible way. Moreover, accounting records can be
served as a proof which helps both the internal and external auditors in assessing the fraud which
prevails in the financial statements (Deegan, 2016). Use of various accounting records for Minty
Cola Co. is enumerated below:
Accounting records Purpose and use
Prime entry book and
Journal
It is the book which contains information regarding all the day to day
transaction made by the firm in accordance with the double entry system.
Through this, the firm can get information about its daily financial
activities (Lafond, McAleer and Wentzel, 2016). Further, journal provides
assistance to the accounting personnel of Minty Cola in preparing the
ledger account.
Ledger This account records, classify and summarize financial information of
the journal. The main purpose behind the preparation of ledger account is
to assess the accounting errors which are prevailed in the journal. Besides
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this, by using the ledger account, Minty Cola can draft appropriate trial
balance.
Trial balance Trial balance presents all the closing of ledger account in their respective
side. By preparing such statement, accounting personnel of Minty Cola can
identify the errors which take place in journal and ledger (Chan and et.al.,
2016). This statement is used by the accounting personnel for preparing
final accounts in an appropriate manner.
Financial statements
Income statement It furnishes information about the revenue generated by the firm during the
year in comparison to the expenses incurred. By preparing the income
statement, Minty Cola Co. can evaluate its profit level in against to the
previous years. Income statement also provides assistance to the firm in
building strategic and competent framework.
Cash flow statement This statement serves information about the inflow and outflow of the firm
which is associated with the various kinds of business activities such as
operating, investing and financing (Barron, Chung and Yong, 2016). In
this, by making use of cash flow statement, business unit can assess the
area of the expenses which requires high control.
Balance sheet It is the statements which render information about the assets, liabilities
and capital. Minty Cola Co prepares such statement to satisfy information
need of decision makers. Business unit has also become able to make
modifications in the policy framework by evaluating their liquidity and
solvency position.
B. Assessing the importance and meaning of different fundamental accounting concept
Accrual concept: In accordance with this concept, all the revenue and expenses must be
recorded in the same year in which they occur. It is not necessary that income receives in cash in the
similar year and the same is also applied in the case of expenses. In this way, accrual concept helps
Minty Cola Co. in reflecting the reliable picture of financial statements in relation to the income and
expenses which are related to the reported period.
Going concern concept: Such concept states that the business will be continued by the
entity for the unlimited time (Sadgrove, 2016). In this, success and failure aspect can be evaluated
by Minty Cola Co. by comparing the cost and output.
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Business entity: This concept entails that business is separate from its real owner. In this,
owner and personnel of Minty Cola Co. has right to make transaction on behalf of the company.
However, all the transactions are recorded in the books of the business. In this way, such concept
helps in keeping away private affairs of the business entity from the organizational transactions.
Historical cost: Minty Cola co. needs to record the actual value of cost in the final accounts
rather than the market price. Moreover, market price of the assets varies as time passes or changes.
Consistency concept: On the basis of this, business organization needs to follow similar
accounting rules in each year for recording the transactions. This concept is highly significant
which maintains the accountability in the financial statements (Chugh, 2016). Besides this, by
following such concept, company has become able to assess its financial health and performance in
against to the past years.
Prudence concept: It implies that business unit needs to avoid the aspects of overestimation
and underestimation in regard to the revenue as well as expenses. The same accounting principles
must be followed by the firm at the time of recording of assets and liabilities (Miller, Bunn and
Noe, 2016). This in turn helps Minty cola Co. in presenting the fair view of the financial aspects.
Materiality concept: It allows the business organization to violate another principle of
accounting if the amount is small. This in turn helps the firm in providing users with appropriate
financial statements.
C. Evaluating the factors that have influence on the nature and structure of accounting system for
Minty Cola Co.
There are several factors which have high level of influence on the nature and structure of
the accounting system of Minty Cola Co. is:
 Nature and structure of the accounting system of Minty Cola is affected from the extent to
which it has competent and experienced personnel. Moreover, accounting personnel can
record transactions in an appropriate way only when it has knowledge about the accounting
principles, conventions, GAAP and IFRS (Fagbemi, Olaoye and Adeyemi, 2016). Hence, if
personnel do not have proper information then they are not able to present the accounting
information in a structured way.
 Along with this, structure of the accounting system is also influenced from the length or size
of the business. In the case of small business, entity only focuses on preparing income
statement with an aim to evaluate the profit generated by him over the expenses. In contrast
to this, size or magnitude of the business of Minty Cola co. is large. Thus, for getting the
deeper information about the profitability, liquidity and solvency Minty Cola Co. prepares
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all financial statements such as income and cash flow statement as well as balance sheet.
TASK 2
A. Identifying the different components of business risk which affect the operations of Minty Cola
Co.
In the present scenario, taste and preferences of the customers are getting change with the
very high pace. Along with this, there are several factors which closely influence the profit level of
the business unit includes sales volume, competition, government regulations, economic climate,
strikes, breakdowns in the equipments etc. Due to all these aspects there is the possibility that
business unit will experience loss rather than attaining anticipated profit margin. In this regard,
there are mainly four components which closely influence the business operations of Minty Cola
Co. are enumerated below: Strategic risk: On the basis of the cited case situation Minty cola Co. offers cola, lemonade
and other soft drinks. In this regard, taste and preferences of the customers of the food and
beverage industry changes more quickly. Hence, if business unit fails to analyze the market
condition in the right direction then it may result into inappropriate strategic and policy
framework (DeZoort and Harrison, 2016). Along with this, it is also highly required for the
firm to prepare strategies by making thorough analysis of the competitors. In business unit
fails to evaluate competitors framework then it may result into loss of profit and other
aspects. For instance: If Minty cola Co. fails to undertake social media marketing strategy
which is employed by its competitor then it may result into the loss of customer base etc. Compliance risk: For offering protection to the customers and employees several rules and
regulations are introduced by the government. In this, if business unit does not comply with
the legal framework then it closely influences the brand image and market share. Further,
government also has right to impose fine on the business organization if it fails to comply
with the legal aspects (The Main Types of Business Risk, 2016). For instance: According to
the laws it is the responsibility of Minty cola to offer highly safe working environment to the
personnel which prevent injury. In this, business unit would liable to give compensation to
the claimant part if it fails to make proper safety arrangement for their personnel. Operational risk: Such kind of risk occurs due to the breakdown of equipments, strike
lockouts etc. Operational risk occurs when autocratic style of leadership is followed by the
business organization. Further, when company fails to employ high tech equipments within
the organization then it may also result into delay in the manufacturing activities due to the
breakdown in machinery.
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 Financial risk: Now, with the aim to enhance the profit margin business organization
invests money in the varied kind of projects to diversify the risk level (Huang and et.al.,
2016). In this, if finance manager fails to select suitable project for the investment then it
may result into loss of profit margin.
B. Analyzing the control system that takes place in Minty Cola Co.
In order to control fraudulent activities regarding cash, inventory and other aspects Minty
Cola undertakes the strategy of corporate governance. According to this aspect, auditors follow
specific rules, practices, process and mechanism to direct control activities within the business
organization. In this regard, Minty cola needs to frame specific guidelines which must be followed
by internal auditors while making assessment of the final accounts. Through this, company would
become able to balance the interest of different stakeholders namely management, customers,
suppliers and government etc. Further, by appointing external auditor Minty Cola can also restrict
the fraudulent activities to the large extent. Moreover, business itself as well as shareholders and
government has right to appoint the external auditor (ZAINUDIN and HASHIM, 2016). In this,
auditor makes verification of each and every transaction in against to the voucher, bills etc. Through
this, company and its stakeholders can assess the fraudulent activities take place within the firm.
This in turn assists company in taking corrective and effectual measures within the suitable time
frame.
C. Evaluating the risk of fraud and methods which are used by Minty Cola Co. to detect it
Risk of fraud
In accordance with the given case situation, some personnel of the firm stolen cash and
inventory which place direct impact on the profit margin of firm. Usually, with the aim to earn high
personnel give untrue voucher or bill of the expenses. In this situation, due to the unavailability of
suitable statement accounting personnel of Minty cola is not in condition to maintain proper and
appropriate record of the cash aspect. Further, sometimes manager maintains false record of the
inventory as compared to the actual level (Mitra, Song and Yang, 2015). In this way, accounting
personnel is not able to present the true and reliable picture of the financial statements in front of
the different stakeholders. Moreover, there are several stakeholders who make decision after doing
the evaluation of final accounts. Along with this, company also employ the strategy of presenting
higher expenses in comparison to the actual amount for getting concession in the tax amount.
Hence, all these aspects may cause of risk of fraud which prevail in the financial statements of the
firm.
Methods to detect fraud
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 By conducting internal audit on a periodical basis Minty cola can assess the fraudulent
activities which take place within the business organization. Moreover, in auditing,
personnel make evaluation of each and every transaction in against to the voucher
(Henderson and et.al., 2015). Through this, auditor can easily find out the deficiencies take
place in the financial statements of the firm.
 Further, risk of fraud can be detected by Minty Cola to the large extent through the means of
strategic framework. By introducing the strict rules and regulations in relation to the
fraudulent activities business enterprise can exert control over the undesirable activities
(Australia, 2015). Moreover, strict rules as well as punishment system develops fear factor
among the employees and restrict them to practice fraudulent activities.
TASK 3
A. Planning an audit for Minty Cola Co. by taking into account the scope, materiality and risk
B. Identifying the appropriate audit test process which can be used by Minty Cola Co.
Audit test is the process which is used by an auditor to gather the enough amount of
evidence for doing investigation in the best possible manner. By applying audit test auditor of Minty
Cola Co can ensure that final accounts are free from the material statement or any error. Moreover,
all these are the essential documents which an auditor require making inspection of the financial
statements. Risk assessment process, test of control and analytical process etc. are the main types of
audit test which auditor of Minty Cola Co. can undertake to detect the fraud (5 types of Audit test,
2016). In this way, by applying such test company would become able to present the fair picture of
financial statements. Auditor of Minty Cola Co. employs substantive and analytical testy process to
assess the errors of financial statements. On the basis of this method, auditor makes comparison of
the actual amount with their level of expectation (Mohammadi, Maharlouie and Noori, 2015). In
this way, such test process assists company in finding the omissions and misstatement which is
present in the final account. Hence, audit test process provides high level of assistance to the firm in
assessing the misstatements in relation to the financial information.
C. Stating the steps of audit process which is undertaken by Minty Cola Co.
Stages which auditor of Minty Cola Co undertakes are enumerated below: Requesting for the documents: In the very first step, auditor requests to the business
organization to make available the copy of last audit report, bank statements, vouchers,
books of journal, ledger etc.
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 Preparation of an audit plan: At this stage, auditors prepare plan about the manner in which
investigation of the final accounts will be conducted. Planning of an open meeting: In this, auditor makes discussion with the management team
of Minty Cola Co. about the scope of audit and materiality aspects. Further, in this,
management also discuss the time frame as well as rules which must be followed by an
auditor (Authority, 2015). Conducting field work: Once open meeting has been conducted thereafter auditor conducts
inspection of the book of accounts in against to the voucher (Six-Step Audit Process, 2016).
Through this, they can present the level to which information mentioned in the financial
statement is true. Drafting a report: Under this, auditor prepares report which contain information about the
discrepancies that take place in the financial statements. Moreover, business unit can take
effectual measure only when they have idea about the errors present in the financial
statements.
 Setting up a closing meeting: In the last stage of auditing process, auditor solicits
information from the management about the level to which they agree or disagree with the
problems identified by them (Kaplan and Atkinson, 2015). In this meeting manager resolves
all the queries of management and thereby evolves satisfaction among them.
TASK 4
A. Preparing a draft audit report for Minty Cola Co.
Audit report may be defined as a documentary framework in which auditors present their
views regarding the financial statements of firm. In this regard, on the basis of the result of an audit
program auditors of Minty cola Co has been prepared the following audit report are:
Internal Audit Report for the Financial Year 2016
To
Board of Directors of Minty Cola Co
Date: 1st October 2016
From audit it has been assessed that cash and inventory balance which is mentioned by the
accounting personnel is not in align with the actual amount. It is reported to the higher
management that accounting personnel has mentioned higher expenses in comparison to the actual
amount. Due to this aspect, errors occur in the cash element of the balance sheet. Further,
discrepancies are also identified in the amount of inventory. By doing investigation it has been
found that transactions which are recorded in the purchasing book are not in accordance with the
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vouchers or bills which are related to it. This aspect clearly indicates that fraudulent activities have
taken place within the business organization. Besides this, both these fraudulent activities place
impact on the profitability aspect of firm. Further, statements which are prepared on the basis of
the inappropriate information will misguide the stakeholders. Thus, it is required for Minty cola Co
to undertake suitable measure within the suitable time frame which restrict the fraudulent
activities. Moreover, when company presents inappropriate financial information in front of the
stakeholders then it negatively influences the brand image and market share of the firm. Hence,
company needs to introduce the system of internal audit which will help firm in detecting the
problems or errors in relation to the financial transaction within the suitable time period.
B. Drafting a suitable statutory audit report for the business organization
Management Letter for the Accounting Period of 2016
To
Board of Directors of Minty Cola Co
Date: 1st October 2016
On the basis of the outcome of auditing process it is recommended to Minty Cola Co to prepare
and introduce strict policies and rules. This in turn helps firm in making control on the unethical
practices of the personnel such as steal of cash etc. Moreover, when employees have idea that they
will lose the job if any employee found with practising unethical activities. Through this, business
enterprise would become able to present the reliable picture and view in front of the stakeholders.
In this way, such statement helps stakeholders in making suitable decision to the large extent. In
addition to this, business unit needs to conducts workshops to raise the motivational aspect of
personnel. Moreover, motivated personnel do their work by following all; the ethical aspects and
avoid fraudulent activities. Besides this, company also needs to place emphasis on establishing
internal audit team to find out the deficiencies present in the financial statements. In this way, by
conducting audit on quarterly basis company can find out the variations prevailed in accounting
data. Thus, all these aspects provide high level of assistance to the firm in maintaining
accountability and reliability in the financial statements.
CONCLUSION
From the above report, it has been concluded that by using the different accounting records
Minty Cola Co can develop competent strategic framework. Further, it can be inferred that by using
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all the accounting concepts and principles finance personnel are become able to record the
transactions in an appropriate way. Besides this, it also has been articulated that Minty Coal is
facing the operational and financial risk which closely affects its profit margin. It can be seen in the
report that by adopting the system of audit company can assess the loop holes which take place in
the financial statements of the firm. Further, audit report also makes aware to management from the
undesirable or fraudulent activities that take place within the firm. This in turn enables business unit
to undertake strategic measures which makes contribution in the attainment of organizational goals
and objectives.
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