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Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Contents
Accounting function Accounting database Recording transactions Organization of data within the general ledger Control and audit
Accounting profession
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Accounting function
Financial accounting system: objectives and scope Uniform accounting procedures Functional transaction processing systems
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Objectives:
Track all economic transactions of the enterprise Record and process them logically in a database Provide reporting tools and formats to communicate information useful to decision makers Highly dependent on the size of the company
Scope
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Business transactions
Decision makers
Data
Information
Processing of data
Reporting
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Uniform accounting systems are central to the coordination and management of an international group Internal accounting manuals to standardize procedures and interpretation of data Uniform accounting rules (like IFRS) versus national accounting rules
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
France
Italy
(Germany)
Netherlands
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Functional systems capture different types of transactions according to their main features, like
Transaction processing implies interactions between the accounting function and operating departments
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Accounting database
General Ledger = central accounting database Primary source of information for internal (management) and external reporting purposes
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
General Ledger
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Recording transactions
Information flows into the general ledger through several layers of processing Individual (daily) transactions are summarized by period and by type Through summarization aggregates are buit up for the years activities
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Daily transactions
prepared by week (or month) and by type of transaction Summaries Summaries
General Ledger
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Journals Capture details of individual transactions Used to build up periodic summaries and feed aggregated data into the general ledger May be organized according to functional transaction processing systems General ledger Collection of summarized, aggregated transaction data Source for the preparation of periodic income statements and balance sheets
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Audit trail
Traces the content of aggregates back to transaction details Used to categorize and record transactions within the accounting database according to the double-entry accounting logic State-mandated or voluntary Automated, flexible reporting tools Using specific tags of individual data items, defined and linked through flexible taxonomies
Chart of accounts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
In the G/L, data are stored according to the double-entry system The G/L is organized into a series of accounts (cfr. chart of accounts): data files to record transactions of a particular type Specifics of an account:
Two columns for figures: debits and credits Narrative commentary Cross-referencing details
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Internal control
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Internal control is a process, established, operated and monitored by those charged with governance and management of a company, to provide reasonable assurance regarding the achievement of objectives in the following categories: a) The effectiveness and efficiency of the companys operations; b) The reliability of its financial reporting; c) Its compliance with applicable laws and regulations.
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Sustaining the companys business operations (efficiency and effectiveness concerns) Preparing reliable financial reporting (including financial statements) Compliance with applicable laws and regulations
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Control environment Risk assessment Control activities Information and communication Monitoring
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Control Environment
The control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure. Control environment factors include the integrity, ethical values and competence of the entity's people; management's philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its people; and the attention and direction provided by the board of directors.
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Risk Assessment
Every entity faces a variety of risks from external and internal sources that must be assessed. A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, forming a basis for determining how the risks should be managed. Because economic, industry, regulatory and operating conditions will continue to change, mechanisms are needed to identify and deal with the special risks associated with change.
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Control Activities
Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties.
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Pertinent information must be identified, captured and communicated in a form and timeframe that enables people to carry out their responsibilities. Information systems produce reports, containing operational, financial and compliance-related information, that make it possible to run and control the business. They deal not only with internally generated data, but also information about external events, activities and conditions necessary to informed business decision-making and external reporting. Effective communication also must occur in a broader sense, flowing down, across and up the organization. All personnel must receive a clear message from top management that control responsibilities must be taken seriously. They must understand their own role in the internal control system, as well as how individual activities relate to the work of others. They must have a means of communicating significant information upstream. There also needs to be effective communication with external parties, such as customers, suppliers, regulators and shareholders.
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Monitoring
Internal control systems need to be monitored--a process that assesses the quality of the system's performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations. It includes regular management and supervisory activities, and other actions personnel take in performing their duties. The scope and frequency of separate evaluations will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the board.
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Control activities
Policy: establishes what should be done Procedure: actions necessary to implement a policy Preventive controls: P&P designed to prevent an error or fraud from occurring Detective controls: P&P designed to detect an error or fraud as soon as posible Corrective controls: P&P to correct problems in a timely manner
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Separation of functions
Separation of functions (segregation of duties) as a preventive control measure It calls for the separation of the four basic functions of transaction processing
Authorizing transactions Executing transactions Recording transactions Safeguarding resources resulting from consummating transactions
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
assurance and consulting activity designed to add value and improve an organisations operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Primary task:
Examine and evaluate the adequacy and effectiveness of the internal control system Evaluate the quality of performance in carrying out assigned responsibilities
Can be considered to be part of the monitoring component of a IC system Its scope potentially covers all activities within the company
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Independence with regard to the acitivities they audit, is essential for the internal audit function Independence should be assured through:
Organizational
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
CEO
Production manager
Marketing manager
...
CFO
Accounting
Treasury
...
Internal Audit
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
CEO
Internal Audit
Production manager
Marketing manager
...
CFO
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
General assembly
Audit committee
CEO
Internal audit
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
As an international professional body, the IIA provides authoritative guidance Standards for the Professional Practice of Internal Auditing establish ethical (attribute standards) and practice (performance standards) guidelines Certification programme leading to the designation of Certified Internal Auditor
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Attribute standards 1000 - Purpose, Authority, and Responsibility 1100 - Independence and Objectivity 1200 - Proficiency and Due Professional Care 1300 - Quality Assurance and Improvement Program Performance Standards 2000 Managing the Internal Audit Activity 2100 Nature of Work 2200 Engagement Planning. 2300 Performing the Engagement 2400 Communicating Results 2500 Monitoring Progress 2600 Management's Acceptance of Risks
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
External audit
External audit = independent audit of a companys financial statements carried out by external auditors
The external auditor expresses an opinion on the representational fairness of the financial statements in conformity with generally accepted accounting principles Reassurance for outside stakeholders that the financial statements are a valid representation of the companys financial position and performance
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
External auditors
(PwC)
These Big Four dominate the audit market for multinational companies
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
To check that the accounting database effectively picks up all the companys activities and is correct To check that the financial statements are a correct representation of the accounting database, use appropriate accounting policies and are a reasonable representation of the companys real state
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Directed to company management (not published) Comments on the audit findings, highlights potential areas of weakness and makes recommendations
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Corporate governance
Corporate governance issues arise whenever ownership of a company is separated from its management Central concern = how managements freedom of action may be limited by outside interests Many countries have specific rules, regulations and guidance on corporate governance
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Chairman of the Board of Directors (BOD) should not be the CEO Appointment of independent or non-executive directors BOD committees with independent directors :
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Accounting profession
Independent auditor Independent accountant Company accountant Specialists licensed to carry out the independent audit required by company law University degree + professional examinations + at least three years as a student in a public auditing firm International variation in nature of scope of statutory audit and in constraints on auditor/client relationship
Independent auditor
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts
Independent accountant
External professionals offering accounting services to (generally small) companies May also provide tax and general consulting services, but not statutory audit services Internal accounting specialists, but not necessarily governed by a professional organization No formal educational prerequisites
Company accountant
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5 2005 Peter Walton and Walter Aerts