Topic 3:

Accounting System and Control

Coverage
3.1 Development of Accounting System
Definition & factors & desired outputs
Principles, phases, procedures: computerised/
manual
Charts of accounts and accounts classification

3.2 Control in Accounting

Purpose
Characteristics
Audit: internal and external

Definition
Accounting systems collect and process
data from transactions and events,
organise them in useful reports, and
communicate results to decision makers.

Factors in development of accounting

system
What are the factors that influenced the
development of an accounting system
within a business entity?
- Size of business
- The volume of transactions
- Branches/ subsidiaries
- Types of business activities

What are the desired outputs?

Summary of all the transactions
financial statements
Quality of outputs:
Relevant, reliable, understandable, timely,
comparable

Qualitative characteristics.
Relevant and Reliable
1)Relevant means information that is
related to a particular decision, which
will affect the decision process.
For example, information on the net
assets and profitability are relevant for
bankers to decide whether loan should
be approved to a particular business.

Qualitative characteristicscont.
This criterion depends on the following:
i. Predictive value Information must have
predictive value to make it relevant. Taking
the previous example (bank), the information
provided enable the bank to predict whether
the business is capable of paying back the
debts.
ii. Feedback value this means the information
that can help decide whether a past decision
can be confirmed or altered.
iii. Timeliness Accounting information is
obtained before any decision is made.

Qualitative characteristicscont.
2) Reliability of accounting information
depends on:
i. Neutral the information is prepared
objectively i.e. without any influence.
ii. Verifiable information provided can be
verified by other parties.
iii. Give the true picture the information
must reflect a true picture of the items
presented.

Qualitative characteristics.cont.
Understandable:
Accounting information is produced to fulfill
the needs of users. The understanding of
the financial statements information is an
essential criteria. Therefore, those parties
interested in the financial statements
should learn how to use it so that
information provided is understood and
helpful in making decision.

Qualitative characteristicscont.
Comparability: Information that enables
users to compare it with the same industry
from other entities.
Consistency: The use of accounting
method must be consistent from one
period to period.

Limitations
i. Cost benefit - the quality of information
issued is constrained by cost. The higher
the quality to be attained, the higher its
cost.
ii. Materiality- information that will affect
decision making. Immaterial information
should be excluded.
iii. Conservatisms use of estimation that
will not have the probability to overstate
the asset or profit.

Principles of accounting system

Control should have internal control measures
Relevance report useful, understandable,
timely & pertinent info for effective decision
making
Compatibility conform to businesss activities,
personnel, structure & uniqueness
Flexibility able to adjust to changes
Cost-benefit benefits should outweigh costs

Analysis

Design

Implementation

Evaluation

Phases in the
development
of accounting
system

Analysis
Planning and identifying information
needs of internal and external users
Identify sources of such information
The records and procedures for collecting
and reporting the data
Analysed present system strengths and
weaknesses
Proposed new/ revised system

Design
Specify system requirements more
precisely
Where data would be captured
The required processing
Where the output would be used

Implementation
Install new / revised systems (e.g.
hardware & software)
Making the system fully operational
User manual
Training users/personnel

Evaluation
Assess the progress and status of new
systems
Monitoring effectiveness and correcting
any weaknesses.
e.g. General acceptance by users, Cost and
benefit

Computerised Accounting
Information Systems
Basic Features
Built-in programs performing journalising, posting
and preparation of trial balance and reports.
Use of modules: general ledger, inventory, accounts
receivable, accounts payable.
Data entered in one module automatically updates
information in other modules.
General ledger and accounting reports updated
automatically.

Computerised Accounting
Information Systems (contd)
Advantages
Ability to process large number of
transactions quickly.
Automatic posting of transactions.
Error reduction.
Fast response time.
Flexible and fast report production.

Computerised Accounting
Information Systems (contd)
Disadvantages
Use of inappropriate and/or incompatible
software and hardware.
Need for reliable back-up procedures.
Lack of computer system skills.
Computer viruses and hackers.
Fraud.

Chart of Accounts
A listing of all accounts and associated
account numbers for a business
WONG PTY LTD Chart of Accounts
Assets
No. Account title
100 Cash
104 Accounts Receivable
105 Commissions Receivable
110 Advertising Supplies
112 Prepaid Insurance
130 Office Equipment
131 Acc. Depreciation
Office Equipment

Liabilities
No. Account title
200 Accounts Payable
210 Interest Payable
213 Revenue Received
in Advance
215 Salaries Payable
230 Bank Loan

Equity
No. Account title
300 Share Capital
300 Retained Profits
320 Dividends
330 Profit and Loss
Summary

Revenues
No. Account title

Expenses
No. Account title

400 Service Revenue 500 Salaries Expense

405 Commissions
505 Supplies Expense
Revenue
510 Rent Expense
515 Insurance Expense
518 Interest Expense
520 Depreciation Expense

Accounts Classification
Accounts are classified according to
common characteristics:
assets,
liabilities,
capital,
revenue,
and expenses

Asset
Definitions of assets:
Things of value which are possessed by a
business
Resources that will bring benefits to the
organisation

Current assets (short-term) cash and

other assets that may be reasonably be
expected to be realised in cash/ sold/
consumed within a year or less through
the normal operations of the business

Asset.cont
Non-current / long-term / fixed/ property, plant &
machinery tangible assets used in the
business that are of a permanent or relatively
fixed nature. Usually span of life is more than 1
year.
Intangible assets do not have any physical
features. They present legal rights and
relationships beneficial to their owners. E.g.
patents, copyrights, trademark and goodwill.

Liabilities
Liabilities debts owned (in term of cash,
goods or services) to outsiders (creditors)
and are frequently described on balance
sheet by titles that include the word
payable

Current liabilities (short-term) liabilities

that will due within short time (usually one
year or less) and that are to be paid out of
the current assets
Long-term liabilities (fixed) liabilities that
will not be due for a comparatively long
time (usually more than one year)

Capital - the owners equity in the

business
Revenue the gross increase in capital
attributable to business activities
Expense cost that have been
consumed in the process of producing
revenue
Drawing money taken from the
business for personal use

Control in Accounting
Detailed procedures adopted by the
management to control the operation of a
business
Means of controlling the entitys activities
to help ensure that they accomplish the
desired objectives

Purposes
To control the operation of business
To provide reasonable assurance those specific
objectives will be achieved
To provide physical security and management
control over an entitys cash, inventories and
other assets
To ensure management policies are adhered to
To prevent errors and frauds
To ensure the record and reports are accurate
and meeting the standards

Types of Internal Control

Administrative Control
Procedures and records that assist
management in achieving business objectives

Accounting Control
Set of procedures and records that are primarily
concerned with the reliability of financial records
and reports and safeguarding of assets

Internal Control
Internal control consists all the
processes used by management to
achieve effective and efficient
operations, compliance with laws, etc.
It includes policies to:
safeguard assets
enhance accuracy and reliability of
accounting records
It is an essential part of risk management.

Principles of Internal Control

1.
2.
3.
4.

Establishment of responsibility.
Segregation of duties.
Documentation procedures.
Physical, mechanical and electronic
controls.
5. Independent internal verification.

Principles of Internal Control (contd)

1. Establishment of responsibility
Assignment of responsibility to specific
individuals.
Monitoring of compliance with procedures

2. Segregation of duties
Responsibility for related activities assigned to
different people
Separation of responsibility for recording and
physical custody of the asset

Principles of Internal Control (contd)

3. Documentation procedures
All documents generated by the business to be
pre-numbered
Documents to be initialled
Provides an audit trail for checking of
transactions

Principles of Internal Control (contd)

4. Physical, mechanical and electronic
controls
Use of safes and safety deposit boxes
Locked cabinets and warehouses
Alarms
Monitors and sensors
Passwords to computer systems and programs
Time clocks

Principles of Internal Control (contd)

5. Independent internal verification
Checking procedures to ensure segregation of
duties
Monitoring by supervisors
Verification by internal auditor
Rotation of duties

Internal Audit
An independent appraisal activity
established within an organisation as a
service to the organisation
It is a control that functions by examining
and evaluating the adequacy and
effectiveness of other controls

Internal Audit: Objective

To assists members of the organisation in
the effective discharge of their
responsibilities
To accomplish this objective, the internal
audit staff is expected to furnish the
organisation with analyses, appraisals,
recommendations, counsel and
information concerning the activities
reviewed.

Responsibilities
Encompassing the examination and
evaluation of the adequacy and
effectiveness of the organisations system
of internal control and the quality of
performance in carrying out assigned
responsibilities

Scopes
Reviewing the reliability and integrity of financial
and operating information and the means used
to identify, measure, classify and report such
information
Reviewing the systems established to ensure
compliance with those policies, plan,
procedures, laws and regulations that have a
significant impact on operations and reports, and
determining whether the organisation is in
compliance

Reviewing the means of safeguarding assets

as appropriate, verifying the existence of
such assets
Appraising the economy and efficiency with
which resources are employed
Reviewing operations and programs to ascertain
whether results are consistent with established
objectives and goals and whether the operations
or programs are being carried out as planned

Internal audit vs external audit

Internal

External

Auditor

Full-time employees of
an entity

Independent
practitioner

Employer

Companies,
CPA Firms
governmental unit, non
profit entities

Perform

Compliance &
operational audit

Financial audit

Responsible Senior management &

to
BOD

3rd parties
-investors

Licensing

Yes (CPA)

No