Accounting Report: Financial Records, Risk, Fraud, and Audit Analysis

This accounting report, likely prepared for a course at LSBM, comprehensively addresses various aspects of financial accounting. It begins with an overview of different types of accounting records, including income statements, balance sheets, cash flow statements, sales ledgers, and purchase accounts, along with their significance in financial analysis. The report then delves into key accounting concepts such as money measurement, going concern, accruals, historical cost, prudence, consistency, objectivity, conservatism, realization, matching, and their implications. It further examines the factors influencing the structure and nature of accounting systems, such as system compatibility, employee perception, training levels, implementation, costs, and business size. The report proceeds to analyze the components of business risk associated with strategic moves, including product risk, market risk, finance risk, execution risk, and overall business risk. It also outlines control systems for identifying fraud within a business, referencing the fraud triangle and emphasizing the importance of organizational structure, policies, and risk assessments. Finally, the report presents a draft audit report, including background information, scope, objectives, results, observations, and an action plan, alongside a letter to the auditor, demonstrating a practical application of accounting and auditing principles.

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Table of Contents
Contents
1 Accounting...............................................................................................................................2
1.1 Types of Accounting Records...........................................................................................2
1.2 Concepts of Accounting....................................................................................................2
1.3 Factors Affecting the Structure and nature of Accounting Systems.................................3
2 Task 2.......................................................................................................................................4
2.1 Different components of business risk associated with strategic move of an organisation4
2.2 Control systems for identification of Fraud......................................................................5
2.3 Risks of fraud in a business...............................................................................................5
3 Task 3.......................................................................................................................................6
3.1 Scope: the statements audited include the Cash flow and Balance sheet statements under the
International Standard on Auditing (UK and Ireland). The ISA (UK and Ireland).....................6
3.2 Audit test s(Millichamp, 2002).........................................................................................6
3.3 The Audit process is recorded as detailed below..............................................................6
4 Task 4.......................................................................................................................................7
4.1 Draft Audit Report............................................................................................................7
4.1.1 Background................................................................................................................7
4.1.2 SCOPE.......................................................................................................................7
4.1.3 OBJECTIVES AND RESULTS................................................................................8
4.1.4 OBSERVATIONS AND ACTION PLAN................................................................9
4.2 Letter to the Auditor........................................................................................................11
5 (To Auditor) 9th November, 2015....................................................................................11
Accounting
AC1.1 Types of Accounting Records
In the accounting system, there exist different types of accounting records. There are the financial records
such as the journals, invoices, and receipts. Notably, every type of record has certain information
concerning the business and are each used for a different purpose. However, each type of a record is
linked to other records that constitute the financial statements. In this subtopic, different types of
accounting records and their importance are discussed (Anthony, Breitner & Anthony, 2003).
Income statement; this statement lists all transactions whether income or expenses. Mostly, it is
referred to as a profit or income statement. It is used to check the profitability of your business.
Remarkably, these statements are prepared within certain periods, which can either be daily,
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monthly, or annual basis. By this, they allow the business owner to know the different periods in a
year when the business makes more profits or incur losses such that when preparing a budget,
considerations are made.
Balance sheet; it records all the liabilities and expenses that a given business owns. Both liabilities
and assets are arranged into long term and short-term categories and listing is made in the order of
liquidity. The most liquids assets and liabilities such as cash are listed first. Mostly, lenders and
investors use the balance sheet to measure the potential of a business.
Statement of cash flows; Used to record cash inflow and outflow. It is important to note that the cash
flow statement only records all those transactions that have already been made. Therefore, such a
record is appropriately used to show if the company has enough cash to cover its current expenses.
Sales Ledger: this records contains the personal accounts of the debtors (customers ) of the business.it is
used to record payments made for debts owned by customers and shows also their payments of the debt
either instalment or as regularly as they pay as stated in their agreement with the business.
Purchase Account: purchase accounts are used by companies to record the purchase of stock. These are
recorded as soon as the liability arises.
Trail Balance: trail balance are used to focus on accuracy of the recording systems of accounts of the
business they are used to prepare the profit and loss account also the balance sheet. Trail balance is like
the hub of all accounting data, everything put together, the reconciliation of revenues and expenses (all
assets, liabilities and revenue) trail balance is split into two balance sheet and income statement as
mentioned above.
.
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AC1.2 Concepts of Accounting
Money measurement; all accounting records are made in monetary terms. Any occurrence in the
business such as striking workers which affects the company’s operations and financial security, are not
listed in the financial statement. Instead, any incurred losses are recorded.
Going Concern, Accounting assumes that any business or company will continue to run forever;
indefinitely. By this, financial statements never represent a company’s worth if all the currents assets are
liquidated; instead, it represents all the available resources that the company has at its disposal; for future
use.
Accruals: accruals are when revenues and costs are recognised as they are earned or accrued. And they
are matched with one another and are dealt with in the profit and loss accounts to which they relate
irrespective of the period of receipt or payment.(CIMA,2000,p.9)
Historical Cost; any asset that a company has depreciates with time. By this, financial records will
include the current cost of an asset after depreciation. That is, cost concept recognises that assets lose
value in time and hence the net cost is recorded in the records.
Prudence: in prudence revenues and profits are not anticipated, only realised profits with reasonable
certainty are recognised. Provisions are made for all known expenses and losses
Consistency: consistency means companies decide to use the most suitable accountability methods and
treatments that apply consistently to them in every accounting year or period. Any change that affects its
profits should be disclosed in the financial statement. New methods can be considered if is considered
better and does reflect true and fair view of the company’s financial position.
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Objectivity; this concept directs that all accounting records should be made on the foundation of objective
evidence such as bank statements, receipts, invoices, among others. As a result, accounting records are
made from facts and not from one’s opinion.
Conservatism; it requires that all incomes and losses should be made from a caution side in that investors
are protected from an overly positive result. By this, the business does not overstate its expected revenue
or expenses that show uncertainty.
Realization; revenues should only be recognised only when they are realised. Conservatism sets in here
where revenues are only recorded once a transaction has been made and the seller has received the cash
and not when a contract has been awarded.
Matching; the principle of matching demands that revenues and related expenses be made within the
same period. Through this, overstatement of income and expenses is easily avoided.
Consistency; once a business decides to use a certain method of reporting such as inventory, then it
must stick with it all the time.
AC1.3 Factors Affecting the Structure and nature of Accounting Systems
System Compatibility with a business; all functions of a system of accounting are influenced by the
operations and nature of a business. Different types of industries will demand diverse accounting systems.
Additionally, daily functions of a business will influence types of a business system required.
Perception; how employees or the management receives a certain accounting system will influence its
relevance and effectiveness. Employees may resist a new accounting system due to its complexity.
Level of Training; Training of users to operate a given business system is paramount. The level at which
they will be trained will affect the effectiveness of the machine. (Ferraino, 2011)
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Implementation; the implementation partners and the nature of implementation will affect the
effectiveness of the system.
Cost and expenses: the cost of running the systems which includes system maintenance, software
updates/upgrades and training staff will cost a lot.
Size of the business: the bigger the business the more work that needs to be done as the number of staff
and business dealing will be on a larger scale compared to a smaller business.
Task 2
AC2.1 Different components of business risk associated with strategic move of an
organisation
The Strategic objective of any business should be a measure of progress in fulfilling the objective,
specific in what is to be accomplished, an achievable target within the organisation capabilities and
opportunities in the environment and within a time frame in accomplishing the objective. As an
organisation is trying to achieve its strategic objectives, it encounters internal and external events and
scenarios that hinder the achievements. It is known as strategic risk (Dalcher and Basu, n.d.).
 Product Risk
 Market Risk
 Finance Risk
 Execution Risk
 Business Risk
The different components of a business risks include the product risk, market risk, finance risk, execution
risk and business risk. The risks are brought about by the organisation’s strategic moves.
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Product Risk: If the business offers the customer, a product that is faulty or a cheap product highly
priced will have a negative impact on the business both professionally and financially. A product analysis
through Customer Surveyor Market sampling ensures good consumer product desires (Langen, 2013).
Market Risk: A business operates within the economic market that has boundaries and limitations that it
cannot exceed. Every business needs to understand its supply and demand to avoid market problems that
can cause bankruptcy. The market risks also include competitors, which comprise of the market shares
that the company controls and can gain while entering new markets. Any business should conduct the
economic growth forecast to help in understanding growing opportunities in the market (Langen, 2013).
Finance Risk: Financing is used by any business to start new operations and expand current ones. If the
business uses too much leverage, bank loans to finance this operation, it will limit cash flow within the
business as bank loans require monthly repayments.
Execution: A business that has a great idea of how to meet the consumers demand but a poor execution
plan sinks the business opportunities of making a profit. Overpayments of the production cost results to
increased prices that the consumer is not willing to pay for the products or services. It causes generation
of high administration of cost for marketing that leads to unprofitable operations.
AC2.2 Control systems for identification of Fraud
According to a report on research by the Nation on Occupational Fraud and Abuse (2014), organisations
lose about 5% of their revenues due to employees’ frauds. Frauds can be categorised into asset
misappropriation, corruption and financial statement fraud. Any business needs to have a control system
to identify frauds.
A business that knows it employees’ behavioural traits will help in identifying potential risks and
addressing internal issues in the business. A business that has a good organisational structure, written
policies and fair employment practice can eliminate fraud within the business.
A fraud risk assessment needs to be performed periodically to identify likely areas of risk and in order to
develop ways to prevent it.The business should look at how a perpetrator will exploit control system
weakness, how they can conceal the fraud. How they can circumvent or override the control systems.
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Criminologist have come up with a triangle on what causes people to commit fraud by .Dr.Donald,
(2005)
CONTROL SYSTEM TO IDENTIFY FRAUD IN A BUSINESS
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KNOW EMPLOYERS prevent fraud from taking place. : Most fraud perpetrators will often
times act in unusual way when they want to commit fraud, knowing your employees ways of behaving
and their personality will help to detect and
SET UP REPORTING SYSTEM LOOKING AT THE FOLLOWING
INTERNAL CONTROLS.
 Look for excessive voids in sales slips, as this can be used to cover theft.
 Missing documents- all documents should be recorded and kept in a particular or named file
for cross checking when needed.
 Make sure that the general ledgers are not out of balance.
 Always duplicate payments must always be crossed checked.
 Monitor employees overtime
 Large payments made to individuals must be crossed checked.
 Employees expense accounts should be signed by two senior managers
 Void pay slips must be checked and also filed for future references.
MONITOR STAFF VACATION BALANCES: employees who hold important positions at
work that has to do with finance of the business should be allowed when necessary to take their annual
leaves and someone else while they are away in a senior position should be in charge of the accounting
statements or affairs of the business.
HIRE EXPERTS: Make sure you hire experts such as accountant’s auditors to do quarterly or
yearly auditing.
ASSET AND MANAGEMENT AND DISPOSAL: Companies should make sure good
assets and management procedures are in place. This may include physical security human and
machines e.g. CCTV
AC2.3 Risks of fraud in a business
Fraud in a business can result in bankruptcy, high cost to maintain its assets and poor management if the
issues of fraud are not addressed properly in the organisation. A business needs to have honest
professionals to manage finances of the organisation. Good employees who are well behaved to avoid
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vandalism of company’s assets. A business that takes care of fraud in the organisation will make profits
that will help in the investment and growth of the business (Lester and Simmons, 1995)
SOME METHODS THAT CAN BE USED IN DETECTING FRAUD IN A
BUSINESS
 Computerised tracking system in place so that if suspicious transactions are made it will be
highlighted.
 Properly filed and stored documents that are open to inspection when necessary.
 Periodic audits carried out by auditors.
 Control the number of people who authorise and issue checks or sign transactions for the business.
 Mandatory entry of all manually entered data
 Always investigate discrepancies in inventories.
 Payroll should do the following-
a) Make sure employees no longer in employment are not paid.
b) There should not be sharp variation between monthly payments if any it should be checked.
c) Same amount of deductions if made must be made for all employees.
 Segregation of duties for employees to prevent fraud.
Task 3
. AC3.1 Plan an audit with reference to scope, materiality and risk.
Scope: the statements audited include the Cash flow and Balance sheet statements under the
International Standard on Auditing (UK and Ireland). The ISA (UK and Ireland)
The auditor will consider the adequacy of controls necessary it will also take into account the
management and operational controls of the business to form its opinion.
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Materiality: Misstatements in the purchase and sales ledger may be responsible for the economic
influence of decisions made with regards to the financial statements. Errors of omission and commission
in the original books of entry regarding purchase account have a ripple effect on subsequent statement
(Saxena et al., 2010).
Risk: some stock quantities are subject to estimation giving way to possibility of fraud by employees or
suppliers
Make reasonable economic decisions based on information in the financial statements.
Audit is a very complicated process and in this one needs to consider number of factors in order to
ensure that he is doing an audit in the right direction and in right way. Scope is the one of the main word
on which an auditor always focused before conduct an audit. In addition to this, it can be stated that by
having an application of audit system the relevant activities can be employed so that long term
sustainability can be attained. Along with this, organisation also need to ensure about all rules and
regulations so that objective of auditing can be accomplished effectively. Any kind of factor negligence
might affect the financial statement and create a risk for company.
AC3.2 Audit test
i. Compliance tests: used to provide evidence on the internal control procedures and whether or not they
are operated as planned
ii. Substantive tests: used to measure how complete, valid and accurate the values in the financial
statements and related notes are.
iii. Risk Assessment procedure: this test helps to understand the entity and business concerned, it will help
the auditor to understand the risk of misstatement in the financial record.
iv. Analytical Procedure: this compares the recorded transactions it is done during the planning and
completion of the audit.eg calculating the gross margin and predicting the ending balance
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v. Test of detail of balance: this looks at the balance sheet and general ledger to help in the monetary
correctness of the accounts.
Audit test refers to the procedure that is followed by an auditor in order to ensure that financial
statements are prepared in systematic way. By using audit test materiality of the financial statements is
measured by the firm. It has been noticed that financial statements are mainly constructed to ensue
about profitability. In order to have effective auditing the experts need to focus on specific test so that
goals and objectives can be accomplished effectively. In order to identify the fraud in the company an
auditor needs to use specific type of test. Application of risk assessment process is also beneficial for
business entity because it allows to make sure that goals and objectives are being accomplished
effectively. Use of analytical process is also beneficial to have effective accomplishment of goals and
objectives.
AC3.3 The Audit process is recorded as detailed below
Stage I: Planning
This initial phase of the audit program is further divided as follows
i. An engagement letter is sent out to the specific auditee. The letter details the audit’s scope and the
auditors that are to undertake the assignment
ii. In an entrance interview, the responsible departments and required documentation determined. Head of
individual departments may be engaged to get a better view of the specific concerns he/she has with the
operations and the key individuals that may hold vital information regarding the department. In this case
we will talk to the team at the purchase department and the head of purchases.
iii. A survey of the department is done for a general overview of the operations of the purchases
department.
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