Financial System and Accounting
Components of Business
Auditing is the most crucial aspect of business that refers to a systematic and independent analysis of accounts pertaining to the transactions of corporate entity in order to examine whether the financial reports are prepared on accurate basis or not (Banerjee, 2006). The report herewith deals with understanding the importance of keeping effective accounting systems as well as demonstrator application of control systems. In addition, this manuscript contributes to planning and conducting of an audit assignment. Different components of business risk are identified while analysing fraud within a business. The report is based on the case study of Bush-Baby Hotels Co. which wants to establish an internal audit department to undertake a fraud investigation. At last, draft audit report for Bush-Baby Hotels Co. is designed along with suitable management letters in relation to a statutory.
Accounting records generally includes various documents that are used for preparing final statements. These records involve the information of business affairs and can be said as the supporting documents for reviewing the financial performance (Coderre, 2009). The accounting record involves Ledger, Day books, trial balance, financial accounts and so on. The purpose and use of various accounting records is explained in following points.
Ledger: Preparation and maintenance of ledger is that foremost aspect of accounting system. Ledgers involve sales, purchases, nominal/general transactions that are used for designing trial balance and financial statements. The purpose of using such accounting records is to check the accuracy of the accounting books (Kawamoto, 2001).
Prime entry books/ day books: Days books are also known as prime entry books or original entry books that are used for recording the business transactions for the first time. The major day books are sales day book, sales return day book, purchase day book, purchase return day book, general journal and cash book (Aletkin, 2014).
Trial balance: Trial Balance is an important accounting record that presents closing balances of ledger accounts for a specific time period. The preparation of financial statements is based on information included in trial balance. The use of trial balance ensured every debit entry recorded in corresponded to credit entry (Libby and Short, 2004).
Final accounts: Final accounts refer to the financial records that are prepared at the end of financial year. These statements include trading account, profit and loss account and balance sheet. The mentioned financial statements are used to access the profitability and liquidity information of company. Further, the major purpose of these records is to represent the financial health of company to external and internal information users.
The points below represent the importance and meanings of the fundamental accounting concepts:
Accruals concept of accounting: This concept is important to present accurate cash transitions in records. It is used in all the financial statements expect cash flow statement. According to this concept, non-cash transactions held in the company are to be mirrored in the financial statements in the period in which those are experienced. These statements are not made in the period in which cash is actually received or paid.
Going concern: The concept is focused towards preparation of accounts of going concern or regular basis. It is made on the assumption that business entity will continue to operate for the predictable future. As per this concept, every organization has to record financial transaction for each period (Krahnen and Schmidt, 2004).
Consistency concept: The business entities have to follow some of accounting concepts during their code of conduct. In other words, some concepts are to be followed by the business to maintain consistency of accounting records. In respect with the present case, Bush Baby Hotel Co. has to choose this concept for presenting reliable picture of the business for long run. As per the concern, same accounting method is to be adopted for subsequent occurrences (McGee and Preobragenskaya, 2006).
Prudence Concepts: At the time of preparing financial statements, account should be prudent. This concept effects the big transaction as if company is in doubt for not completing the transactions so the possible benefits are to be ignored.
Business entity concept: Business entity concept is one and the major concept of accounting that emphasis on treating a business entity separately from its owner. It means the profits and losses earned by company will be recorded in company's accounting and not in owner's account. The concept is to be adopted by the mentioned business entity for smoothing its corporate operations (Selko, 2010).
The points below present various accounting systems and the factors that influence the nature and structure:
Computerised accounting system: The foremost objective of corporate entity is to keep accurate accounting records so that the operations in an organization can be managed. Instead of keeping afloat financially and legally, the funding bodies are also required. The operations of small organization can be kept in simple book- keeping system, but to manage the complex financial transactions of big entities like in present case of Bush Baby Hotel Co., the company required computerised accounting systems. In the present era of technological era, it is easy and conferrable to use computerised accounting packages (Materiality in audits. 2014).
Manual Accounting Systems: In general phenomena, accounting systems are manual. In order to access the importance of manual accounting system, it is crucial to access the role of accounting data and reports. Nowadays, many of computerised systems are designed on the principle of manual accounting. Tally system in computers is used for keeping ledgers and maintaining accounts and records as per manual principles. Bush Baby Hotel Co. is required to adopt a system that is based on basic manual bookkeeping principles. However, the accounting managers require specified knowledge or skill in preferred method of accounting.
Factors considered at the time of using computerised and manual accounting system in Bush Baby Hotel Co.
It is necessary to generate sales /increase invoices and compute VAT in accounting. The business entity has to be prepared to bear the cost of using accounting software. This software is to be regularly updated so that risk can be minimised. In addition, the company need to have capacity for processing payroll and controlling stock which are the main factors of computerised accounting system (Financial Planning, 2013).
There are various components of business risk that become major concern for corporate entity in maintaining good image and achieving success. These components of business risk are explained in following points:
Financial risk is associated with the transactions & financial system of any particular industry. Financial is the major concern of any business. This risk is primarily a function of the relative amount of debt that the firm uses to finance its assets. Financial Risk arises due to shortage of buyers or shortage of sellers against sell orders and buy orders respectively.
Operation risk occurs when the value is being changed caused by the actual losses occurs due to failure in internal process and staff from any kind of external happenings like legal or political risk which is differed from the loss that are already expected. Operating Risk includes fraud, security or any kind of legal risk or environmental risk. In this case, the organization is facing operational risk that hampers business image (Mills, 2014).
Compliance risk arises when company fails to go in accordance with the laws & regulations of industry, or fails to adopt the best internal policies, compliance risk results to legal penalties, financial forfeiture or any material losses to organization.
In the case of Bush-Baby Hotels Co operates, company can manage risk by proper auditing and supervising. The employees are to be controlled over the employees involved in collection of payment. The risk can be managed in the way by identification of the risk, risk evaluation, adapting techniques to manage risk as well as lessening of risks through applying managerial strategies.
The major responsibility of business entity is to avoid business risk therefore Bush Baby Hotel Co. needs to adopt various controlling systems that can help in reducing risks. Corporate governance is the system that is totally dedicated to control over the business. The major role of stakeholders is to appoint external auditors as well they are responsible for designing company's strategic aims. In case of Bush Baby Hotel Co., the Corporate governance will pay a significant role in minimising risk through designing effective management and control system. In the present case, the organization is facing problem of fraud, therefore, it is required to design the corporate governance in accordance to minimise risk (Stocken and Verrecchia, 2004). In this respect, an example of Cadbury Company can be taken into consideration. The company is entitled to present the report of the committee on the Financial Aspects of Corporate Governance. In this report, the company has revealed that the accountancy profession needs to give their responses for the occurrence of financial scandals. The company has to appoint managers to monitor internal activities of hotels to ensure that fraud and theft will not be practised by the company. In addition, IT systems help in anticipating proper accounting policies and reducing negative aspects of frauds (Mills, 2014). However, these systems can be costly for the entity as it includes high amount of investments. Further, the company requires designing and implementing appropriate accounting system so that Bush Baby Hotel can secure itself from any kind of financial risk.
Frauds includes risk on the part of suppliers, creditors, investors, employees, and all other management levels. In case of Bush Baby Hotel Co-operates fraud from employees side is found that is due to improper auditing and accounting system. Company can evaluate risk through identifying key fraud risk. In evaluating these areas, the major step highlighted for reducing fraud is, fraud mitigation program. This will help in making necessary modifications, including the possible performance of a fraud risk assessment.
Fraud affects millions of pounds of business each year ad because of numbers of cases and scale of those losses are difficult to calculate. The negative impact of damages are, reduce profitability of business, increases costs of investigation and prosecutions. Fraud has the potential to lead to dire personal financial consequences and, in extreme cases, even bankruptcy.
Bush Baby Hotel Co-operates can detect the risk through proper monitoring and timely auditing. Therefore, business entity need to hire external auditors. Proper implementation of controlling activity, identify the risk areas, assess scale of the risk, carry out a fraud risk management, improve security system (Coderre, 2009).
An auditor has a major responsibility to make reports including truth and fairness elements in annual accounts. The statements are to be prepared as per relevant legislation. Moreover, the duty report on the truth and fairness of the financial statements lies with external auditors (Matsumoto and Previts, 2010). While planning an auditor report, one can consider some factors that are explained in below points:
It is quite necessary for Bush Baby Hotel Co. to make proper coordination between internal audit activity and external audit activity because it raises the efficiency of financial statements audit and is also helpful in risk control. The foremost concern of external auditors is to identify the mistakes made in financial statements and resolve them. The external auditors of Bush Baby Hotel need to be focused towards making the financial records free of material misstatements. Therefore, they should obtain sufficient understanding of internal audit activities and must assess the material misstatement of the financial statements. This is necessary for designing proper audit procedures. To make effectiveness in internal auditing, it is important to conduct meeting in proper sequences and in appropriate intervals (Materiality in audits,2014). The external auditor need to go through internal auditing reports ad to keep itself informed with significant business affairs.
The audit test is a procedure performed by either an external or internal auditor to assess the accuracy of financial statements. There are various types of audit test but the purpose of all is to make internal controls over financial records. Compliance test is to ascertain that all the internal control system is effectively running through the whole period. In compliance test, auditor's focus is to keep control over all the internal operations. On the other hand, Substantive testing is a process in which auditor examine all the financial document to look after the accuracy level, validity and completeness of the financial records.
Process mapping analysis: The auditors presents maps of the supplier delivery and accounts payable/ and auditors identify potential for suppliers to refuse deliveries (Banerjee, 2006).
Analytical review: In this technique, the benchmarks for analysing tests and to compare the operating statistics with industry are set. This is useful in enhancing the performance in financial experts. These all types of auditing are useful analysing account balances and transactions to identify the misrepresentation.
The audit process of Bush Baby Hotel Co. provide information that company is going to make an effective, efficient, and economic audit. However, the organization needs skilled people for this task. Working papers are the evidence of effective, efficient, and economic audit that has been carried out in the organization. It includes the proper record of auditing that is made in regard to the company. In addition, working papers are important to control over the audit quality and to provide assurance that the task which is given to audit partner is to be completed with full accuracy (Zhang, 2015). It defines the accuracy and effectiveness of audit process and provides the evidence over increased economy, efficiency, and effectiveness of the audit. It is also essential to keep sufficiently detailed and up-to-date fact that are necessary to justify the reasonableness of the auditor's conclusions that will be used for future audits.
Audit report is the crucial part of regulatory framework of company that is used for identifying any fraud done in financial accounts of company or not. The major purpose of preparing audit report is to anticipate the accounting officials of Bush Baby Hotel Co. The financial records maintained by the company can be assessed. The points below represents various kinds of audit reports:
Unqualified opinion: There are various reports that presents deep analysis of financial accounts. These kinds of reports are called as unqualified opinion. The purpose of making such reports is made when no misrepresentations are found tin annual reports (Zhang, 2015).
Qualified opinion: Qualified opinion report is to be issued at the time when company is unable to maintain proper and accurate financial records. In case if any misrepresentations are involved in the financial accounts of company then external auditors go for qualified opinion reports.
Disclaimer of opinion: These are always various reports that can be used as disclaimer of opinion. Such reports are issued at the time when auditor is unable to complete the auditing. It happens generally when auditors are not able to define financial position of business through accounting records (Banerjee, 2006).
The report herewith explained the concept of book keeping and auditing. The effective accounting systems is demonstrated while explaining the application of control systems. Further various components of business risk have been presented meanwhile analysing the risk of fraud within a business. This study was based on the case of Bush-Baby Hotels Co hence, the internal and external audit is explained to undertake a fraud investigation.
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