Delivery in day(s): 5
Diploma in Business
Unit Number and Title
Unit 15 Financial Management
Since ancient time accounting is used by the business to systematic record the business transaction. There is huge change in the process of accounting and at present it is very convenient to record business transaction and use of the accounting records. The accounting provides information to various stakeholder and helps them in decision making. Financial management assignment helps the management in making informed decision over the business issue by using various accounting tools. This also reduces the complexity of recording transaction and help in ascertaining financial performance of the business. To increase the reliability of the financial statement they are generally audited by the expert and they frames the opinion over the current functioning of the business. This help in detecting fraud or misrepresentation made while preparing the financial statement.
The accounting records help the business by providing various information regarding business operations. It is the statutory requirement of all the business to maintain it accounting records for seven years. These records helps the various stakeholder in decision making over the business. To increase the reliability of these human resources they are generally examined by the independent auditor. The auditor uses these records as an evidence while framing opinion over the over the financial statement. They also plays as a proof of monetary as well non-monetary transaction of the business and also proves the assets ownership for creation of liabilities. The purpose and use of various accounting records are as follows-
Sales ledger: This is also known as sold ledger and contains the records of the personal account of the customer of the business. This help in recording the sales of the business and finding that weather the money is received from the customer and how much money is still due (Sonnenberg & vom Brocke, 2014).
Purchase ledger: The purchase ledger provides the records of the creditors of the business and amount which is to be paid to them. The purchase ledger contains the individual account of the supplier from whom the goods are purchased on credit.
Income statement: The statement helps in comparing sales of the particular period with the cost incurred on the goods sold. The income statement of the business is divided into two parts. The first part contains all the expenditure which are of regular nature on the other hand second part records the transaction which are not regular to the business. The income statement helps the business to ascertain the profit during the particular period and control the expenses which are incurred during the operation.
Balance sheet: The balance sheet helps in finding the current position of the business at the particular period of the time. This is the tools used by various stakeholder to obtain the insight of the company financial operations. The help the manager in decision making by comparing the statement of the various years (Sonnenberg & vom Brocke, 2014).
Cash flow statement: This statement records the inflow and outflow of cash within the particular period. This helps the organization in maintaining liquidity within the business. The cash flow records separately the inflow from operating, financing and investing activity which facilitate the company to make decision for the business.
The fundamental accounting assumption are the rules which the organization needs to follow while preparing the financial statement of the company. The organization all around the world use these concept to increase the reliability of the accounting records. This helps in making comparison between the various businesses as all the organization follows same principle while preparing its financial statement. The detail of key accounting concept which the business needs to follow while preparing the financial statement are as follows-
Going concern concept: As per this concept the business records the transaction by assuming that the business will run its operation for the foreseeable future. Due to this concept the company doesn’t write off all the expenditure incurred on acquisition of machinery in the year of purchase and distribute the cost over the various years (Swieringa, 2011).
Consistency: As per this concept the company needs to follow consistent in the method used for preparing financial statement over the various year. The company generally changes its method to misrepresent some fact in the financial statement. The company can change its method if the proper reason is provide for the change of the method and the new method will help in presenting the information in more appropriate way. The Auditor needs to mention the effect of the change in the method on the financial statement in the notes to accounts.
Prudence: As per this concept the company in his financial statement will consider the profit or revenue when they are realized and consider all the liabilities when there is slight possibility of its occurrence. This concept will prevent the company to show excess profit and avoid all contingent liabilities by creating the provision against the liabilities (Swieringa, 2011).
Historical cost: As per this concept the company needs to record the fixed assets at the value when it was acquired and also include all the expenditure incurred to bring the machinery in the working condition. This prevent the companies from recording the assets at the inappropriate value to commit fraud.
The accounting system helps in collecting, storing and processing managing financial and accounting data for the purpose of making decision related to the business. It is the computer based system which helps in recording huge data and track various activity of the business. The Manager needs to decide the accounting system after considering the current structure of the business. The accounting system of the company should facilitate the business in attaining its goals and objective.The system should be chosen after identifying the needs of the business and check that it is able to satisfy those needs (Edison, Manuere, Joseph & Gutu, 2012).
The cost incurred on the accounting system also effect the decision in relation to accounting system. The accounting system is generally not followed by the small organization as it add the extra cost to their activity. The manager needs to identify the cost and benefit of the accounting system before implicating it. These system involves huge cost and thus is generally followed by the large business. The accounting system is generally followed by the business which operates at the large scale level as it helps them in recording and tracking their huge data in relation to the operation of the business. They also helps in managing the company and helps in making informed decision over the business (Tamoradi, 2014).
The company needs to choose the system which is resistant to change in the procedure of the business. Most often there is change in the operation and structure of the business so the system should meet the change need as there is huge cost involved in the implementing the accounting system. The company to avoid the losses should choose the system which is resistant to change.
Most of the time the strategy followed by the business fails to provide the desire result. This may be due to change in internal as well external condition of the business or due to in appropriate strategy followed. The Fail in strategy causes a huge loss to the business so the manager needs to frame the strategy after considering all the factor which affect the business. The manager is required to make certain estimate in various areas of the business. The wrong estimate made by the manager will affects the organization to attain its goals and objective. For example the company is not able to satisfy the demand of the product in the market due to sudden increase in the market as the wrong estimation of it was made by the business (Peltier, & Lanoue, 2015).
The organization may face failure due to the inappropriate strategy followed by the manager. This may be due to wrong estimation of the factor which will affect the strategic decision. The strategy followed by the organization may face the problem of shortage of resources required for the strategy. These risk generally affect the long term performance of the business.
The strategy may also be affected by the change in internal or external factor within the business. For example if there is sudden change the demand and supply or government policy of the business it may affect the strategy of the business in positive or negative way. There may be problem that the company current operational process may not adopt with the change in condition or the plan strategy has not helped in attaining the desired result. The company may face the problem that the strategy may be correct but the external factors affect its implication. The strategy may face problem due to sudden change in the business environment such as entry of new product or competitor in the market (Adetiloye, Olokoyo, & Taiwo, 2016).
The organization needs to design the effective control system to prevent fraud in the business. The system should be as such which facilitate early detection of fraud and helps in avoiding the occurrence of fraud. The fraud within the business has a huge effect on the functioning and profitability of the business and sometime may lead to closure of business. The organization for avoiding the fraud needs to include following activity in there control system.
The organization needs to adopt the system of check and balance to ensure that no person has sole control over all part of the financial transaction. The receipt and deposit function of the company needs to be separate from record keeping function to avoid fraud. The organization should make mandatory for accounting department to take mandatory vacation. The organization should build check over all the key work of the business (Dimitrijevic, Milovanovic, & Stancic, 2015).
For controlling the fraud the company needs to reconcile bank account every month as there is huge chances of fraud in this unit of the organization. The independent person needs to reconcileby the independent person who doesn’t have signing or bookkeeping responsibility.
The organization all the transaction made by the organization are related to the activity of the business and not for the personal benefit of the employees. The organization needs to have proper control on the payment transaction and set the limit of the expenditure to the particular area of business. The organization to control fraud needs to monitor the financial activity on the regular basis by comparing the actual expenditure with the budgeted expenditure. The organization needs to build the policy in relation to fraud and inform the consequences of not ignoring any of the policy at the workplace. The organization should have reporting system where employee feels free to report any issue to the top level manager.
The organization needs to build the internal control where the work of each employee is check by the other employee and the financial transaction are done with proper authorization. There should be proper check over the assets of the business as they are often acquired by the employee for their personal use or are stolen by them. For this the company needs to keep the proper records of all the assets used in the business and regularly check there physical presence. The company needs to check the use of the assets are made for the business purpose only.
To control the fraud the management needs to check the related party transaction done by the business. The management needs to check that the related party transaction are properly disclosed and are approved by the board of the director. The company needs to discourage the hiring of the relatives and discourage the business transaction with board members and employees of the company. The organization can also hire experts to provide internal control audit and analyze to prevent the occurrence of the fraud.
The company faces a huge loss due to fraud and might sometime lead to the closure of the business. So the company needs to regularly monitor the key area of the business where there are huge chances of fraud. For controlling the fraud the company needs to focus on the effectiveness of the internal control system and check there is proper authorization for each of the transaction. The organization can follow the certain measure to control fraud which are as follows-
Internal audit: The company should appoint the internal auditor who examine the effectiveness of the internal control and helps the manager to control the fraud these business. The auditor needs to conduct the audit to check the certain area of the business where there are huge chances of fraud. The auditor through examining the accounting records helps the manager in detecting and preventing fraud.
Segregation of the responsibility: The manager needs to build the internal control system where the proper segregation of the responsibility are done and the financial transaction are done after proper authorization. The lack of segregation of the duties is the root cause of fraud and theft in the companies (Lupasc & Baragan, 2016).
Effective reporting of suspicious activity: The organization system should be as such where the employee free feels to report suspicious and inappropriate transaction. The management needs to conduct the periodic evaluation to determine that whistleblower hotline is effective. The company should promote the employees to report the issue which they find at the workplace.
Unusual behavior: The organization needs to supervise the behavior of the employee and should check the sudden change in the behavior of the employee. The employee who is indulged doesn’t goes on leave with the fear of getting caught. So the organization needs to send the employee on mandatory leave once in the year and needs to rotate the employees over various roles.
To increase the reliability of the financial statement they are generally audited by the internal or external auditor of the company. The auditor generally analyze the financial statement to find the fraud and misrepresentation made within the company. The auditor during his audit process obtain evidence from the accounting record to frame opinion over the financial statement. The auditor needs to follow the steps while planning the audit-
Knowledge of the client business: Before starting the planning the auditor needs to obtain the information & knowledge of the client business and the level of the activity of the client business. The knowledge of the client business help the manger to identify the key area for the audit (Laufer, 2011).
Review audit documents:The auditor needs to obtain the previous year audited documents from the client and which will help him in creating the audit program.
Recent development in the organization: The auditor needs to ask the recent development such as merger and new product line to change the audit procedure from the previous year.
Key area of business: The auditor while planning should identify the key area where there is huge chances of fraud and make decide how to examine those areas.
Staffing: The auditor needs to determine the audit staff required for conducting the audit bases on the level of activity of the business.
Time: The auditor after consulting with the client needs to decide the period during which the audit will be conducted. On the basis of it the auditor needs to prepare the schedule of the audit which includes the area which is to be examined and by whom (Laufer, 2011).
Outside assistance: The auditor needs to determine the specialist which are used in the audit to obtain information over the particular area. The auditor needs to determine the extent of their involvement during the audit.
The audit test allows the auditor to collect sufficient audit evidence to conclude with reasonable assurance that the financial statement are free from material misstatement. The various audit test which can be used by the auditor are-
Test of control: The auditor during his audit determine the effectiveness of the internal control of the company. The internal control is generally the policies and procedure which the organization follows to provide assurance to the management. The auditor needs to check that the internal control provides reliability to financial reporting, compliance with laws and regulation and increase the effectiveness and efficiency of operations (Poonia, 2015).
Compliance testing: The compliance test is the comprehensive review of the organizational adherence to regulatory guidelines. The auditor generally checks that the whether the firm is following the rules and regulation prescribed by the authority and control system while performing their work.
Substantive test: These test are performed by the auditor to detect material misstatement or fraud which are related to account balance or transaction. The method help in detecting fraud at the assertion level and involves direct verification of financial statement figures. For example the auditor may obtain confirmation over the various transaction by communicating with the parties which are the part of the transaction (Poonia, 2015).
Test of details: This method requires examining the supporting documentation to determine the validity, accuracy and completion of the activity.
The audit procedure followed by the auditor helps in guiding him throughout the audit process and helps in collecting evidence for framing opinion over the financial statement. The process provide the sequence of the activity which the auditor needs to follow during the audit. The following steps are followed by the auditor during the audit.
Collect document: The auditor needs to collect all the document which are required by the auditor during the audit to obtain evidence. The document generally includes the previous year audit report, bank statement and other similar document which are required during the audit.
Audit plan: The auditor need to plan his work in the way that facilitate him in collecting the evidence and examine all the key area of the business. The auditor needs to communicate the audit plan between all the audit staff to effectively execute the audit.
Scope of the audit: The scope generally includes the extent to which the document will be analyzed. It determine the amount of time and the document which are to be examined during the audit.
Schedule: The auditor will decide the time when the audit will be conducted and the resources required during the audit. The schedule needs to be decided after communicating with the client when he is suitable to provide all the documents (Beattie, Fearnley & Hines, 2012).
Conducting audit: The auditor in this stage conduct the audit in the planned way and obtain evidence from it.
Drafting report: The final step of the accounting is to draft the report based on the evidence collected during the audit. The reports generally contains the opinion of the auditor on the financial position of the business.
The auditor prepare the written report on his finding as per the format which is provide by the Generally Accepted Accounting Standards. The report generally contains the opinion of the auditor based on the evidence obtained during the audit. The auditor generally provide following type of report over the financial statement.
Qualified report: This report is framed by the auditor when he feels that the financial statement are prepared ignoring the basis accounting policy but represent the true and fair position of the business and are free from material misstatement. The qualified report doesn’t have much effect on the decision of the stakeholder related to the company.
Unqualified report: The auditor states this type of report when he feels that the financial statement are free from error and present true and fair position of the business. The auditor generally doesn’t frame this type of opinion (Pajak, 2012).
Adverse opinion: The adverse opinion is provide when the auditor finds that the company has misrepresented certain facts and the financial statement are not true and fair. This is done to intimate the various stakeholder about the current functioning of the business.
Disclaimer of opinion: The disclaimer of opinion is provide when the auditor fails to obtain the document from the company and was not able to collect the evidence due to lack of document. This is reporting is done when the manager doesn’t cooperate with the auditor during the audit (Guénin, Malsch & Paillé, 2014).
The auditor generally obtains the letter from the management which act as a evidence that all the information provided by the manager are true and the manager is responsible for all the information. This letter is generally signed by CEO and the senior accounting person of the company. The management letter generally contains the following point (De Martinis, Fukukawa & Mock, 2011).
The management has prepared the financial statement as per the applicable accounting frame work.
So it may be conclude that the accounting helps the business in recording all the business transaction and facilitate the management in decision making. These records also helps in controlling the fraud within the organization and facilitate control of all the activity. To improve the reliability of the financial statement these are generally audited by the independent auditor. It helps in avoiding fraud and prevent from misrepresentation of any fact. The auditor frames the opinion on the basis of evidence obtained during the audit.
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