Financial systems and auditing assignment 1

Name:_____________Nguyen Thi Kieu Anh______________Nickname:________Snow___________Student no.: ____F05-014____Unit Outcomes Outcome Evidence for the Internal Verification First Attempt

BANKING ACADEMY, HANOI

BTEC HND IN BUSINESS (ACCOUNTING)

I, Nguyen Thi Kieu Anh _ 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.

_17 th April 2014 _ Signature Date

FOR OFFICIAL USE

-Assignment Received By: Date:

Name: _Nguyen Thi Kieu Anh Nickname: Snow _Student no.: F05-014

Unit Outcomes

Outcome Evidence for the

Internal Verification

First Attempt Re- work

of the different accounting records

Fair: _ Good: _ Very good explanation on the purpose and use of the different accounting records

Rework due to _ Insufficient analysis Lacks of applications _ Poor understanding (oral exam)

1.1

Assess the importance and meaning of the fundamental accounting concepts

Fair: _ Good: _ Very good assessment of the importance and meaning of the fundamental accounting concepts

Rework due to _ Insufficient analysis Lacks of applications _ Poor understanding (oral exam)

1.2

Evaluate the factors which influence the nature and structure of accounting systems

Fair: _ Good: _ Very good Evaluation on the factors which influence the nature and structure of accounting systems

Rework due to _ Insufficient analysis Lacks of applications _ Poor understanding (oral exam)

Fair: _ Good: _ Very good

Identified the different components of business risk

Rework due to _ Insufficient analysis Lacks of applications _ Poor understanding (oral exam)

2.1

Analyse the control systems

in place in a business

Fair: _ Good: _ Very good analysis the control systems in place in a business

Rework due to _ Insufficient analysis Lacks of applications _ Poor understanding (oral exam)

2.2

Evaluate the risk

of fraud within a business, and suggest methods for detection

Fair: _ Good: _ Very good evaluation of the risk of fraud within a business, and suggest methods for detection

Rework due to _ Insufficient analysis Lacks of applications _ Poor understanding (oral exam)

2.3

Outcome Evidence for the

Internal Verification

Assignment

( ) Well-structured; Reference is done properly / should be done (if any)

The student ( has successfully/ has not successfully achieved all the requirements defined in the assessment criteria:

Areas for improvement:

To achieve _ Pass _ Merit _ Distinction, you should

rework outcome 1.1; 1.2; 1.3: 2.1: 2.2: 2.3/ redo oral exam

meet the requirements

and you should show that

relevant theories and techniques to evaluate the effectiveness of accounting and management control systems of a business range of methods and techniques have been applied in accounting and management control systems and the results are justified.

appropriate structure and approach have been used to write a professional report as well as a range of methods of presentation used widely.

synthesis has been used to generate and justify valid conclusions for business improvements.

evidence of substantial investigations have been planned, managed and organized related to accounting and management

control systems.

there are ideas generation and decisions taken in business risk and risk of fraud in the given business situation as well as problems have been solved.

_ No Improvement Congratulations, keep it up!

ASSESSOR SIGNATURE DATE / /

NAME:

(Oral feedback was also provided)

STUDENT SIGNATURE DATE / /

TABLE OF CONTENTS

EXECUTIVE SUMMARY

The aim of studying financial system and auditing is to enable learners to develop skills toevaluate and analyze the accounting systems of a business, using both computerized andmanual records, and apply fundamental concepts as well as evaluate their effectiveness interm of controls and safeguards against error and fraud Besides, it also helps learners todevelop skills in conducting and reporting of audits (adexcel, n.d.) This report bases onprinciples of financial systems and auditing to research the case of Pear International Ltd.The report is divided into 6 tasks as follows:

• Explain the purpose and use of the different accounting records used by Pear

• Analyze the control systems in place at Pear International Ltd

• Evaluate the risk of fraud within Pear International Ltd and suggest methods ofdetection

INTRODUCTION

As a role of an audit supervisor of Apple & Co, my tasks are reviewing documentation ofPear’s internal control in preparation for interim audit Pear International Ltd is amanufacturer of electrical equipment It has factories across the country and its customer baseincludes retailers as well as individuals, to whom direct sales are made through their website.This report is prepared to analyze management control system to identify risks; frauds areoccurring within Pear International Ltd for helping company having the comprehensive viewfor the business and find out the way to maintain strengths and overcome weaknesses inoperation

As to complete this report, I based on information in the Auditing and Financial Systemscourse book and some reference books, many sources from internet, newspapers.Specifically, I would like to express my deep gratitude to my lecturer, Mr Jun Bathan whosupports, motivates me during the process of completing this report

1. The purpose and use of different accounting records used by Pear International Ltd

Accounting records are all the documentation and books involved in the preparation offinancial statement or records relevant to audits and financial reviews Accounting recordsinclude manual or computerized records of assets and liabilities, monetary transactions,ledgers, journals, and any supporting documents such as checks and invoices

(businessdictionary, n.d.) There are 5 accounting records available for Pear International

Ltd:

1.1 Books of prime entry

Books of prime entry refer to a set of books in which transactions are first recorded beforethey are posted to the ledgers (businessdictionary, n.d.) There are some main types ofbooks of prime entry as follows:

1.1.1 Sales day book

This is the book of prime entry for credit sales, where all credit sales of the day are listed

and totaled The total of sales book is then credited to sales account in the general ledger.(accounting4management, 2014)

Pear International Ltd records a list of all the copies of invoices send out to customers intosale day book each day as follows:

1.1.2 Purchases day book

This book records credit purchases Its procedure is similar to the sales day book that is

recorded daily and totaled up in the end of a month The total of the purchases book isposted to the debit of purchases account (accounting4management, 2014)

Pear Co records all the invoices it receives into purchases day book as follows:

PURCHASES DAY BOOK No.331

2831.24Based on recorded data, Pear Co can know exactly the total amount of good purchased oncredit for suppliers each month for adjusting expenses of company

1.1.3 Sales returns day book

Sales returns book is also called returns inwards book It is used for recording goodsreturned to the company by customers (accounting4management, 2014)

In particular, when products of Pear Co have any errors or damages and customers return

it for the company, credit note is issued for them and its value will be recorded in the salesreturn day book as follows:

Figure 1: Example of Pear Company’s credit note

SALE RETURN DAY BOOK Pear International Ltd

1.1.4 Purchases returns day book

Sales returns book is also called returns outwards book It is used to records good whichthe company sends back to its suppliers (accounting4management, 2014)

In particular, when Pear Company returns any goods for their suppliers due to errors ordamages, debit note is sent for the suppliers and its value will be recorded in purchasesreturns day book as follows:

PURCHASES RETURN DAY BOOK

50 3A coil wire wrap

CASH BOOK Pear International Ltd

1.2.1 Sales ledger

A sales ledger is an accounting tool used in business to keep track of sales made orinvoices sent to customers (wisegeek, 2013) By using sale ledgers, Pear can see profitsand loss as well as reveal purchasing trend to give clues to successful campaigns and haveappropriate adjustments

SALES LEDGER A/c no: SL 31

PURCHASES LEDGER A/c no: PL 10

Balance c/d 208.00 Apr 3 Invoice receivedPDB 331 108.00

Apr 4 Balance b/d 208.00The opening balance owned to Metals & Alloys Inc on 4 Apr 2013 is now £208.00instead of £308.00 because of the £100 payment made during 3 Apr 2013

NOMINAL LEDGER A/c no: PL 10

Asset Disposal Account

depreciation

TRIAL BALANCE OF PEAR CO.

PEAR COMPANY INCOME STATEMENT For the year ended 31 Dec 2013

PEAR COMPANY BALANCE SHEET

Retained earnings (ending):

Retaining earnings (beginning) 2,000

In conclusion, each types of accounting record has significant purposes and use, thus, it isnecessary for company to know exactly what kind of those can be used and how to use themreasonable to help manage company’s accounts easier with no risk

2. Assess the importance and meaning of the fundamental accounting concept for Pear Company

Accounting concept refers to the basic assumptions and rules and principles which work asthe basis of recording of business transactions and preparing accounts (businessdictionary,n.d.) There are various fundamental accounting concepts which are very useful for PearCompany such as accruals, business entity, consistency, going-concern, materiality andprudence

2.2 Business Entity

The owner is separate and distinct from his/her business It means that personaltransactions of owners are treated separately from those of the business When ownerinvests money in the business, it is recorded as liability of the business to the owner.Similarly, when the owner takes away from the business cash/goods for his/her personaluse, it is not treated as business expense

→ For example, when Pear’s owner started business investing £200,000 He purchasedgoods, furniture, and plant and machinery of £50,000, the rest remained in hand Theseare the assets of the business and not of the owner The amount of money that ownerinvested in the company will be treated by business as capital or the liability of companytowards the owner of the business Business Entity concept helps Pear Company inascertaining the profit of the business as only the business expenses and revenues arerecorded and all the private and personal expenses are ignored as well as is considered asprinciples to restraints accountants from recording of owner’s private/personaltransactions (Anon, 2014)

2.4 Going-concern

This concept assumes that the business is operating continuously and does not go intoliquidation in a foreseeable future Therefore, all accounting items should not be recorded

at current value, as they are not forced to be realized immediately

→ For example, the acquisition cost of Pear Company’s equipment was £100,000 whereasits current value is £800,000 According to going concern concept, it should be recorded

at £100,000 This concept provides a basis for showing the value of assets in the balancesheet for helping Pear to prepare realistic financial statement (Anon, 2014)

2.5 Materiality

This concept states that you are allowed to ignore an accounting standard if the net impact

of doing so has such a small impact on the financial statements that a reader of thefinancial statements would not be misled

→ For example, Pear Company bought a dozen of pen costing £12, compared with the totalvalue of fixed assets £10,000,000 The cost of a dozen of pen is insignificant in monetaryvalue and surely will not affect the financial statements users to make decision.Therefore, it should not be recorded as depreciable fixed assets and should be charged inprofit and loss account as an expense when it was bought Materiality concept helps theusers of financial statement have understanding about financial position of company andmaking decision with accepting the omitting unimportant financial data (Anon, 2014)

3. Evaluate the factors which might influence the nature and structure of accounting system at Pear International Ltd

3.1 Accounting system

The main purposes of accounting system is providing financial information quickly andexactly to different users such as investors, managers…in order to make decisions rightly.There are two main methods for collecting and analyzing financial information includingmanual and computerize systems

Manual accounting system Computerized accounting system

- Be depended on the system

- High cost for purchasing and updating system and training employees

- Have to face data loss because of virus, power loss, hackers

Table 1: Manual and computerize accounting system (Francis, 2014)

3.2 Business size and structure

The main factors which influence the nature and structure of accounting system are businesssize and structure which I mentioned below:

3.2.1 The finance function and authority in Pear Company

• Line authority: manage some subordinates, such as sales manager of Pear has lineauthority over the staff of the sale department

• Staff authority: giving advice to managers or departments, but cannot influent ondecision making, such as sale manager has staff authority to support, assist andadvise managers of other departments in matters related to sale management

• Functional authority: hybrid of line and staff authority has the authority in certaincircumstances, such as finance manager of Pear has the authority to require timelyreport from sales manager (BPP, 2010)

Problems in Pear authority system

Pear is manufacturer of electrical equipment Transactions of Pear are made through theirwebsites which allows individuals to order goods directly Therefore, they need to handlemany information data related to personal information of customers and their detailedinformation of their orders as well as transfer this order to relevant department to carry ontransactions However, their authority system does not meet that purposes

Firstly, the website is not integrated into the inventory system and inventory levels are notchecked at the time the order are placed The sales order has been entered into the salessystem correctly but not forwarded to the dispatch department for fulfilling The changesabout supplier details in the purchase ledger master file can be undertaken by purchaseledger clecks as well as supervisors The reason of these problems is that thetechnostructure lack responsibility and absence of authority

Secondly, Pear changed parts of its manufacturing process and as a result some newequipment has been purchased, however, there are considerable levels of plant and