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Diploma in Business
Unit Number and Title
Unit 11 Financial Systems and Auditing
Financial system is the process within the business organisation that engaged into recording and maintaining the financial records in order to extract useful information for their respective decision making. There is need to develop the understanding over their financial system. The most important job of financial Accounting Auditing is to maintain legal financial system without any issues. In order to prove the system legal and accountable auditing is essentially required. In the below report there are various factors related to financial system along with auditing program will be discussed in effective manner. Organisation follows the legal framework in order to maintain legality among their accounting systems.
Organisations need to maintain their financial record for diverse reasons such as extracting useful information for decision making, maintaining financial records and many more. As per Companies Act 2006 it is essential for them to maintain accounting records as it helps in recording the financial transactions made during the year in systematicmanner. Accounting records shows the financial records in systematic, logical and sequential order which is essentially important for evaluating their overall performance (Nastase & Eni, 2015). These accounting records get utilised further by different authorities for different purposes. Different authorities include associated stakeholders in the form of management, board of directors, customers, shareholders etc. that make use of their recorded information for the purpose of their decision making. Under financial records there are different statement get recorded such as journal (utilised for recording routinely financial transactions), ledgers (utilised to record entries related to particular account), trail balance (utilised for recording balances of ledger accounts), profit and loss account (utilised for recording income and expenses to measure net profit or loss), balance sheet (utilised to record assets and liabilities), and cash flow statement (utilised to record transactions related to cash and cash equivalent). All these statements get utilised by different stakeholders for the purpose of meeting their requirements by extracting their required information in order to support their decision making (Nastase & Eni, 2015).
Organisation need to prepare the accounting records as with the use of it they segregate their diverse transaction and record them properly. Like Journal is prepared to record each and every transactions in the form of journal entries, trail balance is prepared for the purpose of summarising the balances of all ledger accounts, profit and loss account is prepared for measuring profitability and balance sheet in order to measure their financial position (Moskvitin, et. al., 2016). Organisation follows the double entry system in order to prepare the accounting records and as per this method every entry having its impact over two accounts. Accrual basis of recording is also utilised in order to record their activities. Once these statements get prepared than they get utilised by different stakeholders in order to extract information related to liquidity, profitability, financial position and many more in order to support their decision making (Moskvitin, et. al., 2016).
Fundamental accounting concepts are as follows such as: -
As per this concept organisation runs for a longer time duration.
As per this concept organisation record their income when it is earned and record their expense when they get incurred.
As per this concept business and business owner both are separate entity and also treated separately.
Monetary unit assumption
As per this concept management record all the transactions in the form of monetary format so that they analyse it easily.
As per this concept management prepare financial statement for a specific accounting period in order to measure their overall performance.
As per this concept every transaction having impact over two different accounts.
As per this concept all the expenses and revenues are reported in the same accounting period as it helps in analysing all the revenues.
Importance of fundamentals accounting concepts are as follows: -
There are numerous factors that influence the nature and structure of accounting systems such as: -
In the absence of the adequate training there is effective fall within the capabilities and skill set of employees. This put higher and adverse impact over the overall performance of the business organisation.
Organisational size put effective impact over their accounting system as they require effective accounting system that gather all the necessary information from their different department so that they make effective use of it. Large organisation face challenge in it.
Requirement of accessing data
Different department require different kind of information for their decision making purpose. So it will also impact the accounting system of the business organisation and they need to implement effective system that helps in generating reports and other necessary documents for their purpose.
Management require adequate quality information for the purpose of their decision making. Management need to gather the information which get considered as useful for decision making as it put effective impact over the financial system of the business organisation.
Complexion among business processes
Complex business process put effective impact over the accounting system as they not able to render adequate level of information easily. Accounting system of the organisation must be effective enough as they capable enough in recoding complex information and stored them in logical manner.
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The different components of business risk that get associated with organisational strategic move are discussed below such as: -
Components of business risk
This type of risk make inclusion of different factors such as increase in the competition within their market, fluctuation within their market share, increase or decrease in new entries and so on. These risks put adequate level of impact over organisational performance.
Human resource risks
This type of risk is associated with the human resource of the organisation as how it influence the organisational employees. There are various factors get included such as knowledge related to the procedure followed by them to process the activities and many more. Increase in employee turnover considered as the example of adverse impact over human resources (Weirich, 2012).
This type of risk is associated with the financial loss faced by the organisation. With this effect organisation face adverse impact over their financial position, capital structure and many other factors. Those activities that impacts financial statement such as increase in prices or decrease in costs effectively influence the financial performance of the business organisation (Weirich, 2012).
Structural resources risks
This type of risk is related to the amendments made within organisational resources including IT department, proprietary information and many more that are associated with the organisational structure.
Physical resources risks
This type of risk is related to the disasters that put adverse impact over the physical resources of the business organisation.
This type of risk make inclusion of such risk that having adverse impact over the business relationship with their wide range of stakeholders that make inclusion of customers, clients, shareholders, suppliers and many more. It impacts the overall performance of the business and hampers their brand image within their market (Leung, 2016).
Organisational control system is the effective system that function their activities for the purpose of identifying or detecting the activities related to the fraud. The reason behind implementing control system within the organisation is to identify the risk of irregularities or fraudulent activities within their operation at their early stage so that they took corrective actions in order to resolve these risks in effective manner. Control system is effectively utilised by the organisation for the purpose of reducing the chances of fraudulent activities. It become essential need of the business organisation in order to remove the fraudulent activities, and detect any kind of errors or omissions made by the management. Management make use of this system for the purpose of monitoring and controlling their overall activities (Leung, 2016).
If in an organisation there is no control system is implemented that there is effective chances of having errors or omissions or irregularities or many more within their operations, or in their recorded information. Absence of control system results into increase in the risk associated in the form of fraudulent activities or adverse situation in order to damage the brand image. So with the use of the adequate and effective control system organisation become efficient enough in reducing the chances of happening fraudulent activities and many more. Control system reduce the chances or prevent the harmful activities that put adverse impact over the organisational performance (Seyed, et. al., 2013).
Business organisation having diverse functions on the daily basis that get performed by their management and employees for the purpose of executing their assigned tasks in effective manner. When the majority of the organisational activities or operations performed by the employees or human resources then there is effective chances of increase in the fraudulent activities as employees share the information related to the client or customers with external stakeholders (Seyed, et. al., 2013). Such kind of activities are not considered as favourable for the business organisation because it hampers the brand image of the business organisation and become effective barrier in attaining the organisational objectives. There are various methods get followed for the purpose of identifying the fraudulent activities that get discussed below such as: -
It is the effective software that get utilised by the management in order to put adequate level of control over the functioning of the business organisation. With the help of it management effectively control the activities processed by their employees and helps in controlling activities related to the frauds or else that hampers their brand image. Management introduces this software within their system and it effectively helps in identifying such activities which are considered as fraudulent and helps in restricting unauthorised access (Seyed, et. al., 2013).
It is the effective procedure that get implemented within the business processes. It demand the active participation of the employees in avoiding as well as identifying the fraudulent activities occurred within business processes. In this process when employee identify that some other employees conducting unauthorised activities or unfavourable activities they need to convey this to their management in order to stop that activity and safeguard the reputation of their business organisation. This method active participation of the employees (Boolaky & Omoteso, 2016).
It is the effective method that get introduced by the management in order to check the activities or process by the employees. Under this method management appoint an audit team that make scrutiny of the transactions in order to analyse it. They conduct internal audit program at such areas where the feel that there will be a chance of occurring fraudulent activities processed by their respective managers or employees. With the help of it management effectively identify the weakness of their business process and reduce the possibilities of fraudulent activities (Boolaky & Omoteso, 2016).
Internal control system
As per this system in order to control the fraudulent activities organisation introduces internal control mechanism within their operations so that they easily identify the activities related to the frauds or errors or misstatements or any other harmful activity made by the employees. This system helps in reducing the possibilities of happening activities related to fraud and other harmful activities.
Audit plan is prepared some steps such as: -
Step 1: - Auditors need to contact and get the approvals from management in order to audit their financial statements.
Step 2: - Request and collect all the relevant information in the form of different financial statements.
Step 3: - Review and check the gathered information in order to identify any mistake or loop hole in it.
Step 4: -Once review get completed made auditors opinion (Leung, et. al., 2015).
Audit planning on the basis of three factors such as: -
Scope: - The scope of audit is to audit the payroll system of the organisation and for this purpose there is a need of collecting all the required information. While auditing their scope is limited for the purpose of evaluating the information provided. On the basis of scope auditors responsibility is to make successful execution of audit program (Leung, et. al., 2015).
Materiality: -Audit materiality level is low because auditor believe that they have weakness among their payroll system. Auditor set the materiality level of the payroll system is 10% because organisation having lesser financial risk as compare to other risks such as employee turnover, etc. It is identified that there is 8% of materiality level for their payroll system and there is a 2% of discrepancies.
Risk: -During Audit program inherent risk and control risk is evaluated and it is analysed that there is high rate of risk is related to the payroll system. The payroll system of organisation is weak due to which there are huge chances of fraudulent activities. Auditors need to make effective evaluation of their payroll system so that they identify fraudulent activity (if any) and need to notify them. The rate of detection risk is low during the audit procedures for the purpose of extensive tests (Leung, et. al., 2015).
There are different type of audit tests get discussed below such as: -
As per this audit test they test the weakness present in organisational internal system as with this effect they become able to identify level of control risk. The organisational payroll system having some kind of weakness so due to this effect it become essential that auditor's need to gather adequate size of information. Auditors need to provide evidence over the weakness present in their internal control system of payroll system.
Substantive test over transactions
As per this audit test all the material transactions get included. The motive of including all transaction in order to evaluate whether management record transactions in correct manner or not, or there is any duplication of entry made or not and many more. This test type is not followed for the purpose of auditing the payroll system because this system is majorly utilised for testing accounting systems.
This audit test include the analysis over overall performance of their past as well as present. In order to perform the audit testing they make comparison among past performance and present performance. This audit test become effective enough for the purpose of analysing the overall payroll system as it helps in analysing various factors that include rate of employee turnover and increase in the ratio of incentives rendered to employees.
Test over details
Test of all details consume lots of time period as there is need to review all the payroll related transactions. Auditors make scrutiny of the transactions related to the payroll system. The weakness of their payroll system put impact over their set of information as they need to make effective audit over the gathered information.
There are different stages involved within the audit process that include: -
Letter of Audit engagement
First of all there is effective need of auditor need to get audit engagement letter from organisational management. It is necessary because it is the invitation for conducting audit over their information recorded.
Prepare plan for audit
Secondly after getting audit engagement letter auditor prepare audit plan in effective manner, It make inclusion of the scope of audit, audit materiality as well as risk associated with their audit.
Conduct meeting with management
Thirdly, auditor effectively arrange the meeting with the management for the purpose of discussing their audit plans and also demand for required set of information. With the help of this meeting they tries to understand the organisational culture and many more.
Fourthly, once all plans get set and required set of information gathered then audit program get executed in effective manner. During audit program all related information get analysed and make identification of different incidents along with evidences which get disclosed in the opinions made by the auditor.
Preparing audit report
Fifthly, once audit program get finished auditor is engaged into preparing audit report in which they make inclusion of their opinion over their financial statements along with the evidences.
Closure meeting with management
Lastly, Auditors make discussion with management in context to the evidences and discuss other factors with management in order to complete the audit program and then close the meeting.
Audit record system: - It is the effective system in which auditor effectively record all set of information which is considered as important because these are associated with the audit evidences identified by the auditors and represented by them in their opinion. Auditors prepare working papers in which they make inclusion of all the useful information and the process of recording information is termed as audit documentation. Auditors claim these documents as their property and don't allow client to access these documents (Perjuci, et. al., 2012).
The Boards of Directors
Subject:Audit report on financial statements
We make use of the financial accounts of ABC Company for audit purpose for the year ending 30th June 2016. The financial accounts that get audited include comprehensive income statement, cash flow statement, statement of financial position, statement of change in equity and notes. Along with this utilised accounting policies and standards also get examined effectively (Malgharni & Wan Fadzilah, 2011).
Responsibility of management - Organisational management of ABC Company is solely responsible for preparing their financial statements. They are solely responsible for using and following the applicable accounting standards during preparation of financial statements in order to maintain legal framework. It is stated that all financial statements are free from material misstatement and providing true and fair view of the recorded information (Amin & Mohamed, 2016).
Responsibility of Auditors - Auditors are responsible for expressing their opinion over organisational financial statement during their audit program and provide the evidences recorded by them during audit. All the required information related to the financial statements get collected effectively and utilised fully in conducting audit program. All the auditing standards get followed during the audit program in order to complete the audit and recorded as evidence in the audit report (Amin & Mohamed, 2016).
Auditors Opinion - As per our opinion management effectively follow the set standards and prepare the financial statements accurately that gives clear and fair picture. While preparing their financial statement they maintain legal framework by following adequate accounting principles while preparing their financial statements (Lin & Wang, 2011).
Statement on Requirements of legal and regulatory framework - After analysing all the information gathered in the form of the financial statements it is concluded that their statements get prepared by maintaining legal and regulatory framework. The statements prepared by management following all the set standards and policies that make them legal and effective (Lin & Wang, 2011).
Subject: -Response Letter over Auditors report
This letter is in response related to the auditor's report. Auditor conduct statutory audit over the financial statements prepared by the ABC company for year ending on 30th June 2016. We are thankful for expressing their opinions over the financial statements and commenting that they get prepared with all the set accounting standards and policies and also giving fair and true value. Statements are free from material misstatements and all their statements are corrects (Ndreca, 2013).
We are held responsible for the prepared financial statement and while preparing these financial statement we make use of all applicable accounting standards as well as all set policies in order to maintain the legal framework. All the information recorded within the financial statements are true and we believe that all financial statements are free from material misstatements and didn't contain any kind of irregularities within the statement. All the information mentioned within these statements giving clear information to the users and these information are best in our knowledge. All the information related to the financial statements get recorded within annual report along with this additional information in the form of directors comments, minutes of meeting and others for their shareholders and other stakeholders (Ndreca, 2013).
Management of ABC company
In the end of the report it get concluded that for organisation it become important to record their financial transactions under their different statements. All these statements get utilised for the purpose of extracting information that further utilised in their decision making. While preparing statements they follow the set standards and methods that helps in maintaining legal framework. In order to approve the legal framework audit is conducted that check their utilised methods, their recorded information and all related methods or techniques. Auditor approve the recorded financial statements and write the report for mentioning their comments or fraudulent activities identified within organisational records.
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