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A. The business organization, its stake holders and the external environment B. Business organization structure, functions and governance C. Accounting and reporting systems, controls and compliance
1. The role of accounting 2. Control, Security and Audit 3. Identifying and preventing fraud

The Role of Accounting

The finance and accounting function

Broadly, the role of the overall function is to:
raise money record and control money and related transactions provide key information to managers on financing and accounting matters

Finance
Sources of finance are available from:
the capital markets (long-term) money markets (short-term) international money and capital markets retained earnings bank loans and overdraft facilities working capital venture capital government grants and tax relief

Report to stakeholders Financial planning Financial control Financial decision making

Accounting
The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information (American Accounting Association) Aim to:
assist management in planning, controlling and decision making assist the business functions to achieve objectives assess functional and overall performance assess the performance of directors and managers enable compliance with various statutory requirements,

Basic function
Accounting involves:
capturing and recording numerical transactions (data) analyzing the transactions into a required format presenting the format to a user for appropriate information and action (information)

Detail and sophistication depends on:

Size Type of organization Structure Complexity

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The need for Accounts

Luca Pacioli Double-entry bookkeeping 1494 Dual aspect concept Businesses has to produce accounting records for its stakeholders

Users

Decision Maker
Share holders

Examples of decisions
Buy shares Hold shares Sell Shares Lend money Determine Interest rates Set Product Prices Buy or lease equipments Minimize tax payments

Forms of accounting
Three basic forms of accounting:
management accounting cost accounting financial accounting

Creditors

Plus bookkeeping

Managers

Qualities of good accounting information

Relevance: information should satisfy the needs of users. Comprehensibility: should be complete, easy to understand Reliability: independently verified Completeness: must show clear economic picture Objectivity: as objective as possible Timeliness: reasonable timely fashion Comparability: compare with previous periods

Accounting and finance structure

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Financial accounting
Transactions
Finance Director

Daybooks
Financial Accounting Team Management Accounting Team Treasury Team Tax Team

Ledgers Financial statements

Financial accounting is mainly a method of reporting the results and financial position of a business

Financial Controller
Routine Accounting Providing accounts reports for other departments Cashiers duties and cash control

Treasurer
Raising funds by borrowing (financing) Investing surplus funds on the money market or other investments markets Cash flow control Cash management Financing Foreign currency Tax

Management accounting

Management Accountant
Cost accounting Budget and budgetary control Financial management of projects

Management (or cost) accounting is a management information system which analyses data to provide information as a basis for managerial action. The concern of a management accountant is to present accounting information in the form most helpful to management.

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Accounting and Finance

Financial Accounting
Routine Accounting Providing accounts reports for other departments Cashiers duties and cash control

Management Accounting vs. Financial Accounting

Management Accounting Financial Accounting

Management Accounting
Cost accounting Budget and budgetary control CVP, Critical path, Project management Cost scheduling

Treasury Department
Financing (getting finance and managing) Cash flow control Foreign currency management Tax

Is concerned with information for the internal use of management. Emphasizes the future. Emphasizes relevance and flexibility of data. Emphasizes the segments of an organization rather than the organization as a whole. Is not governed by GAAP.

Is concerned with reports made to those outside the organization. Summarizes the financial consequences of past activities. Emphasizes precision and verifiability.

Summarizes data for the entire organization Must follow GAAP since the reports are made to outsiders and are audited. Is required for publicly-held companies and by lenders

Is not required by external regulatory bodies or by lenders.

Financial Management
Financial management is a separate discipline from both management accounting and financial accounting, although in a small organisation the three roles may be carried out by the same person. The process of managing the financial resources of an organisation, including accounting and financial reporting, budgeting, raising finance, dividend policy and risk management.

Roles of a financial manager

Should the firm borrow from a bank or raise funds by issuing shares? How much should be paid as a dividend? Should the firm spend money on new machinery? How much credit should be given to customers? How much discount should be given to customers who pay early?

Taxation
Tax mitigation Tax avoidance Tax evasion

Auditing
The financial reports must be audited annually by an independent auditor True and fair view of the financial statements of the company

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Unqualified reports
State whether the financial statements are properly drawn up in accordance with the
provisions of the Act so as to give a true and fair view of the companies state of affairs and results of operations Applicable approved accounting standards state whether the accounting and other records and registers required by the Act have been properly kept by the company

Qualified report
Sometimes auditors may disagree with the management on reporting issues In such cases, auditors prepare qualified report stating the matters which they disagree with the management

True and fair view and no material misstatement

Other departments and sections

The regulatory framework

The regulatory system

Companies are usually required to submit their accounts to a government regulated department, e.g. Companies house in the UK. Companies are accountable to the tax authorities in the country in which they are based Companies are required to retain their accounting records for a minimum period Directors are legally responsible for the creation of financial statements

The regulatory system

Company law Accounting concepts and individual judgment Accounting standards The European Union Other international influences Generally accepted accounting practice (GAAP)

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Company law
UK Companies Act 2006 or CA 2006 Must to prepare and publish accounts annually

Requirements for financial statements

Following accounting standards Following generally accepted best practice Having information of sufficient quality Having information of sufficient quantity Being free from material misstatement

Accounting concepts and individual judgment

Various accounting concepts Application of judgment is essential in some cases Valuation of buildings in times of rising property prices. Research and development. Is it right to treat this only as an expense? In a sense it is an investment to generate future revenue. Accounting for inflation.

UK Accounting standards
Accounting Standards Committee: (1970 and 1990), SSAPs Accounting Standards Board(ASB): issues standards 'concerned with principles rather than fine details'. Its standards are called Financial Reporting Standards (FRSs). Urgent Issues Task Force (UITF): tackle urgent matters not covered by existing standards

Financial Reporting Review Panel (FRRP): concerned with the examination and questioning of departures from accounting standards by large companies. As per CA 2006, companies must publish notes to accounts stating that accounts are prepared in accordance with the standards

The EU
Since the United Kingdom became a member of the European Union (EU) it has been obliged to comply with legal requirements decided on by the EU. It does this by enacting UK laws to implement EU directives.

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Accounting Standards

International Accounting Standards Committee Foundation (IASCF): Appoint, oversee and raise funds for standard setting procedure International Accounting Standards Board (IASB): Sets the technical agenda, approves standards, exposure drafts and interpretations Standards Advisory Council (SAC): Advises IASB on their agenda and impact of proposed standards to the practical users International Financial Reporting Interpretations Committee (IFRIC): Assists IASB to improve standards, issues interpretations where conflicts in standards occur

International Accounting Standard Board (IASB)

IASB was set up in 1973 to work for the improvement and harmonization of financial reporting. The objectives of the IASB are:
To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions. To promote the use and rigorous application of those standards. To bring about convergence of national accounting standards and International Accounting Standards to high quality solutions.

Use of IAS
As national requirements, often after a national process As the basis for all or some national requirements As an international benchmark for those countries which develop their own requirements By regulatory authorities for domestic and foreign companies By companies themselves

Generally Accepted Accounting Practice (GAAP)

GAAP is a set of rules governing accounting. The rules may derive from:
Company law (mainly CA 2006) Accounting standards International accounting standards

True and fair view

True and fair view is not defined in company law or accounting standards. For practical purposes, it can be taken to mean accurate and not misleading. Company law requires that:
The statement of financial position must give a true and fair view of the state of affairs of the company as at the end of the financial year. The statement of comprehensive income (income statement) must give a true and fair view of the profit or loss of the company for the financial year.

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Failure to comply with regulations can have serious consequences:

Failure to keep accounting records is a criminal offence and could lead to prosecution Failure to present a true and fair view is a criminal offence Inaccurate tax records could lead to tax evasion Poor accounting could lead to a qualified audit report which could result in bad reputation and may find harder to borrow money Poor accounting could lead to business failure

Internal and External Financial Information

External reports:
These are prepared for external stakeholders These reports are usually based on historical cost accounting concept Those include, income statement, balance sheet, statement of cash flow

Accounting reports, called financial statements, provide summarized information to the owner.

Financial Statements
Statement of comprehensive incomeA summary of the revenue and expenses for a specific period of time. Statement of changes in owners equityA summary of the changes in the owners equity that have occurred during a specific period of time. Statement of financial positionA list of the assets, liabilities, and owners equity as of a specific date. Statement of cash flowsA summary of the cash receipts and disbursements for a specific period of time.

Income statement
Record of income and expenditure over a given period of time Measures the financial performance of the business (Profit/Loss) Managers may require quarterly or monthly reports Helps to determine the past financial performance, predict future performance, and assess the capability of generating future cash flows through reporting of the income and expenses Profitability of the company

Statement of financial position

Lists of all the assets and liabilities of the company at a particular date Assets: resources owned by business Liabilities: resourced owed by business Assets = Capital + Liabilities Shows the financial position of the company Liquidity position

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Statement of Cash flow

Sources of cash generated and how it is spent during a particular period Statement of cash flow requires information from the SOFP and SOCI for its preparation Profit is not equal to cash They show the companys ability to produce cash and the needs which utilizes those cash flows Helps to monitor future movements in cash

Statement of Cash Flows

Cash Flows from Operating ActivitiesThis section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing ActivitiesThis section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing ActivitiesThis section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

Internal reports
Mostly prepared for managers to help them run the business effectively and make the decisions on daily basis Common reports are:
Cost schedules Budgets Variances

Cost schedules
Future cost Helpful for pricing products Important for cost control purposes Cost schedules can be prepared for wages and salaries, departmental costs, cost of sales, selling expenses and administrative costs

Budgets
Important part of control process Budgets could be prepared for functional areas, departments and business as a whole Purchasing, cash, sales and mater budgets could be prepared
i. ii. iii. iv. v.

Steps in Budgeting process

Establish the aims and objectives of the business Set Production, Marketing, Financial, and Master budgets. Measuring actual outcomes Analysis of variances between actual and budgeted performance Reviewing outcomes in order to plan for the next period Agreement on action to be taken on significant variances

vi.

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Variance reports
One reason for preparing budgets is to identify variances The actual and cost schedules could be compared with the budgets Variances could be adverse or favorable Labor variances, material variances

Accounting and other functions

Control over business organization Purchasing Sales and marketing HR General Administration Finance

Policies
Authorization policies Formal vs. informal communication depending on size of the organization Policy manual Effective systems and procedures should ensure that:
Relationships with customers are effectively managed Relationships with suppliers are effectively managed Office functions interrelate properly and are not duplicated

Weaknesses in office procedures may be signaled by:

Arguments over job functions Disputes with customers/suppliers Missing paperwork Goods not delivered

Sales
Retail org Shop floor Manufacturing organisation there will normally be a sales and marketing function whose responsibility is to market the organization's products and take orders from customers. Checking credit limits, making sure goods are delivered, dispatch, aiding with invoicing etc..

Purchases
Initiated by either purchasing or store department Checking and updating inventory, making purchase requisition, finding best suppliers, and assist with accounts department

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Control over transactions

In particular this means that management must have control over the following areas:
Sales on credit made to new customers Purchases of goods or non-current assets and payments for expenses Payroll

Financial control procedures

Financial control procedures exist specifically to ensure that:
Financial transactions are properly carried out The assets of the business are safeguarded Accurate and timely management information is produced

Some financial control procedures

Cheques over a certain amount to need two signatories Authorization limits for purchase orders Authorization for petty cash and expenses claims Effective credit control procedures Computer security procedures and access levels

Weaknesses in financial systems

Cash or cheques going missing Excessive bad or doubtful debts Customers not paying within credit terms Suppliers not being paid on time Unauthorized purchases being made Failure to produce accounts or other reports at the specified time

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