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Task1
1. What are accounting records? Why are they the chief evidence in auditing?
Maintenance of clear cut accounting records is necessary for the health of financial management systems in companies. These records are the resource for all things pertaining to the companies’ activities and transactions and hence have to be maintained carefully and meticulously in hard and electronic form these days. They serve as the source of information and evidence which are used for the preparation, verification and auditing of financial statements. They are very important in auditing as:
1. They provide the record of source of funds for activities which have received financial assistance.
2. The accounting records also provide information as to grants, awards, tenders, budgets, permissions received or rejected, authorisations, assets and liabilities, expenses etc.
3. This is the minimal requirement for meeting standards of accountability. The auditor will be examining all these records and documentation to ensure that the organisation meets the information appear in the statements and it is true and valid.
4. Provide information as to proper utilisation of the assets and proper record of all data such as documentation of proof of ownership of assets, liabilities, evidence of monetary and non monetary transactions. They can take on many forms and shapes such as ledgers, journals, bank statements, contracts, receipts, invoices, vouchers, paid bills, cancelled cheques, payrolls etc and can be in physical and electronic formats.
The major accounting records are the ones which summarise the entire financial activity of a business . The main records are:
1. Income statements- known as profit and loss statements. It is an account of all the income and expense transactions undertaken by the business. Is a measure of how profitable your business is and indicates how well the business is doing as well as the periods of profit and losses. It also highlights the sustainability and can be annual, monthly weekly or daily. It helps in budget planning and allocation.
2. Balance Sheet – is an account of the assets and liabilities of the company which are listed in order of the current and long term status. They are listed in order of liquidity.ie. which ones are the ones which are going to be used up earliest and which ones will take a longer time/ Equity owned by the owner is also displayed on the balance sheet. People can make an estimate of the financial position of the company.
3. Statement of Cash inflows and outflows: This is a statement of the actual income received and expenses paid by the company. This can keep a check on whether the income received is enough to balance the expenses accrued.
4- Different methods of keeping accounting records. They can be cash or Accrual methods. The former indicates actual incomes received and paid as and when. The latter includes actual and expected flows of money. ( The types of accounting records, 2014)
2. Explain fundamental accounting concepts with example.
Some fundamental principles of accounting have been established in order to ensure that accounting takes place in a correct way, is logical and conforms to the best practices.
1. Going Concern- The first principle of accounting is that accounting has to be carried out on the presumption that businesses will be operating indefinitely for an indefinite length of time and hence accounting has to be an ongoing and continuous process and in tune with what is happening at current. The company is assumed to be ultimately fulfilling al its objectives and its current worth is estimated on the basis of its current assets.
2. Consistency – There should be uniformity and consistency in the accountancy procedures and practices prevailing over different times as then only can the financial statements could be comparable from year to year.
3. Accrual- Accounting procedures should take into account both non cash and cash events as they occur. Accrual is the process of dealing with the payments to be received and paid in the future. These include: income, expenses, wages, salaries, taxes, rentals, GST, etc/
All records are maintained as to all such events irrespective of whether they have occured or not. Accruals can be kept track of in the following ways: Asset Accounts, Liabilities, Capital and Revenue Accounts.
4. Double book keeping- this ensures that there are strict controls to ensure that there are no wrongful or unauthorised transactions and protects the financial management system from manipulations. It ensures that a balance sheet is maintained between the assets and the liabilities and expenses and can be done with the help of an independent auditor.
5. Fund Accounting- This is a separate set of accounting measures and accounts related to the incomes and expenses related to specific activities which have been carried out using specific funds. The type of fund (governmental, fiduciary, proprietary) determines the kind of accounting.
6. Accounting on Accrual and Modified Accrual Basis- These are used for the NGOS and certain governmental fund accounting.
7. There would be different kind of revenues and expenditures and the accounting systems should take this into consideration and record accordingly.
8. Unearned revenue such as advances received from sources for various projects should be placed under liabilities payable to the source and should not be allowed to be a part of the general fund or used for any other future purpose. Accounts regarding these have to be carefully maintained.
9. Receivables (Income and payment received) should be taken into account and noted under assets and balances.
10. Inventory records – should be maintained in separate account books. This includes expenses related to the purchase of items on inventory as well
11. Materiality- Risks have to be taken into account as well as the accuracy of the statements owing to various malpractices as well as misstatements. Materiality is of great importance when assessing the financial condition of a company. (Basic Accounting Principles, 2014)
3. What are the different factors which influence the structure of accounting system in any organisation?
Different organisations will have different kinds of accounting systems based on the way they operate their businesses and manage their financial transactions. Some factors which would influence the structure of accounting systems would be:
1. kind of business and industry in which it operates
2. Kind of growth plans: short, medium and long term
2. Kind of operation systems
3. Daily functions will also determine the kind of accounting system in place. It should be compatible with the way incomes and expenses are generated and accrued, storing and retrieval of client information
4. Acceptability to employees- It should ideally be perceived user friendly by employees but sometimes changes in accounting structures may find resistance amongst the employees owing to comfort with the existing system, difficulty in shifting to new methods etc. Hence when companies install accounting systems, they should consider this factor too
5. Availability of training will also determine the kind of accounting system. If the training is easily available, then the system may be more in use, the level and nature of the training will influence how the system is used to best effect.
6. Implementation- Designing an accounting system tailored to the organisation’s means is not enough, it has to be implemented properly i.e. integrated in such a way that it functions well with the other arms of the business such as operations. This requires collaboration between the accounting team as well as the agent which is responsible for establishing and maintaining the system. (Wicks,2014)
Therefore, the kind of accounting system would differ based on the size and structure of the companies/businesses. (Tyndall,2014) The kind of software used for small companies may not be as complicated as that required for large businesses such as hotels like the Hilton which is a global conglomerate. Small companies may do well with entry level accounting software programs such as Quick books which can fulfil their basic accounting needs as they have very limited number of employees and functions involved. Medium sized organisations may need more sturdy software to deal with the accounting requirements. Large and complex business including Hotels such as the Hilton may need a variety of complex software to manage their complex financial processes. For e.g. Enterprise Accounting Software are very advanced and specialised software which can be used by such companies such as oracle or SAP as well as software for analysing the business intelligence such as BizNetEXCELerator and customer relationship management software which will help in management of customer related issues. Manual accounting systems are used by small companies, who are just starting out.
Task 2
1. Explain different types of business risks and its nature?
Business risks are associated with the operation of all kinds of businesses and refers to the fact that any time in its operation, a business continuously faces the risk of not obtaining profits or facing losses or dealing with a situation which may lead to closure or failure of the company or business. These risks may arise from a variety of factors and hence risks are unpredictable. They can be divided into two categories: internal and external risks. Internal risks are those which arise from causes attributed to the organisation and external risks are risks which are due to factors not within the control of the organisation and in fact are extrinsic to it. Internal risks are more predictable and can be controlled more easily as compared to external risks. (business risks, 2014)( Evaluate business risk, 2014) (business risk definition, 2009) (types of business risk, 2014)Further, business risks are of five major types. These include:
A. Strategic Risk- risks which occur due to the nature of the industry you are operating within at the specific time. These risks can occur due to changes in industry trends, customer preferences, competitors’ strategies, changing market forces. Companies have to constantly be abreast of what is happening in this area so they are prepared to deal with such risks.
B. Compliance Risk
These risks are associated with matters pertaining to legislative, bureaucratic, environmental, safety, international law, economy matters as well as state and country wise rules and their impact on the operations of companies.
C. Financial Risks.
These risks are associated with how the company manages the money it receives as a result of investment, business services offered as well as expenses related to company operation and to the company policies regarding usage of money, credit and debt management as well as foreign exchange rates and prevailing economic conditions.
D. Operational Risks
These are associated with the problems with the way of operation and management of the company including management issues with employees, ineffective management processes, lack of suitable skills, equipments and any logistical issues associated with the functioning of the company.
E. Reputation risk
Factors which can create harm to the company’s reputation including products, promotional issues, improper ways of dealing with customer. This risk is more in today’s times owing to the preponderance of social media..
F. Unexpected risks- which are beyond any control such as political or natural events which systematically damage the functioning of the country as well as issues relating to health
2. For your selected organisation, explain the method of internal control mechanism in place?
Hilton Inc is one of the world’s foremost leaders in hotel managements and is involved in running and managing several hotels under the Hilton brand name throughout the globe. The hotel has managed its position as one of the leading hotels owing to various reasons. One of the primary factors which will contribute to the success of a hotel such as Hilton is its maintenance management. This is critical as hotels have to cope with influx of visitors at varying rates through the year and they have to be prepared for this at all times. Hence maintenance control is one of the primary internal control mechanisms which has to be in place to ensure that the staff are competent and very well prepared to deal with various aspects such as services, operations and management of the buildings, the infrastructure, the electrical and logistics aspects, as well as hotel service, state and quality of accommodation, food and beverages. The hotel need to also manage its operating costs in this regards and one of the strategies many such hotels would do is to outsource some of its key functions so that it can lead to increased productivity, increased revenues, lower operating costs and risk reduction. There will be checks and monitoring mechanisms to ensure that each step is monitored. The functions normally outsourced are accounting, maintenance, security and promotion (hotel maintenance management, 2014). In addition, there is an emphasis on separating the ownership and management so that management issues can be better managed.
3. Explain different types of fraud in an organisation and suggest how these frauds can be detected?
Organisations can face different kinds of frauds. These frauds can range from the level of individual to that at the level of organisational level. The different kinds of frauds are as follows:
a. Individual frauds. These are committed by employees. These may include fraudulent changes in income received or expenses spent such that the excess money not accounted is taken by the employees. Such frauds occur when there are no systematic checks in place to ensure that the documentation is all in order and whether the claims are feasible and valid. This may also involve the creation of falsified documents and false transactions.
b. theft from the company’s bank account, theft of company stock. Usually by someone in the knowhow of the company bank details
c. Making changes in the sales figures to obtain bonuses for the term. This would mean inflation of the items sold or contracts made, for instance.
d. Fraud perpetrated by suppliers or agencies with whom companies have contracts. Again lack of sufficient monitoring mechanisms ensure such things to happen.
d. organisational frauds.
This is large scale fraud and includes tax evasion. This is done at the organisational level, possibly involving the team management so that tax payment can be avoided and can involve creation of complicated procedures and obfuscation of information. (Taylor, 2014)(7 tips to detect fraud in your business, 2014)(how to find and stop fraud, 2012) (top ten types of fraud, 2012)
Some methods for detection of internal frauds are:
1. Ensuring checks and controls and monitoring mechanisms of internal controls, which should be regularly done so that there is not much scope for misuse
2.Proper record of liabilities and assets so that no mismanagement of assets can occur. Any such occurrences can be detected.
3. Monitoring the employees’ behaviours in the office to identify any possible deviations from the norm which may be as a result of such practices.
4. Take the recommendations of auditors and audit committees seriously and follow up. They usually point out any serious causes for concern in the functioning of the business.
5. Give positive encouragement to those who can give information regarding possible frauds and ensure that they are never victimised. (how to find and stop fraud, 2012)
Task 3
1. For a selected organisation plan an audit with reference to scope, materiality and risk?
An audit can be planned for the Hilton Hotels Inc, which is an internally reputed group having interests in hotels and tourism sector. This internal audit would be conducted at regular intervals by a team of independent auditors, to ensure that all mechanism pertaining to the governance and operation of the hotel would be in place and are functioning effectively. The scope of the audit would include such aspects as relate to governance and management, how well the management are doing the assigned tasks, whether it is being conducted within the timeframe, how is risk management being done, whether sufficient internal controls and checks are in place to protect the assets and to prevent fraud, how effective are the reporting mechanisms and accounting procedures and whether the accounting records are in order, whether the balance sheet and profit and loss statement are balanced, compliance with local and international laws as well as maintenance management, how the salaries are disbersed, customer and employee issues etc. The scope should focus on areas which are particularly troubling to the company.
The scope would take into account all aspects related to the functioning of the hotel. There would be fraud investigators, to look into any possible cases of fraud. The audit procedures would be taken into account audit risk and materiality which are vital for understanding whether any fraud has occured. Audit risk refers to the risk that the auditor may fail to modify opinion on statements that are misreported or mis-stated, Materiality refers to the magnitude of the omission or misstatement, which would significantly impact the judgement of a reasonable auditor. A level of audit risk and materiality would be determined so that the auditor/s can determine whether the given set of financial statements are giving a fair and accurate value of the company, within that set level. And this level should be as low as possible to increase the veracity of the financial statements. Materiality is usually determined twice during the auditing process. (SOP for large hotel, 2014) (internal audit reporting, 2014)(Internal audit services, 2014) (Audit Risk and Materiality in Conducting an Audit, 2014)
2. What are the different audit tests which can be applied for your audit plan?
There are several types of audit tests that can be applied with the audit plan. These tests focus on different kinds of activities and are meant o uncover shortcomings/weaknesses and improprieties with the different functions related to finance. These include:
1. analytical procedures- These include comparisons of figures between different intervals of time to detect any substantial differences, financial ratios and review information from al the sources i.e. for e.g. details of transactions, purchases, tenders etc to ensure that all is proper. This also includes examinations of predictive information used at different time intervals. This is more fact based than based on opinions.
2. substantive tests of detail- these are basically mathematical in nature and aim to check that company is operating like others similar to it. IT uses ratios, calculations and checks of amounts borrowed or lent to clients and agents would be checked.
3. internal controls- tests of internal control measures would be evaluating procedures starting from top leadership and management onwards. The review would check whether the internal procedures operating are in line with the actual stated policies and procedures and would involve the evaluation of statements and even testing out the work in the company under the stated conditions and control ( What are the different type of audit tests, 2014)
3. How audit process is recorded, stored and why these documents are important?
Audits are a way of gauging how well the organisation is functioning in line with the best operating and financial practices. For effective audits, the audit process should be planned, conducted and the whole process and the results should be recorded and stored for the company’s records. Documents are created such as checklists to record every stage of the audit process including determining objectives of the audit, measures to evaluate whether the audit has been successful or not, data collection and analysis and reporting and review. Records are stored electronically and in hard paper form and are vital for evaluating and assessing whether the company is complying with established standards and norms. (Internal Audit reporting, 2014)
Task 4 A. Sample Audit report for Hilton Hotels
The sample report, below indicates the basic parts of an audit report for, in this case, Hilton Hotels. The report should specify what it is about (as indicated by the title), location of the audit and date on which the audit was carried out as well as the details of the auditor team. It also mentions the source of distribution of the audit reports. The audit report mentions the objectives, the scope and methodology followed for doing the audit as well as summarises the opinion arrived at regarding the validity of the objectives and whether the objective was achieved or not. The appendices would be attached which would provide additional information.
Title: Financial Status Compliance Audit: ensuring that all the financial statements are in working order and tallying with existing company situation
Location : Accounts/Finance/Managers Office
Date of Audit: 1-30 April 2014
Audit Undertaken By: Independent Auditor team from Auditor and Co. Along with internal audit representative of hotel Mr. Smith
Sample: Statements of financial records, undertakings, transactions, expenses and incomes for the last six months to be compared along side previous records
Distribution of Report: Chief Financial Officer, Hilton hotel
Objectives: To ensure that the Balance Sheet, Profit and Loss Account and the Cash flow statement for the year ended on 31st March 2014 is in order. The aim of the audit is to express an opinion on the validity and sustainability of these financial statements and how it would impact the company. The audit would be conducted in line with established audit procedures.
Audit Scope & Methodology: The aim of the audit is to express an opinion on the validity and sustainability of these financial statements and how it would impact the company. The audit would be conducted in line with established audit procedures. The aim would be to ensure that there are no material misstatements. We would be examining as mentioned the balance sheer, profit and loss account, cash flow accounts and comparing it to the books of account and accounting standards to ensure that there is balance overall. All statements, depositions, evidences in favour of income and expenses would be evaluated and verified. The examination would also include evaluating the methodology of the principles used for accounting.
Summary Findings: The audit has concluded that all procedures have been followed and the financial statements made by the company are in line with the evidences analysed. All the fixed assets are in place and all details have been provided.
Appendices: Copies of the audited financial statements, evidences used for compiling this report.
(SOP for audit for large hotel, 2014) ( Hotel Leela Venture: Auditor's Report of Hotel Leela Venture, 2014)
Task B. Explain the contents of a management letter. Further, draft a management letter in relation to a statutory audit report.
A management letter is basically a letter written by the auditors to the management regarding the results and/ or findings of the audit conducted on certain key issues pertaining to financial and compliance risks. The letter pertains to the auditors’ opinion on the situation of the company as far as those issues are concerned, whether they are satisfactorily placed or not. The comments would highlight any weaknesses/deficiencies they came up on in the management/operations of the company as well as indications of serious fraud/mismanagement of company finance. These are called material weaknesses and would require serious correctional efforts on part of the company. The presence of the weaknesses would indicate that serious corrections are needed in the internal controls of the company so as to mitigate the effect of those risks.
A typical management letter would be as follows:
Sample Management Letter For the year ended
31 March 2014
July 2014
The Management
ABC
Dear Sirs
Management letter for the year ended 31 March 2014
This is regarding the recent audit we performed regarding the financial statements of your company, as per the recognised norms. It has been our best attempts to ensure that the audit has been performed with as much diligence and care, and taking all available facts and evidence into consideration. We are glad to inform you that we found the statements free of material misstatements and we can give a reasonable opinion that your internal controls are working. However, we would like to suggest some technical issues which have come up regarding efficiency of your accounting software and those we have enclosed in a separate document along with some suggestions as to how these processes can be more efficient and more smoother. These documents are circulated along with the letter to all members of the management and staff of the company.
We would once again like to thank you and your staff for your valuable help so that we could complete this audit without major issues.
Please feel free to ask us for any clarifications.
Yours faithfully
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