Nt1310 Unit 1 Assignment
NGUYEN TRAI UNIVERSITY
BTEC HND IN BUSINESS (MANAGEMENT)
ASSIGNMENT COVER SHEET
NAME OF STUDENT
VU THI PHUC
REGISTRATION NO.
UNIT TITLE
Unit 11: Financial Systems and Auditing
ASSIGNMENT TITLE
Kangaroo Construction Ltd Management Control Systems
ASSIGNMENT NO
1 of 2
NAME OF ASSESSOR
Mr. JUN ALEJO BATHAN
SUBMISSION DEADLINE
11/12/2013
I, __________________________ hereby confirm that this assignment is my own work and not copied or plagiarized from any source. I have referenced the sources from which information is obtained by me for this assignment.
________________________________ _______11/12/2013_________
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----------------------------------------------------------------------------------------------------------------FOR OFFICIAL USE
Assignment Received By: Date:
Unit Outcomes
Outcome
Evidence for the criteria
Feedback
Assessor’s decision
Internal Verification
First Attempt
Re-work
Understand the importance of keeping effective accounting systems within a business LO1
Explain the purpose and use of the different accounting records
1.1
Assess the importance and meaning of the fundamental accounting concepts
1.2
Evaluate the factors which influence the nature and structure of accounting systems
1.3
Be able to analyze the management control systems of a business
LO2
Identify the different components of business risk
2.1
Analyze the control systems in place in a business
2.2
Evaluate the risk of fraud within a business, and suggest methods for detection
2.3
Merit grades awarded
M1
M2
M3
Distinction grades awarded
D1
D2
D3
Assignment
( ) Well-structured; Reference is done properly / should be done (if any)
Overall, you’ve
Areas for improvement:
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NAME :
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I. INTRODUCTION According to the scenario, Kangaroo specializes in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts. Kangaroo has had a difficult year: house prices have fallen and as a result, revenue has dropped. In order to address, this management has offered significantly extended credit terms to their customers. However, demand has fallen such that there still some completed houses in the inventory where the selling price may be below cost. During the year, whilst calculating depreciation, the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charge. Besides, Kangaroo changed their main material supplier to a cheaper alternative to improve profit. In addition, the company borrowed £1 million from the bank during the year which is repayment at the end of 2013. As the audit senior of Rhino & Co, I have been asked to produce a report for the CEO of Kangaroo Construction Ltd. In the report, I am required to address the following tasks:
1) The purpose and use of the different accounting records used by Kangaroo Construction Ltd.
2) The importance and meaning of the fundamental accounting concepts applicable in the above scenario.
3) The factors which might influence the nature and structure of accounting systems at Kangaroo Construction Ltd.
4) The different components of business risk associated with Kangaroo Construction Ltd.
5) The control systems in place at Kangaroo Construction Ltd.
6) The risk of fraud within Kangaroo Construction Ltd and suggest methods of detection.
Table of Contents
II. ANALYSIS
1. The purpose and use of the different accounting records used by Kangaroo Construction Ltd. Based on BPP, Finance: Auditing and Financial System and Taxation (Course book, 1st Ed, July 2010, Chapter 1), accounting is defined as a systematic process of classifying, recording, verifying, summarizing and interpreting financial information into financial statements and reports.
On the other hand, accounting information system is a system of collection, processing, and storage of financial and accounting data that is used for decision making. Accounting record is a part of accounting information system, which is any type of hard copy or electronic document that provides information regarding the financial situation of an organization or a company including recording of assets and liabilities, ledgers, prime entry books (daybooks) and other supporting documents such as invoice, debit notes, credit notes. Prime entry books (daybooks) In term of accounting records, prime entry books (daybooks) are known as books of original entry, where the transactions are first recorded. The main daybooks comprise cash book (i.e. receipt: cash sales; payment: salary), sales daybook, purchase daybook, general journal. (Appendix 1.1) …show more content…
Ledgers Ledgers are used for preparing trial balance and checking the accuracy of accounting books. There are three types of ledgers as sales ledgers, purchase ledgers and general ledgers. Ledgers are also used as storage of all kind of information to be used for preparing final accounts and financial statements. (Appendix 1.2)
Trial balance A trial balance is prepared at the end of an accounting period by adding all the account balances in the ledgers. In trial balances, the sum of the debit balances should equal the sum of the credit balances; if there is an unequal result between total debits and total credits, the company must track down the errors. (Appendix 1.3) Financial statements are prepared from the information in the trial balance. (Appendix 1.4) Since accounting records play an important and useful role by providing information how good or bad the financial condition of the business is which activities or products have been profitable. Besides, accounting records set on the base of practices that will help a business to compare results between different periods. It also is good evidence in a court of law if a company faces with legal issues. For a big company or developing company, the business results increase in large number of transactions, accounting records help the company avoid the necessity of remembering various transactions. Accounting records are also important in planning and making decision for a company; the resulting financial statements and reports can be used internally by management or externally by other interested parties like investors, creditors, bankers, tax authorities. In case of Kangaroo Construction Ltd, cheques are through the post and over the counter. About half the customers are given credit and pay by cheque through the post. As can be seen that Kangaroo Ltd use manual accounting system for almost their transaction. For this system, it use of multiple paper ledgers to record and keep track of all the financial transactions of a company. Each type of transaction is inputted in its own ledger. This method is often appropriate for small companies because the transaction is stored in seconds so if it is a large company will spend a lot of time to classify and record; furthermore, the measure leads to mistake in settlement and reporting financial transactions and which many take time to check each ledger. Therefore, the company should pay attention to invest in the development of computerized system and focus on staff training in short courses to improve their qualifications. Besides, the company should use integrated software to reduce data errors disparities between departments, for example:
Figure : Integrated accounting control
(Source: http://www.antraweb.com/enterprise-suite-functionality.htm) According to Functionality of Antraweb Enterprise Suite for manufacturer article, flexible account structure and seamless integration with all business operations provide easy access to the financial effects of operations. Automated accounting entries eliminate errors and save time for reviewing, analyzing, and acting on financial information. The account & Finance module provides Complete Book Keeping, Registers & Statement of Accounts, General Ledger, Credit Control, Accounts Receivables & Payable, Flexible Voucher Numbering, Flexible Classifications of Accounts Heads, Bird 's Eye View / Drill Down Display, Date Based Reporting, Voucher & Cheque Printing, Columnar Report, Bank Reconciliation, Multi Currency, Multiple financial year, Comparison of data, Post dated Vouchers, User defined Vouchers, Sales and Purchase Extracts, Daily Balances & Transactions Value, Cash Flows, Interest Calculations, Percentage Based Reporting and many more features… For example, an accounting record of Kangaroo as purchase building material ledger (Appendix 1.5) can be shown as follows:
Inputs to a purchase ledger: detail of purchases recorded on invoices and the returns to suppliers for which credit notes are received; details of the payment to suppliers and the adjustment of the management accountant in accounting department.
Process: firstly, the amounts of outstanding on the supplier’s accounts are adjusted in purchase ledger. The amount will represent money owed to the suppliers. Then the management accountant will adjust the owed brought-forward balance by adding or deducting the value of transaction then importing to computer. The carried-forward balance becomes the new balance recorded on the suppliers account.
Outputs: The lists of transactions posted; an analysis of expenditure for nominal ledger purpose; Lists of trade payables balances; Copy of trade payables’ account.
2. The importance and meaning of the fundamental accounting concepts are applicable in the above scenario. Audit is an examination and verification of a company 's financial and accounting records and supporting documents by a professional, such as a Certified Public Accountant. According to Companies Act in 2006, the fundamental accounting concepts can be explained as follows:
Accruals concept of accounting: Other than the cash flow statement, the accounts have been set on an accruals basis. The accruals basis of accounting involves the non-cash of transactions to be mirrored in the financial statements for the period in which those effects are experienced and not in the period in which cash is actually received or paid.
For Kangaroo Ltd, this concept has meaning for amounts spent to purchase materials or consumer debts first. For instance, Kangaroo Ltd companies can use this concept to lists of its expenses without cutting applications such as purchasing materials (i.e. bricks, furniture for decorating, etc) from suppliers can burn it to ensure the production of the company. As a result, companies can use after the first sell products to pay for suppliers without having to spend an additional planet in the production line.
Going concern: The accounts have been prepared on a going concern basis which means that the accounts have been prepared on a going concern basis. This principle is mainly help in preparing the financial statements of Kangaroo Ltd as well as ensuring that investors will get revenue on their investments. This may indicate that last year Kangaroo Ltd is no major audit issues and evaluate risk capital is relatively low and controlled environment is considered satisfactory. The company is clearly very successful, showing good profitability, strong cash flow, and good financial with 20 suppliers and a healthy balance at the bank. Many suppliers offer settlement discount. It means the business entity of Kangaroo Ltd will continue to operate in a long time and create confidence for investors.
Consistency concept: There are a number of different ways in which some concepts can be applied. Each business must choose the approach that gives the most reliable picture of the business, not just for this period, but over time also. According to the consistency convention, when a method has been adopted for the accounting treatments of an item, the same method will be adopted for all subsequent occurrences of similar items. However, it does not mean that the firm has to follow the method until the firm closes down. For this concept, Kangaroo Ltd shows the certain criteria for a production to be able to review the situation profitability of the company.
Prudence concept: The account should be prudent when preparing financial statements. In other words, if something is in doubt, plan for the worst and, if a transaction has not yet been completed ignore ant possible benefits that may arise from it. For this concept, the company only records production costs and loss, limited to jot down profit in preparation for a worst case scenario.
Materiality concept: accounting reports are prepared for the benefit of the various user groups, it is important that the information provided is both meaningful and comprehensible. The concept of material to ensure that the information provided is clear by skipping the important criteria for the user in understanding the overall financial situation of Kangaroo Ltd. Kangaroo Ltd also applies this concept to present information for business leaders who need it to make important decisions. It condenses the operation of a business into an easy to understand format.
Business entity concept: financial accounting is based on the premise that the transactions and balances of a business entity must be separately accounted. Therefore, the business entity is considered to be distinct from its owners for accounting purposes. Depending on the accounting concepts will help Kangaroo Ltd of the financial statements. Also, it helps Kangaroo Ltd determine the company 's obligations to the owner. The important of fundamental concept to Kangaroo Ltd With the help of the basic accounting concepts, Kangaroo Ltd. can maintain consistency accurate financial information to limit its risk, errors, or even fraud. With the basic accounting concepts, Kangaroo Ltd can achieve their financial goals using financial data accurately and vital records were recorded in a period of time. For example , Kangaroo Ltd wants to implement a new financial strategy this year with the aim of increasing their financial as well as attract investors , Kangaroo Ltd will review financial data , records and reports of last year to see basically the same as owning its assets and liabilities it incurs . Besides, if there are any problems in the past year, Kangaroo Ltd can find out the improvements this year to be better strategic and financial future. As a result, Kangaroo Ltd can maintain accurate financial information to help build the trust of stakeholders, such as investors, suppliers, governments, customers and employees. Moreover, basic accounting concepts also help the company with platforms on which to base Kangaroo Ltd can compare their financial situation for competitors and other business in the market.
3. The factors might influence the nature and structure of accounting systems at Kangaroo Construction Ltd. The finance function and authority
Line authority – is the authority a manager has over a subordinate (BPP, pp.14). (Appendix 2.1)
Staff authority – is the authority one manager or department may have in giving specialist advice to another manager or department, over which there is no line authority. Staff authority does not entail the right to make or influence decisions in the advisee department (BPP, pp.14). (Appendix 2.2)
Functional authority – is a hybrid of line and staff authority, whereby the techno-structure manager or department has the authority, in certain circumstances, to direct, design or control activities or procedures of another department (BPP, pp.14). (Appendix 2.3)
Other factors might affect the nature and structure of accounting systems at Kangaroo Construction Ltd The factor might affect the nature and structure of accounting systems at Kangaroo Construction Ltd is the type of accounting systems. There are two typical types of accounting systems: manual and computerized system. Manual accounting system Manual accounting system uses multiple paper ledgers to record and keep track of all the financial transactions of a company. Each type of transaction is inputted in its own ledger. This method is often appropriate for small companies.
Advantages of manual accounting:
Cost savings.
Accounting software can be expensive. If a business has just begun, the company can save money by doing the accounting in a paper ledger.
Avoiding risks such as software errors result in a loss of accounting data.
Disadvantages of manual accounting:
Consuming time; because accounting staff don 't have a computer categorizing and totaling figures, they must do these themselves. It takes more hours to do manual accounting than it does computerized accounting.
This method requires high precision; therefore, accounting staff must add the correct column, double-check their work, and physically write in numbers. Computerized accounting system Computerized accounting system uses the accounting software. After financial data is entered into the program, it will automatically organize information; the data will be calculated and expressed as accounting numbers or other financial reports. This method is suitable for both large companies and small companies. It will help the company save time when examining the transaction process and decision making easier.
Advantages of computerized
system:
The program allows managers to view the financial position of the company in "real time" and make adjustments to business strategy as necessary.
Computerized systems can also provide instant reports on stock assessment, profit and loss, customer accounts and payroll and sales analysis, once again, allowing faster adjustment the business strategy of the company.
The accounting software that allows data entry faster than manual accounting, and allows documents such as invoices, purchase orders and payroll are collated and printed quickly and the determined. Because of its efficiency and ease of use, the accounting system on the computer also can allow improving inventory control and collecting payments, saving time and improve cash flow. Since computer systems automatically update some records, account records of the company will always be updated. Although this is a very useful method for the company but using accounting software comes with its own set of problems, such as the need to protect against data loss through loss electricity or virus, and the risk of hackers stealing data, computer fraud is also a concern, and company need to triggers the control system for people with access to information especially customer information such as password settings. Besides, the import supply accurate information is a matter of attention otherwise it will lead to error calculations chains in the system. Both these system use same accounting records, principle, and code.
The sized and structure of Kangaroo Ltd
Figure : Structure of Kangaroo Ltd The factor can influence the nature and structure accounting system of the company is the size and structure of company. In addition to the size and structure of company, the functional authority is the ability for subordinate staff to veto suggested management decisions or to propose action based on their superior expertise in a particular area. Many accounting professionals working for the finance department of a business will be granted the functional authority to veto management decisions and initiate action according to their best judgment. There are three structure of accounting system: line authority, staff authority, functional authority. In case of Kangaroo Ltd, the awareness of employee and management is one of the factors that affect accounting systems. Employee resistance to changes in accounting systems may be due to complexity of the system, effectiveness of an existing system or apprehension over the introduction of accounting controls and auditing. Sometimes, the employees may see the need for accounting systems, contrary to the views of the management. A lack of support from management can render the accounting system irrelevant to the decision-making functions of the organization. In addition, the level of training is also one of the important factors; the level and nature of training attained by users’ influences the way in which the system serves to meet business objectives. A lack of adequate training among users, such as managers and supervisors, can cause the accounting system to be a problem rather than a solution to financial management. The final element is that the ability to operate of the company and other databases. Kangaroo Ltd must ensure their data is always accurate so as not to system errors. Besides, the company should also regularly check the accounting software to avoid system errors and upgrade databases, integrated accounting software.
4. The different components of business risk associated with Kangaroo Construction Ltd. Based on ISA 315 (2009), business risks are actions or events have worse effects or adverse business users. For a company or an organization, these risks shield the company or organization can measure lower than expected profits or losses rather than profits. Business risks can come from internal factors or external factors, which may include all types of risks such as operational risk, financial risk, and compliance risk. Business risks cannot be completely eliminated but can be managed and minimized as much as possible by process management in a company or an organization by company policy and implement strategy according to four potential responses (accept risk, reduce risk, avoid risk and transfer risk). In case of Kangaroo Construction Ltd, the business risk can be shown as follows:
Table : The components of business risk and the responses within Kangaroo Ltd
Components of business risk
Responses to given risks
Personal authority
Operating risk
Operating risk can be defined as the error or mistake made in the operation of the business (BPP, pp. 20). Based on JP Morgan Chase defines operational risk as the risk of loss resulting from inadequate or failed processes, people and systems or from external events.
For example,
1 In Purchase department, wrong order in buying furniture for decorating a new house.
2 In Human Resource department, lacking labor safety for building worker such as gloves, helmet, safety working clothes.
3 In accounting department, manual accounting system is performed.
4 For the external factor, the weather disasters (i.e. storm) or uncertainty events (i.e. fire) can affect the quality of a building project.
The company should reduce that by setting up a system of internal control.
The company should reduce that by setting an internal control system.
The company can accept that by setting an internal control system in order to manage the risk as low as possible.
The company can transfer the risk by buying comprehensive insurance for their building projects.
This is department risk, the senior management should check the order before it is sent and check the goods after receiving them.
This is strategic and department risk, directors should define the labor safety regulations to make sure all building workers has their own safety working clothes; and they will be changed in new clothes when running out of date. The senior management should check whether workers wear them or not.
This is strategic risk, directors should determine the pros and cons of manual system; if the company is becoming bigger, the board of directors need consider using computerized system to reduce several costs (i.e. printing cost) and prevent losing information.
This is strategic risk, the board of directors should identify.
Financial risk
Financial risk covers all of the risks of incorrect payments being made or not all due receipts being collected (BPP, pp.20).
For example,
1 In accounting department, wrong payment of salary such as ‘dummy’ employees.
2 In sales department, wrong payment with customers by getting wrong material information. It might make customers pay more than the money has been signed in the contract.
The company should reduce it by setting up a system of internal control.
The company should avoid it by setting a standard information control system.
This is department risk, the senior management should define how much workers they got in a building project by contacting with the Human Resource department.
This is department risk, the senior management should check the information system whether it is adequate or not (such as order record, customer information).
Compliance risk
Compliance risk is the overall risk that a company will not comply with all the legal requirements laid out in the Company Act. (BPP,pp.20)
For example,
1 In accounting department, preparing financial statement not based on the standard or the company activities.
The company should avoid that by setting up a system of internal control.
This is department risk, the senior management should define the standard they have to follow and show it to the staff. Besides, the senior must also check all the accounting records whether they are adequate and accurate or not.
5. The control systems in place at Kangaroo Construction Ltd. According to BPP, Finance: Auditing and Financial System and Taxation (Course book, 1st Ed, July 2010, Chapter 2), A system of internal control refers to the process by which organizations maintain environments that encourage incorruptibility and deter fraudulent activities by management and employees. An organization’s components of internal control are evaluated during the planning phase of an independent financial statement audit. The results of the evaluation directly influence the auditor’s level of detailed testing. It includes compliance with internal policies, asset protection, prevention, and detection of fraud and error, the accuracy and completeness of accounting records and timely preparation of reliable financial information dependable. There are five elements of an internal control systems which are indentify by ISA, as follows: Control environment Environmental control is the framework in which the control operations including management functions, the attitudes, awareness, and actions of those charged with governance and management regarding the internal control unit and its importance in the entity (based on BPP, pp.23). There are seven factors reflected in the control environment will be demonstrated as follows:
Table 2: Seven factors reflected in the control environment
Communication and enforcement of integrity and ethical value
Communication and implementation of ethical integrity and control system of Kangaroo Ltd value can be just as effective that managers and employees have integrity and in an ethical system. It gives a guide to help managers / employees doing the right thing.
Commitment to competence
Competence is the knowledge and skills necessary for the individual to perform the job. Currently, Kangaroo Ltd is facing inefficiencies in the operation of the software led to errors made by staff as they lack training.
Participation by those charged with governance
Management control system will be reviewed by staff independent of the system that is responsible administrator. In Kangaroo Ltd, the supervisor will check the staff performing monthly by meeting.
Management’s philosophy and operating style
Executive management must demonstrate a proactive approach to risk management. Currently, management of Kangaroo Ltd is running a centralized approach in which all the products are distributed from a central repository. It leads to inaccurate order execution and slow.
Organizational structure Organizational structure of the company to provide communication systems and report accordingly to allow the control system to be effective. Kangaroo Ltd has structure functions as sales department, accounting department, marketing department, Human resource department. This helps managers find inefficiencies in the operation of what functions to be able to adjust in time.
Assignment of authority and responsibility
Responsibility means that employees know when they have done / under control and how to report weaknesses to control an appropriate management. For Kangaroo Ltd , through recent inventory report of the internal auditor to management to address the weaknesses in the integration of accounting software inventory.
Human resource policies and practices According to the scenario, the company announced a 10% increase in executive salaries and the implementation of further performance related pay schemes and share options for all directors. This was in order to motivate the team to deliver the company 's global ambitions.
Risk assessment process Risk assessment process is the entity’s process of identifying business risks relevant to the financial reporting objectives and deciding about the actions to address those risks and the results thereof. (BPP, pp. 24). As what have been discussed on table 1, the business risk of Kangaroo Ltd can be managed as figure follows:
Information system Information system is the system that processes information within an organization. It includes not only the processing of information but also the procedures to initiate, record, process and report on financial statements, both manual and computerized. (BPP, pp.25) As have been discussed on answer 3, the information system of Kangaroo currently is manual accounting system. All the records of transaction and payment are received by post and the orders is received through post and telephone. This system might fit into a company with business forms that fit small and not too large amount of information about orders and transactions. Almost transactions be preserved and not much has changed. For Kangaroo Ltd., which is a construction company in the form of medium-sized business (with approximately 100 employees); moreover, there are majority accounting records such as invoices, purchase daybooks, return purchase daybooks, cash book, purchase ledgers, etc. Therefore, requirement of the adequacy and accuracy of the information collected is necessary. Consequently, Kangaroo Ltd should consider upgrading their accounting system to computerized system in order to prevent business risk.
Control activities Control activities are specific activities within an organization which are designed to address risks and therefore help to ensure that management directives are carried out. (BPP, pp.25) In case of Kangaroo Ltd, the control activities can be shown as an example of performance reviews. The supervisors want to ensure that the staffs have been operating the control system effectively; they can hold a meeting monthly with the senior management to check the duty of each staff in department. The senior management in each department should observe and check the performance of each employee whether they do their work right or not, then collecting the concern of employees about their job in order to identify the job enrichment. Another example is that Kangaroo Ltd can use physical controls by ID system to ensure the attendant of staffs or avoid ‘dummy’ employees.
Monitoring of controls Monitoring of controls are the external auditor should obtain an understanding of the major types of activities that the company uses to monitor internal control over financial reporting and how the entity initiates corrective actions to its controls. (BPP, pp.26) In term of Kangaroo Ltd, auditor of Kangaroo Ltd. should have an understanding of the control environment because thereby, Kangaroo Ltd can operate well in an environment where they are treated as important. In addition, the auditor should have an understanding of the risk assessment process to help identify risks related to the financial goals of the Kangaroo Ltd. Since then, the auditor can evaluate their presence in an appropriate manner and minimize them as much as possible. In addition, an understanding of information systems and control activities help to ensure that the information may be accurate processing and settlement risks effectively. In addition, an understanding of the monitoring of internal controls help evaluate the effectiveness of internal control systems of the company.
Limitation of internal control systems According to BPP, Finance: Auditing and Financial System and Taxation (Course book, 1st Ed, July 2010, pp. 27), there are several inherent limitations of internal control systems which Kangaroo might face with:
The costs of control not outweighing their benefits. For example, the ID system can control the number of employees in the company but it cannot control all of the season building workers since they works in a period of time.
The potential for human error. For example, unequadate information in accounting records though the manual accounting system.
Collusion between employees. For example, the collusion between the supplier and the buyer from purchasing department raising the price of materials.
The possibility of controls being by-passed or overridden by management. For example, the management of purchasing department can hide the real price of material and enter into collusion with the supplier and the employee.
Controls being design to cope with routine but not non-routine transaction. For example, the company usually get orders are received by post and telephone from suppliers and from individuals; the senior managements can only check the orders have been received through post, for telephone orders, they can check through records but the accuracy might not be ensured.
6. The risk of fraud within Kangaroo Construction Ltd and suggest methods of detection. Fraud comprises both the use of deception to obtain an unjust or illegal financial advantage, and intentional misrepresentation by management, employees, or third parties. In contrast, an error is an unintentional mistake. (BPP, pp. 27)
Types of frauds might happen within Kangaroo Ltd There are nice types of frauds including ghost employees, miscasting of the payroll, stealing unclaimed wages, collusion with external parties, teeming and lading, altering cheques and inflating expense claims, stealing assets, issuing false credit notes, and failing to record all sales. In case of Kangaroo Ltd, the company might face with these following frauds:
Ghost employees: Kangaroo Ltd. is a construction company hired workers so the construction can occur if their workers are not enough to carry the construction project. Therefore, staff ghost is what can happen when managers are not able to monitor the exact amount of a worker employed in the process.
Teeming and lading: occur when a clerk has the chances to misappropriate payments from the trade receivables or to trade payables (BPP, pp.28). For example, the delivery driver has subsequently sold the goods delivered short and shared the proceeds with the employee who records the purchase directly.
Failing to record all sales: occur when a dishonest bookkeeper may invoice customers but fail to record the invoice so that the customer’s payment never have to be recorded and the misappropriation is not missed (BPP, pp.29). For example, Kangaroo Ltd might deal with a dishonest of head foreman, is responsible for checking deliveries of raw materials for quantity and quality against copy purchase orders prepared by the purchasing department; however, the head foreman accepted short deliveries but signed a receipt for the quantity of goods ordered. It means that the record has unreal information of quantity of raw materials. Hence, this is an elaborate fraud may be perpetrated in any companies with extremely poor controls over sales recording and minimal segregation of duties.
External collusion: occur when the employee or junior management in sales department or purchasing department could collude with the supplier, customers or their staff to overcharge on purchase invoices, undercharge on sales invoices or the sale of confidential information (i.e. customer list) to a competitor (BPP. Pp. 28). For example, an employee in purchasing department has in collusion with a supplier’s delivery driver about signing a receipt for the quantity of goods ordered but he has consistently accepted short deliveries. Seriously, the delivery driver has subsequently sold the goods delivered short and shared the proceeds with this employee.
Prevention of fraud Fraud will only be prevented successfully if potential fraudster aware the risk of detection as being high, and if personnel are adequately screened before employment and given no incentive to turn against the company once employed (BPP, pp. 32). There are some ways of prevention and detection fraud as follows:
A good internal control system. For example, accountant is one of important roles to control the financial statement in order to avoid financial risk.
Financial accountant is responsible for report to external shareholders based on historical information to create financial statement followed the GAAP/ IFRS standard.
Management accountant is responsible for report to internal users based on the forecast of accounting department and marketing department to create budget and financial statement.
Continuous supervision of all employees.
Surprise audit visits.
Thorough personnel procedures. Another solution is that the company can use the corporate governance such as:
Corporate governance is the system by which companies are directed and controlled.
Cadbury Committee report 1992 (BPP, pp. 36) The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report issued by "The Committee on the Financial Aspects of Corporate Governance" chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. The report was published in draft version in May 1992. Its revised and final version was issued in December of the same year. The report 's recommendations have been used to varying degrees to establish other codes such as those of the European Union, the United States, and the World Bank etc. The central components of this voluntary code, the Cadbury Code, are: that there be a clear division of responsibilities at the top, primarily that the position of Chairman of the Board be separated from that of Chief Executive, or that there be a strong independent element on the board; that the majority of the Board be comprised of outside directors; that remuneration committees for Board members be made up in the majority of non-executive directors; and that the Board should appoint an Audit Committee including at least three non-executive directors.
(According to http://www.jbs.cam.ac.uk/cadbury/report/ assessed 10 Dec 2013) Based on Cadbury Report, Kangaroo Ltd will have to repartition a clear mandate from the executive board for their staff to. According to the scenario, the four directors are often away on business and the office staff is run, in the absence of the financial director, by a part-qualified accountant with six staff. With the absence of a fourth director, the monitoring will depend on the senior and junior management; this will lead to the occurrence of the employee collusion or management or the supplier in recording wrong invoice on purpose and the manager can hide the truth as what they know. Another problem is that the accounting system of Kangaroo Ltd should improve to computerized system to ensure the accurate and adequate because they are using manual accounting system with uncertain risk.
III. CONCLUSION In this assignment, Kangaroo specializes in building houses and provides a five-year building warranty to its customers. As an audit manager has held a planning meeting with the finance director. The finance director has provided you with the following notes of his meeting and financial statement extracts. Through this assignment, Kangaroo Ltd management can define again the important of accounting records and how to control them. An accounting record is any type of electronic or hard copy document that provides information regarding the financial status of an individual or entity. A number of documents are included as part of the process of preparing and maintaining accounting record books. Invoices issued by a business are one of the fundamental documents that are noted and tracked in ledgers and journals. The invoices make it possible to keep track of potential income that can reasonably be anticipated by the business. By entering the invoices and the invoice amounts in the accounting books, it is much easier to apply checks or other forms of payment that are remitted by customers when and as they arrive and are prepared for deposit into a bank account. In addition, Kangaroo Ltd can also understand how much business risk they are face with and how to manage them. Based on the analysis above, it is clear to know the importance of accounting records with Kangaroo Ltd. Besides, the identification of business risk is also very necessary because by doing this Kangaroo can minimize the risks as much as possible. Notably, it is extremely vital for company to set up and analyze its own control systems and finally, company also can evaluate its possible fraud to prevent and detect timely.
IV. REFERENCES
1. (July 2010), BPP Learning Media Ltd, BPP House – Aldine Place, London W12 8AA. United Kingdom. Finance: Auditing and Financial System and Taxation.
2. BPP, Chapter 1, pp. 3-18. Accounting Systems. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
3. BPP, pp.20. Type of risks. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
4. BPP, pp.14. Line authority, staff authority and functional authority. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
5. BPP, pp.20. Operational and financial risk. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
6. BPP, pp.21. Responses to given risks. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
7. BPP, pp.22. Internal control system. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
8. BPP, pp.24. Five elements of internal control systems. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
9. BPP, pp.36. Cadbury Committee reporting. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
10. BPP, pp.24. Risk assessment process. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
11. BPP, pp.34. ISA 240 on fraud. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
12. Antraweb (2013) Functionality of Antraweb Enterprise Suite for manufacturers [Online], Available: http://www.antraweb.com/enterprise-suite-functionality.htm [Accessed on Dec 8, 2013].
13. Adrian Cadbury (1992) the Financial Aspects of Corporate Governance [Online], Available: http://www.ecgi.org/codes/documents/cadbury.pdf [Accessed on Dec 10, 2013].
14. Cambridge Judge Business School (2013) The Cadbury Report [Online], Available: http://www.jbs.cam.ac.uk/cadbury/report/ [Accessed on Dec 10, 2013].
15. Global Association of Risk Professionals (2013) Operational Risk Management [Online] Available: http://www.garp.org/media/673303/operational%20risk%20slides.pdf [Accessed on Dec 10, 2013].
16. Global Association of Risk Professionals (2013) Operational Risk Management [Online] Available: http://www.garp.org/media/665968/icbrr-operational0711preview.pdf [Accessed on Dec 10, 2013].
17. Template photos (n.d) Bookkeeping Template [Online] Available at: http://refiningpractice.blogspot.com/2010_05_01_archive.html [Accessed on Dec 10, 2013]
18. Excel Worksheet Template (n.d) Cash Received - Sales Ledger Invoices Only Excel Worksheet Template [Online] Available at: http://www.docstoc.com/docs/609989/Cash-Received---Sales-Ledger-Invoices-Only-Excel-Worksheet-Templatel [Accessed on Dec 10, 2013]
19. Trial Balance Worksheet (n.d) Free Business Templates - Trial Balance Worksheet [Online] Available at: http://www.docstoc.com/docs/271933/Free-Business-Templates---Trial-Balance-Worksheet [Accessed on Dec 10, 2013]
20. Template photo (n.d) what is a Balance Sheet [Online] Available at: http://lerablog.org/business/economy/finance/what-is-a-balance-sheet/ [Accessed on Dec 10, 2013]
21. Appendix 1.5. Purchase Ledger Module Detail [Online] Available at: http://www.vintner.co.uk/Vintner-Bond/Bond-Purchase-Ledger.aspx [Accessed on Dec 10, 2013]
22. Appendix 2.1. Report on Management of Anwar Group [Online] Available at: http://www.assignmentpoint.com/business/report-on-management-of-anwar-group.html [Accessed on Dec 10, 2013]
23. Appendix 2.2. Line and staff authority relationships [Online] Available at: http://wikieducator.org/Qualification_Framework/Professional_Education/Management/MHRM/Principles_of_Management/Relations_with_in_the_Organization/Line_and_staff_relation [Accessed on Dec 10, 2013]
24. Appendix 2.3. Communications and Stakeholder Engagement [Online] Available at: http://www.tc.gc.ca/eng/civilaviation/opssvs/managementservices-referencecentre-documents-1764.html [Accessed on Dec 10, 2013]
V. APPENDIX
Appendix 1.1
Figure : Cash daybook of Kangaroo Ltd (Template photo)
Appendix 1.2
Figure : Sales ledger of Kangaroo Ltd (Excel Worksheet Template)
Appendix 1.3
Figure : Trial Balance of Kangaroo Ltd (Trial Balance Worksheet)
Appendix 1.4
Figure : The balance sheet of Kangaroo Ltd (Template photo)
Appendix 1.5
Figure : Purchase ledger of Kangaroo Ltd
Figure : The process of recording payment within Kangaroo Ltd
Figure : Creditors list after recording purchase ledger of Kangaroo Ltd
Appendix 2.1
Figure : Line authority structure
Appendix 2.2
Figure : Staff authority structure
Appendix 2.3
Figure : Functional authority structure
BTEC HND IN BUSINESS (MANAGEMENT)
ASSIGNMENT COVER SHEET
NAME OF STUDENT
VU THI PHUC
REGISTRATION NO.
UNIT TITLE
Unit 11: Financial Systems and Auditing
ASSIGNMENT TITLE
Kangaroo Construction Ltd Management Control Systems
ASSIGNMENT NO
1 of 2
NAME OF ASSESSOR
Mr. JUN ALEJO BATHAN
SUBMISSION DEADLINE
11/12/2013
I, __________________________ hereby confirm that this assignment is my own work and not copied or plagiarized from any source. I have referenced the sources from which information is obtained by me for this assignment.
________________________________ _______11/12/2013_________
Signature …show more content…
Date
----------------------------------------------------------------------------------------------------------------FOR OFFICIAL USE
Assignment Received By: Date:
Unit Outcomes
Outcome
Evidence for the criteria
Feedback
Assessor’s decision
Internal Verification
First Attempt
Re-work
Understand the importance of keeping effective accounting systems within a business LO1
Explain the purpose and use of the different accounting records
1.1
Assess the importance and meaning of the fundamental accounting concepts
1.2
Evaluate the factors which influence the nature and structure of accounting systems
1.3
Be able to analyze the management control systems of a business
LO2
Identify the different components of business risk
2.1
Analyze the control systems in place in a business
2.2
Evaluate the risk of fraud within a business, and suggest methods for detection
2.3
Merit grades awarded
M1
M2
M3
Distinction grades awarded
D1
D2
D3
Assignment
( ) Well-structured; Reference is done properly / should be done (if any)
Overall, you’ve
Areas for improvement:
ASSESSOR SIGNATURE DATE / /
NAME:
(Oral feedback was also provided)
STUDENT SIGNATURE DATE / /
NAME :
FOR INTERNAL USE ONLY
VERIFIED YES NO
DATE :
VERIFIED BY :
NAME :
I. INTRODUCTION According to the scenario, Kangaroo specializes in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts. Kangaroo has had a difficult year: house prices have fallen and as a result, revenue has dropped. In order to address, this management has offered significantly extended credit terms to their customers. However, demand has fallen such that there still some completed houses in the inventory where the selling price may be below cost. During the year, whilst calculating depreciation, the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charge. Besides, Kangaroo changed their main material supplier to a cheaper alternative to improve profit. In addition, the company borrowed £1 million from the bank during the year which is repayment at the end of 2013. As the audit senior of Rhino & Co, I have been asked to produce a report for the CEO of Kangaroo Construction Ltd. In the report, I am required to address the following tasks:
1) The purpose and use of the different accounting records used by Kangaroo Construction Ltd.
2) The importance and meaning of the fundamental accounting concepts applicable in the above scenario.
3) The factors which might influence the nature and structure of accounting systems at Kangaroo Construction Ltd.
4) The different components of business risk associated with Kangaroo Construction Ltd.
5) The control systems in place at Kangaroo Construction Ltd.
6) The risk of fraud within Kangaroo Construction Ltd and suggest methods of detection.
Table of Contents
II. ANALYSIS
1. The purpose and use of the different accounting records used by Kangaroo Construction Ltd. Based on BPP, Finance: Auditing and Financial System and Taxation (Course book, 1st Ed, July 2010, Chapter 1), accounting is defined as a systematic process of classifying, recording, verifying, summarizing and interpreting financial information into financial statements and reports.
On the other hand, accounting information system is a system of collection, processing, and storage of financial and accounting data that is used for decision making. Accounting record is a part of accounting information system, which is any type of hard copy or electronic document that provides information regarding the financial situation of an organization or a company including recording of assets and liabilities, ledgers, prime entry books (daybooks) and other supporting documents such as invoice, debit notes, credit notes. Prime entry books (daybooks) In term of accounting records, prime entry books (daybooks) are known as books of original entry, where the transactions are first recorded. The main daybooks comprise cash book (i.e. receipt: cash sales; payment: salary), sales daybook, purchase daybook, general journal. (Appendix 1.1) …show more content…
Ledgers Ledgers are used for preparing trial balance and checking the accuracy of accounting books. There are three types of ledgers as sales ledgers, purchase ledgers and general ledgers. Ledgers are also used as storage of all kind of information to be used for preparing final accounts and financial statements. (Appendix 1.2)
Trial balance A trial balance is prepared at the end of an accounting period by adding all the account balances in the ledgers. In trial balances, the sum of the debit balances should equal the sum of the credit balances; if there is an unequal result between total debits and total credits, the company must track down the errors. (Appendix 1.3) Financial statements are prepared from the information in the trial balance. (Appendix 1.4) Since accounting records play an important and useful role by providing information how good or bad the financial condition of the business is which activities or products have been profitable. Besides, accounting records set on the base of practices that will help a business to compare results between different periods. It also is good evidence in a court of law if a company faces with legal issues. For a big company or developing company, the business results increase in large number of transactions, accounting records help the company avoid the necessity of remembering various transactions. Accounting records are also important in planning and making decision for a company; the resulting financial statements and reports can be used internally by management or externally by other interested parties like investors, creditors, bankers, tax authorities. In case of Kangaroo Construction Ltd, cheques are through the post and over the counter. About half the customers are given credit and pay by cheque through the post. As can be seen that Kangaroo Ltd use manual accounting system for almost their transaction. For this system, it use of multiple paper ledgers to record and keep track of all the financial transactions of a company. Each type of transaction is inputted in its own ledger. This method is often appropriate for small companies because the transaction is stored in seconds so if it is a large company will spend a lot of time to classify and record; furthermore, the measure leads to mistake in settlement and reporting financial transactions and which many take time to check each ledger. Therefore, the company should pay attention to invest in the development of computerized system and focus on staff training in short courses to improve their qualifications. Besides, the company should use integrated software to reduce data errors disparities between departments, for example:
Figure : Integrated accounting control
(Source: http://www.antraweb.com/enterprise-suite-functionality.htm) According to Functionality of Antraweb Enterprise Suite for manufacturer article, flexible account structure and seamless integration with all business operations provide easy access to the financial effects of operations. Automated accounting entries eliminate errors and save time for reviewing, analyzing, and acting on financial information. The account & Finance module provides Complete Book Keeping, Registers & Statement of Accounts, General Ledger, Credit Control, Accounts Receivables & Payable, Flexible Voucher Numbering, Flexible Classifications of Accounts Heads, Bird 's Eye View / Drill Down Display, Date Based Reporting, Voucher & Cheque Printing, Columnar Report, Bank Reconciliation, Multi Currency, Multiple financial year, Comparison of data, Post dated Vouchers, User defined Vouchers, Sales and Purchase Extracts, Daily Balances & Transactions Value, Cash Flows, Interest Calculations, Percentage Based Reporting and many more features… For example, an accounting record of Kangaroo as purchase building material ledger (Appendix 1.5) can be shown as follows:
Inputs to a purchase ledger: detail of purchases recorded on invoices and the returns to suppliers for which credit notes are received; details of the payment to suppliers and the adjustment of the management accountant in accounting department.
Process: firstly, the amounts of outstanding on the supplier’s accounts are adjusted in purchase ledger. The amount will represent money owed to the suppliers. Then the management accountant will adjust the owed brought-forward balance by adding or deducting the value of transaction then importing to computer. The carried-forward balance becomes the new balance recorded on the suppliers account.
Outputs: The lists of transactions posted; an analysis of expenditure for nominal ledger purpose; Lists of trade payables balances; Copy of trade payables’ account.
2. The importance and meaning of the fundamental accounting concepts are applicable in the above scenario. Audit is an examination and verification of a company 's financial and accounting records and supporting documents by a professional, such as a Certified Public Accountant. According to Companies Act in 2006, the fundamental accounting concepts can be explained as follows:
Accruals concept of accounting: Other than the cash flow statement, the accounts have been set on an accruals basis. The accruals basis of accounting involves the non-cash of transactions to be mirrored in the financial statements for the period in which those effects are experienced and not in the period in which cash is actually received or paid.
For Kangaroo Ltd, this concept has meaning for amounts spent to purchase materials or consumer debts first. For instance, Kangaroo Ltd companies can use this concept to lists of its expenses without cutting applications such as purchasing materials (i.e. bricks, furniture for decorating, etc) from suppliers can burn it to ensure the production of the company. As a result, companies can use after the first sell products to pay for suppliers without having to spend an additional planet in the production line.
Going concern: The accounts have been prepared on a going concern basis which means that the accounts have been prepared on a going concern basis. This principle is mainly help in preparing the financial statements of Kangaroo Ltd as well as ensuring that investors will get revenue on their investments. This may indicate that last year Kangaroo Ltd is no major audit issues and evaluate risk capital is relatively low and controlled environment is considered satisfactory. The company is clearly very successful, showing good profitability, strong cash flow, and good financial with 20 suppliers and a healthy balance at the bank. Many suppliers offer settlement discount. It means the business entity of Kangaroo Ltd will continue to operate in a long time and create confidence for investors.
Consistency concept: There are a number of different ways in which some concepts can be applied. Each business must choose the approach that gives the most reliable picture of the business, not just for this period, but over time also. According to the consistency convention, when a method has been adopted for the accounting treatments of an item, the same method will be adopted for all subsequent occurrences of similar items. However, it does not mean that the firm has to follow the method until the firm closes down. For this concept, Kangaroo Ltd shows the certain criteria for a production to be able to review the situation profitability of the company.
Prudence concept: The account should be prudent when preparing financial statements. In other words, if something is in doubt, plan for the worst and, if a transaction has not yet been completed ignore ant possible benefits that may arise from it. For this concept, the company only records production costs and loss, limited to jot down profit in preparation for a worst case scenario.
Materiality concept: accounting reports are prepared for the benefit of the various user groups, it is important that the information provided is both meaningful and comprehensible. The concept of material to ensure that the information provided is clear by skipping the important criteria for the user in understanding the overall financial situation of Kangaroo Ltd. Kangaroo Ltd also applies this concept to present information for business leaders who need it to make important decisions. It condenses the operation of a business into an easy to understand format.
Business entity concept: financial accounting is based on the premise that the transactions and balances of a business entity must be separately accounted. Therefore, the business entity is considered to be distinct from its owners for accounting purposes. Depending on the accounting concepts will help Kangaroo Ltd of the financial statements. Also, it helps Kangaroo Ltd determine the company 's obligations to the owner. The important of fundamental concept to Kangaroo Ltd With the help of the basic accounting concepts, Kangaroo Ltd. can maintain consistency accurate financial information to limit its risk, errors, or even fraud. With the basic accounting concepts, Kangaroo Ltd can achieve their financial goals using financial data accurately and vital records were recorded in a period of time. For example , Kangaroo Ltd wants to implement a new financial strategy this year with the aim of increasing their financial as well as attract investors , Kangaroo Ltd will review financial data , records and reports of last year to see basically the same as owning its assets and liabilities it incurs . Besides, if there are any problems in the past year, Kangaroo Ltd can find out the improvements this year to be better strategic and financial future. As a result, Kangaroo Ltd can maintain accurate financial information to help build the trust of stakeholders, such as investors, suppliers, governments, customers and employees. Moreover, basic accounting concepts also help the company with platforms on which to base Kangaroo Ltd can compare their financial situation for competitors and other business in the market.
3. The factors might influence the nature and structure of accounting systems at Kangaroo Construction Ltd. The finance function and authority
Line authority – is the authority a manager has over a subordinate (BPP, pp.14). (Appendix 2.1)
Staff authority – is the authority one manager or department may have in giving specialist advice to another manager or department, over which there is no line authority. Staff authority does not entail the right to make or influence decisions in the advisee department (BPP, pp.14). (Appendix 2.2)
Functional authority – is a hybrid of line and staff authority, whereby the techno-structure manager or department has the authority, in certain circumstances, to direct, design or control activities or procedures of another department (BPP, pp.14). (Appendix 2.3)
Other factors might affect the nature and structure of accounting systems at Kangaroo Construction Ltd The factor might affect the nature and structure of accounting systems at Kangaroo Construction Ltd is the type of accounting systems. There are two typical types of accounting systems: manual and computerized system. Manual accounting system Manual accounting system uses multiple paper ledgers to record and keep track of all the financial transactions of a company. Each type of transaction is inputted in its own ledger. This method is often appropriate for small companies.
Advantages of manual accounting:
Cost savings.
Accounting software can be expensive. If a business has just begun, the company can save money by doing the accounting in a paper ledger.
Avoiding risks such as software errors result in a loss of accounting data.
Disadvantages of manual accounting:
Consuming time; because accounting staff don 't have a computer categorizing and totaling figures, they must do these themselves. It takes more hours to do manual accounting than it does computerized accounting.
This method requires high precision; therefore, accounting staff must add the correct column, double-check their work, and physically write in numbers. Computerized accounting system Computerized accounting system uses the accounting software. After financial data is entered into the program, it will automatically organize information; the data will be calculated and expressed as accounting numbers or other financial reports. This method is suitable for both large companies and small companies. It will help the company save time when examining the transaction process and decision making easier.
Advantages of computerized
system:
The program allows managers to view the financial position of the company in "real time" and make adjustments to business strategy as necessary.
Computerized systems can also provide instant reports on stock assessment, profit and loss, customer accounts and payroll and sales analysis, once again, allowing faster adjustment the business strategy of the company.
The accounting software that allows data entry faster than manual accounting, and allows documents such as invoices, purchase orders and payroll are collated and printed quickly and the determined. Because of its efficiency and ease of use, the accounting system on the computer also can allow improving inventory control and collecting payments, saving time and improve cash flow. Since computer systems automatically update some records, account records of the company will always be updated. Although this is a very useful method for the company but using accounting software comes with its own set of problems, such as the need to protect against data loss through loss electricity or virus, and the risk of hackers stealing data, computer fraud is also a concern, and company need to triggers the control system for people with access to information especially customer information such as password settings. Besides, the import supply accurate information is a matter of attention otherwise it will lead to error calculations chains in the system. Both these system use same accounting records, principle, and code.
The sized and structure of Kangaroo Ltd
Figure : Structure of Kangaroo Ltd The factor can influence the nature and structure accounting system of the company is the size and structure of company. In addition to the size and structure of company, the functional authority is the ability for subordinate staff to veto suggested management decisions or to propose action based on their superior expertise in a particular area. Many accounting professionals working for the finance department of a business will be granted the functional authority to veto management decisions and initiate action according to their best judgment. There are three structure of accounting system: line authority, staff authority, functional authority. In case of Kangaroo Ltd, the awareness of employee and management is one of the factors that affect accounting systems. Employee resistance to changes in accounting systems may be due to complexity of the system, effectiveness of an existing system or apprehension over the introduction of accounting controls and auditing. Sometimes, the employees may see the need for accounting systems, contrary to the views of the management. A lack of support from management can render the accounting system irrelevant to the decision-making functions of the organization. In addition, the level of training is also one of the important factors; the level and nature of training attained by users’ influences the way in which the system serves to meet business objectives. A lack of adequate training among users, such as managers and supervisors, can cause the accounting system to be a problem rather than a solution to financial management. The final element is that the ability to operate of the company and other databases. Kangaroo Ltd must ensure their data is always accurate so as not to system errors. Besides, the company should also regularly check the accounting software to avoid system errors and upgrade databases, integrated accounting software.
4. The different components of business risk associated with Kangaroo Construction Ltd. Based on ISA 315 (2009), business risks are actions or events have worse effects or adverse business users. For a company or an organization, these risks shield the company or organization can measure lower than expected profits or losses rather than profits. Business risks can come from internal factors or external factors, which may include all types of risks such as operational risk, financial risk, and compliance risk. Business risks cannot be completely eliminated but can be managed and minimized as much as possible by process management in a company or an organization by company policy and implement strategy according to four potential responses (accept risk, reduce risk, avoid risk and transfer risk). In case of Kangaroo Construction Ltd, the business risk can be shown as follows:
Table : The components of business risk and the responses within Kangaroo Ltd
Components of business risk
Responses to given risks
Personal authority
Operating risk
Operating risk can be defined as the error or mistake made in the operation of the business (BPP, pp. 20). Based on JP Morgan Chase defines operational risk as the risk of loss resulting from inadequate or failed processes, people and systems or from external events.
For example,
1 In Purchase department, wrong order in buying furniture for decorating a new house.
2 In Human Resource department, lacking labor safety for building worker such as gloves, helmet, safety working clothes.
3 In accounting department, manual accounting system is performed.
4 For the external factor, the weather disasters (i.e. storm) or uncertainty events (i.e. fire) can affect the quality of a building project.
The company should reduce that by setting up a system of internal control.
The company should reduce that by setting an internal control system.
The company can accept that by setting an internal control system in order to manage the risk as low as possible.
The company can transfer the risk by buying comprehensive insurance for their building projects.
This is department risk, the senior management should check the order before it is sent and check the goods after receiving them.
This is strategic and department risk, directors should define the labor safety regulations to make sure all building workers has their own safety working clothes; and they will be changed in new clothes when running out of date. The senior management should check whether workers wear them or not.
This is strategic risk, directors should determine the pros and cons of manual system; if the company is becoming bigger, the board of directors need consider using computerized system to reduce several costs (i.e. printing cost) and prevent losing information.
This is strategic risk, the board of directors should identify.
Financial risk
Financial risk covers all of the risks of incorrect payments being made or not all due receipts being collected (BPP, pp.20).
For example,
1 In accounting department, wrong payment of salary such as ‘dummy’ employees.
2 In sales department, wrong payment with customers by getting wrong material information. It might make customers pay more than the money has been signed in the contract.
The company should reduce it by setting up a system of internal control.
The company should avoid it by setting a standard information control system.
This is department risk, the senior management should define how much workers they got in a building project by contacting with the Human Resource department.
This is department risk, the senior management should check the information system whether it is adequate or not (such as order record, customer information).
Compliance risk
Compliance risk is the overall risk that a company will not comply with all the legal requirements laid out in the Company Act. (BPP,pp.20)
For example,
1 In accounting department, preparing financial statement not based on the standard or the company activities.
The company should avoid that by setting up a system of internal control.
This is department risk, the senior management should define the standard they have to follow and show it to the staff. Besides, the senior must also check all the accounting records whether they are adequate and accurate or not.
5. The control systems in place at Kangaroo Construction Ltd. According to BPP, Finance: Auditing and Financial System and Taxation (Course book, 1st Ed, July 2010, Chapter 2), A system of internal control refers to the process by which organizations maintain environments that encourage incorruptibility and deter fraudulent activities by management and employees. An organization’s components of internal control are evaluated during the planning phase of an independent financial statement audit. The results of the evaluation directly influence the auditor’s level of detailed testing. It includes compliance with internal policies, asset protection, prevention, and detection of fraud and error, the accuracy and completeness of accounting records and timely preparation of reliable financial information dependable. There are five elements of an internal control systems which are indentify by ISA, as follows: Control environment Environmental control is the framework in which the control operations including management functions, the attitudes, awareness, and actions of those charged with governance and management regarding the internal control unit and its importance in the entity (based on BPP, pp.23). There are seven factors reflected in the control environment will be demonstrated as follows:
Table 2: Seven factors reflected in the control environment
Communication and enforcement of integrity and ethical value
Communication and implementation of ethical integrity and control system of Kangaroo Ltd value can be just as effective that managers and employees have integrity and in an ethical system. It gives a guide to help managers / employees doing the right thing.
Commitment to competence
Competence is the knowledge and skills necessary for the individual to perform the job. Currently, Kangaroo Ltd is facing inefficiencies in the operation of the software led to errors made by staff as they lack training.
Participation by those charged with governance
Management control system will be reviewed by staff independent of the system that is responsible administrator. In Kangaroo Ltd, the supervisor will check the staff performing monthly by meeting.
Management’s philosophy and operating style
Executive management must demonstrate a proactive approach to risk management. Currently, management of Kangaroo Ltd is running a centralized approach in which all the products are distributed from a central repository. It leads to inaccurate order execution and slow.
Organizational structure Organizational structure of the company to provide communication systems and report accordingly to allow the control system to be effective. Kangaroo Ltd has structure functions as sales department, accounting department, marketing department, Human resource department. This helps managers find inefficiencies in the operation of what functions to be able to adjust in time.
Assignment of authority and responsibility
Responsibility means that employees know when they have done / under control and how to report weaknesses to control an appropriate management. For Kangaroo Ltd , through recent inventory report of the internal auditor to management to address the weaknesses in the integration of accounting software inventory.
Human resource policies and practices According to the scenario, the company announced a 10% increase in executive salaries and the implementation of further performance related pay schemes and share options for all directors. This was in order to motivate the team to deliver the company 's global ambitions.
Risk assessment process Risk assessment process is the entity’s process of identifying business risks relevant to the financial reporting objectives and deciding about the actions to address those risks and the results thereof. (BPP, pp. 24). As what have been discussed on table 1, the business risk of Kangaroo Ltd can be managed as figure follows:
Information system Information system is the system that processes information within an organization. It includes not only the processing of information but also the procedures to initiate, record, process and report on financial statements, both manual and computerized. (BPP, pp.25) As have been discussed on answer 3, the information system of Kangaroo currently is manual accounting system. All the records of transaction and payment are received by post and the orders is received through post and telephone. This system might fit into a company with business forms that fit small and not too large amount of information about orders and transactions. Almost transactions be preserved and not much has changed. For Kangaroo Ltd., which is a construction company in the form of medium-sized business (with approximately 100 employees); moreover, there are majority accounting records such as invoices, purchase daybooks, return purchase daybooks, cash book, purchase ledgers, etc. Therefore, requirement of the adequacy and accuracy of the information collected is necessary. Consequently, Kangaroo Ltd should consider upgrading their accounting system to computerized system in order to prevent business risk.
Control activities Control activities are specific activities within an organization which are designed to address risks and therefore help to ensure that management directives are carried out. (BPP, pp.25) In case of Kangaroo Ltd, the control activities can be shown as an example of performance reviews. The supervisors want to ensure that the staffs have been operating the control system effectively; they can hold a meeting monthly with the senior management to check the duty of each staff in department. The senior management in each department should observe and check the performance of each employee whether they do their work right or not, then collecting the concern of employees about their job in order to identify the job enrichment. Another example is that Kangaroo Ltd can use physical controls by ID system to ensure the attendant of staffs or avoid ‘dummy’ employees.
Monitoring of controls Monitoring of controls are the external auditor should obtain an understanding of the major types of activities that the company uses to monitor internal control over financial reporting and how the entity initiates corrective actions to its controls. (BPP, pp.26) In term of Kangaroo Ltd, auditor of Kangaroo Ltd. should have an understanding of the control environment because thereby, Kangaroo Ltd can operate well in an environment where they are treated as important. In addition, the auditor should have an understanding of the risk assessment process to help identify risks related to the financial goals of the Kangaroo Ltd. Since then, the auditor can evaluate their presence in an appropriate manner and minimize them as much as possible. In addition, an understanding of information systems and control activities help to ensure that the information may be accurate processing and settlement risks effectively. In addition, an understanding of the monitoring of internal controls help evaluate the effectiveness of internal control systems of the company.
Limitation of internal control systems According to BPP, Finance: Auditing and Financial System and Taxation (Course book, 1st Ed, July 2010, pp. 27), there are several inherent limitations of internal control systems which Kangaroo might face with:
The costs of control not outweighing their benefits. For example, the ID system can control the number of employees in the company but it cannot control all of the season building workers since they works in a period of time.
The potential for human error. For example, unequadate information in accounting records though the manual accounting system.
Collusion between employees. For example, the collusion between the supplier and the buyer from purchasing department raising the price of materials.
The possibility of controls being by-passed or overridden by management. For example, the management of purchasing department can hide the real price of material and enter into collusion with the supplier and the employee.
Controls being design to cope with routine but not non-routine transaction. For example, the company usually get orders are received by post and telephone from suppliers and from individuals; the senior managements can only check the orders have been received through post, for telephone orders, they can check through records but the accuracy might not be ensured.
6. The risk of fraud within Kangaroo Construction Ltd and suggest methods of detection. Fraud comprises both the use of deception to obtain an unjust or illegal financial advantage, and intentional misrepresentation by management, employees, or third parties. In contrast, an error is an unintentional mistake. (BPP, pp. 27)
Types of frauds might happen within Kangaroo Ltd There are nice types of frauds including ghost employees, miscasting of the payroll, stealing unclaimed wages, collusion with external parties, teeming and lading, altering cheques and inflating expense claims, stealing assets, issuing false credit notes, and failing to record all sales. In case of Kangaroo Ltd, the company might face with these following frauds:
Ghost employees: Kangaroo Ltd. is a construction company hired workers so the construction can occur if their workers are not enough to carry the construction project. Therefore, staff ghost is what can happen when managers are not able to monitor the exact amount of a worker employed in the process.
Teeming and lading: occur when a clerk has the chances to misappropriate payments from the trade receivables or to trade payables (BPP, pp.28). For example, the delivery driver has subsequently sold the goods delivered short and shared the proceeds with the employee who records the purchase directly.
Failing to record all sales: occur when a dishonest bookkeeper may invoice customers but fail to record the invoice so that the customer’s payment never have to be recorded and the misappropriation is not missed (BPP, pp.29). For example, Kangaroo Ltd might deal with a dishonest of head foreman, is responsible for checking deliveries of raw materials for quantity and quality against copy purchase orders prepared by the purchasing department; however, the head foreman accepted short deliveries but signed a receipt for the quantity of goods ordered. It means that the record has unreal information of quantity of raw materials. Hence, this is an elaborate fraud may be perpetrated in any companies with extremely poor controls over sales recording and minimal segregation of duties.
External collusion: occur when the employee or junior management in sales department or purchasing department could collude with the supplier, customers or their staff to overcharge on purchase invoices, undercharge on sales invoices or the sale of confidential information (i.e. customer list) to a competitor (BPP. Pp. 28). For example, an employee in purchasing department has in collusion with a supplier’s delivery driver about signing a receipt for the quantity of goods ordered but he has consistently accepted short deliveries. Seriously, the delivery driver has subsequently sold the goods delivered short and shared the proceeds with this employee.
Prevention of fraud Fraud will only be prevented successfully if potential fraudster aware the risk of detection as being high, and if personnel are adequately screened before employment and given no incentive to turn against the company once employed (BPP, pp. 32). There are some ways of prevention and detection fraud as follows:
A good internal control system. For example, accountant is one of important roles to control the financial statement in order to avoid financial risk.
Financial accountant is responsible for report to external shareholders based on historical information to create financial statement followed the GAAP/ IFRS standard.
Management accountant is responsible for report to internal users based on the forecast of accounting department and marketing department to create budget and financial statement.
Continuous supervision of all employees.
Surprise audit visits.
Thorough personnel procedures. Another solution is that the company can use the corporate governance such as:
Corporate governance is the system by which companies are directed and controlled.
Cadbury Committee report 1992 (BPP, pp. 36) The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report issued by "The Committee on the Financial Aspects of Corporate Governance" chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. The report was published in draft version in May 1992. Its revised and final version was issued in December of the same year. The report 's recommendations have been used to varying degrees to establish other codes such as those of the European Union, the United States, and the World Bank etc. The central components of this voluntary code, the Cadbury Code, are: that there be a clear division of responsibilities at the top, primarily that the position of Chairman of the Board be separated from that of Chief Executive, or that there be a strong independent element on the board; that the majority of the Board be comprised of outside directors; that remuneration committees for Board members be made up in the majority of non-executive directors; and that the Board should appoint an Audit Committee including at least three non-executive directors.
(According to http://www.jbs.cam.ac.uk/cadbury/report/ assessed 10 Dec 2013) Based on Cadbury Report, Kangaroo Ltd will have to repartition a clear mandate from the executive board for their staff to. According to the scenario, the four directors are often away on business and the office staff is run, in the absence of the financial director, by a part-qualified accountant with six staff. With the absence of a fourth director, the monitoring will depend on the senior and junior management; this will lead to the occurrence of the employee collusion or management or the supplier in recording wrong invoice on purpose and the manager can hide the truth as what they know. Another problem is that the accounting system of Kangaroo Ltd should improve to computerized system to ensure the accurate and adequate because they are using manual accounting system with uncertain risk.
III. CONCLUSION In this assignment, Kangaroo specializes in building houses and provides a five-year building warranty to its customers. As an audit manager has held a planning meeting with the finance director. The finance director has provided you with the following notes of his meeting and financial statement extracts. Through this assignment, Kangaroo Ltd management can define again the important of accounting records and how to control them. An accounting record is any type of electronic or hard copy document that provides information regarding the financial status of an individual or entity. A number of documents are included as part of the process of preparing and maintaining accounting record books. Invoices issued by a business are one of the fundamental documents that are noted and tracked in ledgers and journals. The invoices make it possible to keep track of potential income that can reasonably be anticipated by the business. By entering the invoices and the invoice amounts in the accounting books, it is much easier to apply checks or other forms of payment that are remitted by customers when and as they arrive and are prepared for deposit into a bank account. In addition, Kangaroo Ltd can also understand how much business risk they are face with and how to manage them. Based on the analysis above, it is clear to know the importance of accounting records with Kangaroo Ltd. Besides, the identification of business risk is also very necessary because by doing this Kangaroo can minimize the risks as much as possible. Notably, it is extremely vital for company to set up and analyze its own control systems and finally, company also can evaluate its possible fraud to prevent and detect timely.
IV. REFERENCES
1. (July 2010), BPP Learning Media Ltd, BPP House – Aldine Place, London W12 8AA. United Kingdom. Finance: Auditing and Financial System and Taxation.
2. BPP, Chapter 1, pp. 3-18. Accounting Systems. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
3. BPP, pp.20. Type of risks. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
4. BPP, pp.14. Line authority, staff authority and functional authority. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
5. BPP, pp.20. Operational and financial risk. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
6. BPP, pp.21. Responses to given risks. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
7. BPP, pp.22. Internal control system. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
8. BPP, pp.24. Five elements of internal control systems. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
9. BPP, pp.36. Cadbury Committee reporting. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
10. BPP, pp.24. Risk assessment process. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
11. BPP, pp.34. ISA 240 on fraud. Available at: Auditing and Financial Systems and Taxation. [Accessed on Dec 9, 2013]
12. Antraweb (2013) Functionality of Antraweb Enterprise Suite for manufacturers [Online], Available: http://www.antraweb.com/enterprise-suite-functionality.htm [Accessed on Dec 8, 2013].
13. Adrian Cadbury (1992) the Financial Aspects of Corporate Governance [Online], Available: http://www.ecgi.org/codes/documents/cadbury.pdf [Accessed on Dec 10, 2013].
14. Cambridge Judge Business School (2013) The Cadbury Report [Online], Available: http://www.jbs.cam.ac.uk/cadbury/report/ [Accessed on Dec 10, 2013].
15. Global Association of Risk Professionals (2013) Operational Risk Management [Online] Available: http://www.garp.org/media/673303/operational%20risk%20slides.pdf [Accessed on Dec 10, 2013].
16. Global Association of Risk Professionals (2013) Operational Risk Management [Online] Available: http://www.garp.org/media/665968/icbrr-operational0711preview.pdf [Accessed on Dec 10, 2013].
17. Template photos (n.d) Bookkeeping Template [Online] Available at: http://refiningpractice.blogspot.com/2010_05_01_archive.html [Accessed on Dec 10, 2013]
18. Excel Worksheet Template (n.d) Cash Received - Sales Ledger Invoices Only Excel Worksheet Template [Online] Available at: http://www.docstoc.com/docs/609989/Cash-Received---Sales-Ledger-Invoices-Only-Excel-Worksheet-Templatel [Accessed on Dec 10, 2013]
19. Trial Balance Worksheet (n.d) Free Business Templates - Trial Balance Worksheet [Online] Available at: http://www.docstoc.com/docs/271933/Free-Business-Templates---Trial-Balance-Worksheet [Accessed on Dec 10, 2013]
20. Template photo (n.d) what is a Balance Sheet [Online] Available at: http://lerablog.org/business/economy/finance/what-is-a-balance-sheet/ [Accessed on Dec 10, 2013]
21. Appendix 1.5. Purchase Ledger Module Detail [Online] Available at: http://www.vintner.co.uk/Vintner-Bond/Bond-Purchase-Ledger.aspx [Accessed on Dec 10, 2013]
22. Appendix 2.1. Report on Management of Anwar Group [Online] Available at: http://www.assignmentpoint.com/business/report-on-management-of-anwar-group.html [Accessed on Dec 10, 2013]
23. Appendix 2.2. Line and staff authority relationships [Online] Available at: http://wikieducator.org/Qualification_Framework/Professional_Education/Management/MHRM/Principles_of_Management/Relations_with_in_the_Organization/Line_and_staff_relation [Accessed on Dec 10, 2013]
24. Appendix 2.3. Communications and Stakeholder Engagement [Online] Available at: http://www.tc.gc.ca/eng/civilaviation/opssvs/managementservices-referencecentre-documents-1764.html [Accessed on Dec 10, 2013]
V. APPENDIX
Appendix 1.1
Figure : Cash daybook of Kangaroo Ltd (Template photo)
Appendix 1.2
Figure : Sales ledger of Kangaroo Ltd (Excel Worksheet Template)
Appendix 1.3
Figure : Trial Balance of Kangaroo Ltd (Trial Balance Worksheet)
Appendix 1.4
Figure : The balance sheet of Kangaroo Ltd (Template photo)
Appendix 1.5
Figure : Purchase ledger of Kangaroo Ltd
Figure : The process of recording payment within Kangaroo Ltd
Figure : Creditors list after recording purchase ledger of Kangaroo Ltd
Appendix 2.1
Figure : Line authority structure
Appendix 2.2
Figure : Staff authority structure
Appendix 2.3
Figure : Functional authority structure