Professional Documents
Culture Documents
Student Name
Date
Contents
Summary.................................................................................................................... 3
Task 1......................................................................................................................... 4
Understand the importance of keeping effective accounting systems within a
Business..................................................................................................................... 4
Purpose of financial reports..................................................................................... 4
Prospective Investors.............................................................................................. 4
Employees............................................................................................................... 4
Customers............................................................................................................... 5
Suppliers................................................................................................................. 5
Government............................................................................................................ 5
Suitability of current reports with accounting systems.............................................................5
Task 2......................................................................................................................... 6
Be able to analyze the management control systems of a business..........................6
Explain the key purposes of the financial statements contained within an annual
report......................................................................................................................... 7
When compiling financial statements, certain core accounting concepts must be
adhered to.................................................................................................................. 8
The Accruals concept.............................................................................................. 8
Materiality............................................................................................................... 8
Prudence................................................................................................................. 9
Evaluate the current system at BV Limited focusing on identifying the weakness in
the current system..................................................................................................... 9
System evaluation for weaknesses identification..................................................10
Step 1....................................................................................................................... 11
Explain the benefits to Bluebird Enterprises Co of establishing an audit committee11
Financial statement Fraud detection.....................................................................11
Asset Misappropriation.......................................................................................... 11
Fraud detection by Audit Committee................................................................................11
Stale Items in Reconciliations................................................................................12
Missing Documents............................................................................................... 12
General Ledger Out-of-Balance............................................................................. 12
Employee Expense Accounts.................................................................................12
Discuss the advantages and disadvantages of appointing:......................................12
Anthony Goldfinch.............................................................................................. 12
2
(c) Discuss the importance of the Cadbury report in light of the CEOs comments
and the need for good corporate governance..........................................................14
Importance of corporate governance....................................................................14
Step 2....................................................................................................................... 16
Make recommendations as to how to control and prevent the risk of fraud.............16
Recommendations to remove weaknesses and risk of fraud....................................................16
Training needs....................................................................................................... 16
Changes in organizational culture.........................................................................16
Latest accounting software................................................................................... 17
Higher level of job security....................................................................................17
Possible improvements in sustainability................................................................17
Evaluate the role of the auditor in the prevention of fraud......................................18
Integrity................................................................................................................. 18
Objectivity............................................................................................................. 18
Professional competence and due care.................................................................18
Confidentiality....................................................................................................... 18
Actual or possible professional ethics breaches....................................................19
Evaluation of accounting systems against sustainability..........................................19
Conclusion................................................................................................................ 20
References................................................................................................................ 22
Summary
The report aims at discussing the importance of financial statements and their use to different
stakeholders of a company. Financial statements are books of accounts comprising on set of five
financial statements which present the performance and position of a business. The report has
also discussed the importance of internal control of the company in detection and prevention of
fraud risk. Auditor has a duty to check books of accounts and give his opinion whether the books
represent compliance with financial reporting frameworks of not. The report has also made
recommendations related to weaknesses in internal control system of the company which may
lead to fraud and misappropriation of business assets.
Task 1
Understand the importance of keeping effective
accounting systems within a Business
Purpose of financial reports
The purpose of financial reports is to facilitate stakeholders including partners, shareholders,
suppliers and employees to understand the situation of the business. It makes clear the going
concern ability of the business (Abbott et al., 2011). It also helps in presenting financial position
of the business so that the future investors and suppliers may think twice while making any
investment or contract with the business.
The basic objective of financial statements is to provide an insight about the financial
performance and position of a company to its stakeholders. The stakeholders of a company have
direct interest in its functioning due to their benefits associated with successful functioning of the
organization (Abdel-Kader and Luther, 2008). The major stakeholders of an organization who
have interest in financial position of a business are its partners, shareholders, customers,
employees and investors. Different stakeholders of BV Ltd who gets impacted by favourable or
adverse financial reports of company are as follows
Prospective Investors
Investors required audited financial statements of companies in order to evaluate whether it
would be feasible to invest in a company or not. Investors invest with a purpose to get interest,
profit or dividend in return. Investors analyse the financial position of a business with the help of
financial reports in order to forecast the future dividend a company can offer. The risk
assessment related to investment in a company is also associated with prospective investment of
money (Akella, 2007). In case the company shows high rate of fluctuating profits, it indicates a
risk related to loss in business operations. Hence investors can conclude that investing in
company can cause them loss in long run.
Employees
Employees are the foundation of BV Ltd hire. This gathering of partners can represent the
moment of truth the organization through its endeavours. It is the workforce that facilitate the
customers at BV Ltd consequently. They are prepared to manage the clients in the best
5
conceivable way and give them benefit that is unmatched by whatever other in the business
(Baatwah, salleh and Ahmad, 2009). They are appreciated and motivated by fulfilling an
exclusive requirement of workplace that lives up to their desires and concerns.
Customers
In the rent a car business, it is the clients who are the most vital partner for any organization on
the grounds that they are the fundamental wellspring of incomes for the organization (Bhm,
Bollen and Hassink, 2016). The organization makes each move to keep the clients fulfilled
through its item and administration offerings.
Suppliers
Without suppliers there is no business. Suppliers are likewise as critical for BV Ltd as its Plan A
that can't be effective unless the organization avail support of its suppliers. For the rent a car
company its are the wellspring of generating incomes. In this way, the administration are
resolved to give the best conceivable offices to its suppliers keeping in mind the end goal to keep
them in place (Chantiri, 2003). The organization approach for suppliers expresses that when
affirmed by an official of the Company, an endowment of sensible quality may be made to a
decent supplier. On the other hand, the blessing ought not to have been requested, nor ought to a
representative acknowledge a reward. Suppliers interests are dependent on positive cash flows
of company, hence they have concerns regarding financial reports of company
Government
Government get taxes from high revenue generating companies. The taxes are levied on revenues
generated by companies after deducting admissible business expenses. Financial statements need
to be fair as per accounting principles (Hellman, 1993). Government officials have interest in
financial statements of a company in order to check out whether tax charged is in accordance
with the tax regulations and income shown is actually earned or not. Government has interest in
keeping a track record of economic progress made by businesses.
Suitability of current reports with accounting systems
BV Ltd has currently established modern financial reporting systems which are compatible with
accounting policies and principles (Hersh and Johnson, 1997). The financial reporting system of
company are based on local accounting frameworks and standards. The company has installed
ERP systems for resource allocation and accounting software for accurate transaction recording.
The financial reporting system of the company comprises of following financial reports
Despite of extensive financial reporting framework, the current accounting system of BV Ltd is
very compatible but still it lacks proper formats as required by general purpose framework of
accounting (Hoitash and Hoitash, 2008). There is a need to follow the format of financial
statements in order to present the financial position, financial performance, changes in equity of
business after partnership and cash flows of company in a logical and clear way. The company
requires internal audit department as well in order to regulate the compliance of accounting
principles and policies.
Task 2
Be able to analyze the management control systems of a
business
Internal controls play a significant role in establishing fair accounting systems and integrity of
management. It helps in avoiding any kind of frauds or embezzlement in books of accounts. In
partnership all partners are concerned with management control and fairness of books of
accounts. In case internal controls are not sufficient to make it sure that transactions are properly
verified and authenticated by higher authority, it may lead to any kind of fraud.
Internal controls are required to comply with accounting principles and policies in order to
present fair financial statements to win trust of stakeholders and other related parties. Internal
controls established by management help in detection of any kind of error or fraud committed by
personnel, customers, managers and suppliers (Keum, 2015). Internal controls helps in putting
strict checks on performance of companies and set laws and accounting frameworks in order to
avoid any kind of embezzlement or theft. The basic objective of establishment of internal
7
controls is to avoid any kind of shop lifting in case of retail stores, embezzlement of cash in case
of companies and wrong posting of expenses in irrelevant heads.
In some cases employees dont intend to override internal controls for fraud purpose instead
they do it by mistake. Internal controls help in highlighting any kind of wrong postings which
can impact financial performance and position presentation of a company (Laufer, 2011).
Internal controls enhances the immunity power of business in order to cope up any kind of theft,
embezzlement or misappropriation of assets. The fraud disaster is commonly prevalent in
partnership based businesses due to multiple authority channels. Internal controls assure it
partners on behalf of management that practices conducted by businesses are fair and
noncompliance of laws has been avoided properly.
recording. The budgetary reporting arrangement of the organization contains taking after
financial reports
Regardless of broad financial reporting structure, the present bookkeeping arrangement of start
to finish vehicle contract is extremely perfect yet at the same time it needs legitimate
configurations as required by universally useful system of bookkeeping (O'Leary, 2009). There is
a need to take after the organization of financial statements so as to present the budgetary
position, financial execution, changes in value of business after association and trade streams of
organization out a coherent and clear way. The organization requires inside review office also
with a specific end goal to control the consistence of bookkeeping standards and strategies.
Materiality
Materiality concept refers that financial information is material in case it influences the financial
performance of a business. In case omission of a financial information influences the
9
Prudence
Prudence is an accounting concept which states that a business should not overstate its revenue
and under state its expenses. Several businesses try to show huge revenues in order to attract
customers and investors. In case revenues are overly stated in financial statements, it can be
considered that financial statements are not fairly presented (Unnikrishnan, 2009). In case
expenses or liabilities are understated, it may present an overly favorable position of company.
Accounting principles require companies to show their books of accounts and financial
statements in a fair and transparent way.
Prudence concept require companies to record revenues in case revenue transactions or assets of
a company are certain and the expense of liability should be recorded even if it is probable. This
accounting principle require companies owners to record revenue in case it is very certain and
delay it till the revenue is not duly confirmed. The Prudence concept is often misunderstood with
the concept that the revenues should be understated and expenses or liabilities should be
overstated. This concept ruins the positions of a business and should be avoided in order to
should proper position of a business.
10
The accounting software adopted by company for maintenance of books of accounts are
no duly updated
ERP systems are not properly implemented which results in miss allocation of resources
Management is not independent in making its major decisions and confidential
The potential area of fraud located in BV ltd is employee and business expenses. Employee
expenses have increased to a great extent which have resulted in a decrease in net profit. Due to
lack of purpose able justification of business expenses especially use of petty cash, the
employees are probably involved in embezzlement of cash by different means.
Other areas including cash ledge and bank reconciliation does not show major risk of fraud due
to multiple steps of authentication and verification at different stages. The potential for risk is
highest in employee expenses (Akella, 2007). There are several indicators that employees may be
using money for their personal use and showing it for the use of business expenses. Internal and
external auditors of the company are required to work on this area in order to find out possible
potential for fraud related to embezzlement of fraud.
11
Step 1
Explain the benefits to Bluebird Enterprises Co of
establishing an audit committee
The purpose of an audit committee is to find out the weakness in internal control of a company
and to detect fraud in its books of account. Such as
Asset Misappropriation
The asset misappropriation or cash embezzlement happens mainly when workers have
opportunity to commit fraud (Hughes, 2004). The fraudulent activities are committed by workers
when they have following indicators
12
2016). Missing checks may indicate that the payee is a fictitious person and the related amount
has retained by management staff or accountant.
Missing Documents
A clear red flag for fraud is an indicator of missing documents. In case the management has no
valid justification for the lost documents, it may indicate that management is involved in a
fraudulent conduct.
13
limited scope. In case the director had agreed to work on percentage in profit basis, it would have
resulted in a decrease in company operations.
The company has appointed a non-executive director from a banking operations which will
impact the quality of services provided by the new director. The director has an experience and
expertise related to banking institutions and related accounting and auditing frameworks
(Hoitash and Hoitash, 2008). Retail companies operate on different terms for that reason the
audit operations needs to vary according to nature and size of company. The appointment of
Anthony Goldfinch may not meet the target set by the CEO of Bluebird enterprise for
improvement in internal control and compliance of company operations with international
framework of accounting principles.
Jacob Mallard has been working as non-executive director at a small retail company which is not
competitor of Bluebird enterprise. Due to hiring director from a company which is not
competitor of company, Bluebird enterprise will not face any kind of noncompliance of audit
requirements as per code of ethics issued by international federation of auditors. The company
will get exposure related to internal audit requirements by appointing this new non-executive
director due to his wide experience in a retail company. The company will be able to make
compliance with auditing and accounting requirements by this appointment (Hoitash and
Hoitash, 2008).
The newly formed audit committee will help in making employees accountable for their acts and
will set a check on internal control in order to detect and prevent fraud. On the other hand the
newly appointed director is younger brother of CEO due to which it has close association with
higher management. It will impair the independence of internal audit committee. The audit
committee should not have influence of higher management or CEO of company in order to
work in an independent way. In case of any kind of influence of related party, the integrity and
objectivity of audit committee will be impaired. The brother of CEO of Bluebird enterprise is a
related party of the company which can impair the decision making process of company. This
way the company will not be able to meet the target to achieve the compliance with auditing and
corporate governance provisions.
14
Corporate governance acknowledges that the stakeholders in the company must be recognized
in all areas of society, the market, legality, and their contracts. The stakeholders are important
members of the corporation that dont hold any shares (Murcia and Borba, 2007). Stakeholders
include people such as investors, creditors, customers, suppliers, and employees.
15
As a corporation, the business should not only respect shareholders and their rights, but help
the shareholders when it comes to exercising their rights. The best way this is done is by
allowing and encouraging shareholders to participate in the activities in the company such as
meetings (Murcia and Borba, 2007).
The board of the directors are those that stand at the head of a corporation. The responsibilities
of the board are diverse and it requires people needing both skill and knowledge to evaluate
employee performance. In addition to this, the corporate governance helps to make sure that
the board has the level of commitment and the size that it needs in order to properly run the
business.
Ethical Behavior
Ethics and integrity are also key principles of corporate governance. The integrity of anyone
placed in corporate office or in the board should have a high level of integrity (O'Leary, 2009).
They must also follow a code of conduct and exhibit ethical behavior during the decision
making process of the business.
Transparency
The final principle of corporate governance is the concept of disclosure or transparency. This is
the idea that the corporation should always let it be known what the responsibilities and duties
are of those that work for the corporation as well as who is management in order to keep
stakeholders accountable. Another aspect of transparency is disclosing material related to the
corporation that should be given out in a way that promises anyone who is invested in the
company can have clear access to information.
A companys corporate governance sets the stage for how it is run, as well as what the roles
and duties of those who work in the corporation may be. When creating a business plan, it
16
would be wise to consider how corporate governance will be implemented into the business
model (O'Leary, 2009). A company with a poor business plan is essentially doomed to fail.
Step 2
Make recommendations as to how to control and prevent
the risk of fraud.
Recommendations to remove weaknesses and risk of fraud
In order to remove weaknesses and lacking in internal control of Swandive Co needs to re design
its internal control structure by devising new hierarchy of management staff, establishing further
controls and installation of new software (Murcia and Borba, 2007). Internal control has to be
strict and based on closed supervision structure in order to avoid any kind of fraud or errors by
employees. The major changes which should be made by management of Swandive Co in order
to overcome weaknesses related to internal controls should be as follows
Training needs
The management staff should be trained by employing experts. It may help in improving their
working skills by conducting different training sessions. The training sessions should create
awareness related to correct use of accounting systems in order to avoid any kind of errors in
posting of transactions or maintenance of proper books of accounts. Training sessions should be
continued in long term for improvement in learning regime of workers. It helps in updating
working practices by upgrading worker skills time to time through training sessions and seminars
(Rotberg, 2014). Workers may get insight related to management processes and internal controls
by the help of external experts
17
The management should design safer and more environmentally friendly services. It
should rely on eco-design expertise and companys competence on restricted substances
18
It should ensure social compliance throughout companys supply chain. It has to ensure
that companys services are made under acceptable environmental, social and working
conditions
Integrity
The auditor follows the integrity principle which require management to be straightforward and
honest about its policies. In case double standards are adopted by management it may result in
poor management practices which are influenced by biased attitude and favour based behaviour
of management (Walton, 2003). It may result in low morale among workers and impact the
reputation of business. Auditors will get assurance that Swandive Co has maintained
management integrity to some extent but the honesty of management is still under consideration
due to weak internal controls maintained
Objectivity
The undue influence of partners on management staff impair the independence and results in
biased professional practices. The objectivity of management has become defective due to
trespass of verification and authentication rules devised for fair accounting practices.
Confidentiality
It required the secrecy of business relationship in order to avoid any kind of breach or problem in
a business relationship. Due to weak controls and unprofessional business activities, the secret
business information is not kept confidential at company which leads to wrong business practices
19
(Akella, 2007). The partners of the Swandive Co have been using business information for
personal motives which has breached confidentiality requirement of ethical principles.
20
promise of timely service is also not fulfilled and customers are also overcharged which is
impairing the spirit of sustainability principles adopted by the company.
Conclusion
The purpose of financial reports is to facilitate stakeholders including partners, shareholders,
suppliers and employees to understand the situation of the business. It makes clear the going
concern ability of the business. It also helps in presenting financial position of the business so
that the future investors and suppliers may think twice while making any investment or contract
with the business.
BV Ltd has currently established modern financial reporting systems which are compatible with
accounting policies and principles. The financial reporting system of company are based on local
accounting frameworks and standards. The company has installed ERP systems for resource
allocation and accounting software for accurate transaction recording. Internal controls play a
significant role in establishing fair accounting systems and integrity of management. It helps in
avoiding any kind of frauds or embezzlement in books of accounts (Hellman, 1993). In
partnership all partners are concerned with management control and fairness of books of
accounts. In case internal controls are not sufficient to make it sure that transactions are properly
verified and authenticated by higher authority, it may lead to any kind of fraud.
Internal controls help in highlighting any kind of wrong postings which can impact financial
performance and position presentation of a company. Internal controls enhances the immunity
power of business in order to cope up any kind of theft, embezzlement or misappropriation of
assets. The potential area of fraud located in BV ltd vehicle is employee and business expenses.
Employee expenses have increased to a great extent which have resulted in a decrease in net
profit. Due to lack of purpose able justification of business expenses especially use of petty cash,
the employees are probably involved in embezzlement of cash by different means.
Blue Bird enterprises has chosen has chosen Anthony Goldfinch as non-executive director as he
has experience of years for being non-executive operations. The experience of this new director
will help the company to implement the checks and controls by internal audit committee
appropriately and in long run. Anthony Goldfinch has agreed to work on fixed fee it will help the
company to add to the expenses on a limited scope. In case the director had agreed to work on
21
percentage in profit basis, it would have resulted in a decrease in company operations. Jacob
Mallard is younger brother of CEO due to which it has close association with higher
management. It will impair the independence of internal audit committee. The audit committee
should not have influence of higher management or CEO of company in order to work in an
independent way.
The Cadbury report has put light on several issues which has detected potential of fraud and
weaknesses in internal control of company. The report has represented the lacking in corporate
governance of the company and has made recommendations related to implementation of
sound corporate governance framework (Hersh and Johnson, 1997). A good corporate
governance set up is required in order to keep the operations of Bluebird fair and transparent. It
helps in proper implementations of code of conduct for employees to keep the operations of
company fair and productive in order to achieve the corporate goals.
In order to remove weaknesses and lacking in internal control of Swandive Co needs to re design
its internal control structure by devising new hierarchy of management staff, establishing further
controls and installation of new software. Internal control has to be strict and based on closed
supervision structure in order to avoid any kind of fraud or errors by employees. The
management staff should be trained by employing experts. It may help in improving their
working skills by conducting different training sessions. The training sessions should create
awareness related to correct use of accounting systems in order to avoid any kind of errors in
posting of transactions or maintenance of proper books of accounts.
The accounting system of Swandive Co should be revised and latest accounting software should
be used in order to ensure that transactions in books of accounts are not misleading or based on
fictitious entries. Swandive Co should provide higher level of job security in order to avoid
resentments and frictions among workers. Staff members should be provided an opportunity to
take part in decision making process. It will help in increasing their motivation level. The undue
impact of accomplices on administration staff disable the autonomy and results in one-sided
proficient practices. The objectivity of administration has gotten to be imperfect because of
trespass of check and validation rules conceived for purpose able bookkeeping rehearses. The
respectability standard oblige administration to be clear and legitimate about its strategies.
22
References
Abbott, L., Parker, S., Peters, G. and Raghunandan, K. (2011). The Effect of Audit Committee
Characteristics and Non-Audit Fees on Audit Fees. SSRN Electronic Journal.
Abdel-Kader, M. and Luther, R. (2008). The impact of firm characteristics on management
accounting practices: A UK-based empirical analysis. The British Accounting Review, 40(1),
pp.2-27.
Akella, D. (2007). Learning Organizations: Managerial Control Systems?. Global Business
Review, 8(1), pp.13-28.
Baatwah, S., salleh, z. and Ahmad, N. (2009). Audit Committee Financial Expertise and
Financial Reporting Timeliness: Does Audit Committee Chair Enhance the Quality?. SSRN
Electronic Journal.
Bhm, F., Bollen, L. and Hassink, H. (2016). Audit Committee Charter Scope: Determinants and
Effects on Audit Committee Effort. Int. J. Audit., p.n/a-n/a.
Chantiri, R. (2003). A Comparative Analysis of Regulatory Strategies in Accounting and their
Impact on Corporate Compliance. European Accounting Review, 12(2), pp.386-390.
Hellman, N. (1993). A comparative analysis of the impact of accounting differences on profits
and return on equity. European Accounting Review, 2(3), pp.495-530.
Hersh, M. and Johnson, M. (1997). A study of advanced control systems in the work place.
Control Engineering Practice, 5(6), pp.771-778.
Hoitash, U. and Hoitash, R. (2008). Conflicting Objectives within the Board: Evidence from
Overlapping Audit and Compensation Committee Members. Group Decision and Negotiation,
18(1), pp.57-73.
Keum, D. (2015). "Is Good Governance Always Good? Innovation, Governance, and
Performance Feedback". Academy of Management Proceedings, 2015(1), pp.11802-11802.
Laufer, D. (2011). Small Business Entrepreneurs: A Focus on Fraud Risk and Prevention.
American Journal of Economics and Business Administration, 3(2), pp.401-404.
23
Laufer, D. (2011). Small Business Entrepreneurs: A Focus on Fraud Risk and Prevention.
American Journal of Economics and Business Administration, 3(2), pp.401-404.
Maqsood, T. (2011). Managing Risk in Projects20111D. Hillson. Managing Risk in Projects .
Farnham: Gower 2009. 102 pp. Int J Managing Projects in Bus, 4(1), pp.179-180.
Murcia, F. and Borba, J. (2007). Framework for Detecting Risk of Financial Statement Fraud:
Mapping the Fraudulent Environment. Brazilian Business Review, 4(3), pp.162-177.
O'Leary, C. (2009). An Empirical Analysis of the Positive Impact of Ethics Teaching on
Accounting Students. Accounting Education, 18(4-5), pp.505-520.
Rotberg, R. (2014). Good Governance Means Performance and Results. Governance, 27(3),
pp.511-518.
Samaha, K., Khlif, H. and Hussainey, K. (2015). The impact of board and audit committee
characteristics on voluntary disclosure: A meta-analysis. Journal of International Accounting,
Auditing and Taxation, 24, pp.13-28.
Sultana, N. (2015). Audit Committee Characteristics and Accounting Conservatism.
International Journal of Auditing, 19(2), pp.88-102.
Unnikrishnan, P. (2009). Managing Risk, Ensuring Privacy and Preventing Fraud - Risk
Management in a Computerized Accounting System. SSRN Electronic Journal.
Walton, P. (2003). A Comparative Analysis of Regulatory Strategies in Accounting and Their
Impact on Corporate Compliance. The International Journal of Accounting, 38(1), pp.112-115.
24