buy custom The Financial Statements of the Company essay

buy custom The Financial Statements of the Company essay An accounting record refers to the documentation and books kept for purposes of making financial statements and records kept for auditing purposes and financial review. The accounting records can be in the form of a flowchart which is a pictorial representation that shows the procedure followed within an organization. The flow chart follows a systematic way from the time the order is place to the time it is received. The first stage is the authorization of the purchase by the relevant person in the firm followed by placing an order for the purchase, which is, issuing the invoices. Sequential numbering of the invoices follows for ease of record keeping and for audit purposes. Then the approval i.e. initiating of signs is done to authenticate the invoices. Adherence to authority limits should be observed in order to be in line with company rules. The goods received notes should be checked for proper recording and matching against purchase orders. The fundamental accounting concepts refers to the basic rules and regulations thatshould be incorporated in the new computerized system include the following. It should show materiality. This refers to the importance of an amount, transaction or a discrepancy. Something is said to be material if its omission would affect the operations of the business in a huge way. Therefore, the system should be in apposition to detect material transaction from immaterial transaction. The other concept that should be incorporated in the software is that of consistency. This means that the firm has to be consistent in the application of the accounting principles and all the accounting standards without changing them regularly. For example the firm should use only one method of providing for depreciation such as the straight line method. The other concept that should be incorporated is that of the matching concept. It is a principle based on accrual and revenue recognition. The system should be in a position to record an accrual when it has been incurred rather when it is paid while the revenue should be recorded when it is earned rather when it is received. The other concept that should be incorporated is that of time period. This means that the system should record a transaction in the period in which it regards. Transaction of one accounting period should not be recorded in another financial period. The advantage of a computerized accounting system is that it is faster. It is faster to do data entry in a computer as compared to the manual process since it has inbuilt databases for suppliers and customers. A computerized system is effective in the automatic production of documents. The other advantage is that there is a high level of accuracy. Computerized system minimizes to a great extent the occurrence of errors since there is only one entry compared to the manual way where there may be two or three entries that increases chances of errors.. A computerized system also allows for compatibility. This means that different people within the same organization can share information stored in the system. A computerized system also leads to cost savings. The programs reduce staff time and it reduces audit costs since records are neatly kept. Disadvantages of a computerized system The systems are subject to risks such as hacking and fraud. This can lead to important and confidential information about the firm being leaked to unauthorized person which can affect a company. The systems are costly. It is expensive to purchase and install the systems in an organization. The systems require regular updating, the staff has to be trained to enable them use the systems and this adds to operating costs. The computer systems are difficult to understand and they require experts to use them. The computer systems depend on power and they suffer a great deal of failure in times of power blackout. The computer system can cause health problems to users. This is so where an individual has to use the system though out and it can bring complication. A business risk refers to the possibility of a loss to a firm, or a factor that may affect the operations negatively. The business risks that the firm may face in Vietman are due to economic conditions in Vietnam. This may be due to high cost of doing the business due to high interest rates, inflation, increase in spending power and high costs of paying wages. The firm may also be faced with political risks. This is due to political instability in Vietnam which will lead to low sales, destruction of the warehouses. The other risk the firm may face is change in legislations by the government, change of taxation policies, increased costs of licenses and these will lead to low profits and sales. The firm may also face internal risks which may stem from lack of expertise to operate the warehouses in Vietnam. The firm may also face financial challenges here it will not be in a position to finance all its operations. The firm may face the risk of running obsolete equipment which is outdate d and thus lack of market which will lead to massive losses. The key objectives of internal control over plant, property and equipment is to safeguard them from theft, misuse and accidents, to ensure maximum utilization of the assets through preventing wastages and unnecessary usage and thus encouraging efficient utilization, to ensure reliability and this is by ensuring that all cash transactions are in line with the companys objectives to prevent loss of money, the other objective is to ensure compliance with the relevant legislation, the other objective is t ensure operational efficiency of the assets. The control system required by kingsmead over office equipment, motor vehicles and property plant and equipment include completeness of all the transactions. This means that all records must be kept to avoid any omission. There should be adequate valuation of the assets. This means that depreciation should be provided for at the end of each accounting period. There should be ownership controls. This involves inspection of title deeds, log books, certificates of ownership and solicitors certificates. Corporate governance refers to the way an organization is controlled and operated. It refers to process where the shareholders and the suppliers of funds assure themselves of an efficient utilization of their resources, security of their funds and a return on their investment. It is usually spearheaded by the management of an organization which includes the board of directors of a company on behalf of the shareholders and this creates the agency theory. Companies participate in corporate governance because of the principle of equal treatment of all the shareholders, taking care of 3rd parties interest in the firm, the integrity of the management team and the disclosure of relevant information to the general public to enable them makes informed decisions. Corporate governance leads to the agency problem between the shareholders and the management of the company. This is where there is an internal act by one or more persons to miss-represent the financial statement of the company with intent of misleading and thus resulting to a fraud. The fraud can take the form of misappropriation of assets, alteration of records and documents, misappropriation of accounting polices, creative accounting, suppression of the effects of a transaction from the books and engaging in money laundering. Fraud within an organization can be detected by the implementation of adequate accounting and operation systems. In order to achieve efficient corporate governance, the company should have a board of directors appointed by the shareholders in an annual general meeting, the auditors should also be appointed competitively and the company should have a non executive committee which would be able to look in the affairs of the company in a more detached manner from the management and the main board. Test of control refersto tests which seek to provide audit evidence that the internal control procedures are applied as prescribed. Control procedure/activity Test of control Segregation of duties between the sales and receivables in the organization, between the dispatch and accounting departments. Making enquiries about the conduct of duties by the various departments, the Matching of the invoices with the local purchase orders and sales receivables, and their sequential referencing. This would involve taking a sample of the sales invoices and try to get evidence that the company made comparison of the details in the local purchase order and in the sales orders. Signing of the documents for authorization purposes. The goods dispatch note should be signed by the customer and another person. The review of the accounting accuracy of the invoices by a second and third person. The sales invoices should be reviewed to obtain evidence that they were reviewed by a second and third person. Documenting collection of cash. This would involve observing the process, asking questions about the process and reconcile the bank statements with the cash books. Obtaining credit approvals for the extension of credit days from 45 to 60 This would involve checking the credit policy of the company. It would involve selecting a sample of the transactions and checking the approval process Audit procedures refer to the different methods used by an auditor in obtaining the evidence necessary for making an opinion on the financial statements of the firm. The different types of audit tests that can be used by the auditor include the substantive tests and tests of control. The substantive tests that are used include are the analytical reviews which examine the financial statements of the company to verify whether they have been prepared following the required principles. The internal control tests check on the suitability of the companys internal control systems. The procedures may be carried out using audit software. Audit software is software used by the auditor to read on client file to provide information for the audit and to perform procedures carried out by the client program. They are generelarised software, specialized writers software, utility software and audit software. The generalized software is for general application and can be used on different types computers. The specialized softwarre is programs written to be used on a particular client file only. Kingsmead can use this software to record all the transactions involving all its major customers for ease of tracing and evaluation. The utility program is the software that is used by the firm to perform common data processing such as sorting and printing files. Kingsmead can use this software to classify its debtors according to their compliance to paying their debts, and also monitoring the percentages of discounts and provisions for bad and doubtful debts. These audit software can be used in calculation checks, completeness check, selecting items for audit test, detecting violation of system rules such as on credit limits, unreasonable checks such as on hours worked and the equivalent pay on those hours worked. There is also the embedded soft ware which is used by the auditor to examine transactions passing through the system by placing his own program with a set of programs used for processing allowing real time testing of data. We also have the test data/test facts which are compliance tests designed to test the performance of clients programmes. The different audit records that can give evidence of work done include working papers. Working papers are the documents for recording work done by the auditor while conducting his audit. They provide assurance that the audit was carried out following the required standards. The audit papers usually show how the work was planned, how the audit process was carried out, the level of supervision involved and that proper review was carried out. They also show that sufficient evidence was obtained to enable the auditor make an opinion. The audit papers have to be signed and dated by the relevant staff and any matters outstanding have to solved in the due course. The other records which can be kept by the auditor include the working files where we have the primary audit files and the secondary files used at the different stages of the audit. An audit report is the final product of the audit engagement which enables the auditor to express his opinion on the financial statements of the company. The following is a draft audit report of Kingsmead plc. Independent Auditors Report To the shareholders, Kingsmead plc Report on the financial statement We have audited the financial statement of Kingsmead plc which includes the balance sheet of the company as at 30.06.2011, and the income statement, statement of changes in equity and the cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Management responsibility for the financial statement. The management is responsible for the preparations of the financial statements and the fair presentation of these statements in accordance with the internationally standard of reporting and for such internal control as management determines necessary to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on those financial statements based on our audit. We conducted our audit in accordance with the international standards of auditing. These standards require that we comply with ethical requirements and plan and perform our audit to obtain reasonable assurance about whether the financial statements are free from material misstatements. As the audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements, the procedure selected depends on our judgment including the assessment of the risk of material misstatement of the statements, whether due to fraud or error. The audit was carried out on a test basis. The audit also involved evaluating the appropriateness of accounting policies used and the reasonableness of entities need as well as evaluating the presentation of the financial statements and the level of management. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion the financial statements of the company show the inapplicability of the going concern concept of the company as at 30.06.11, this is because of the financial difficulties the firm is going through as well as a threat of a take over. The company also has adverse gearing ratios meaning that it will not be able to pay its liabilities as and when they fall due. The companys share price dropped drastically and its an indication of poor management. Also the companys board chairman resigned and there was no replacement. The company has changed its operations and the future is uncertain. Therefore, the financial position show the inapplicability of the going concern concept and it is in the interest of the shareholders and creditors that we issue a qualified report, in accordance with the international auditing standards. Auditors signature. Date.. Auditors location.. Management letter of representation. A management letter is a letter written by the auditor to the management of the firm drawing the attention of the management to the shortcomings and weaknesses in the internal control of the organization. The letter is written after the evaluation of the internal control system but before the issue of the audit report. A draft management letter is as shown below; XYZ LTD POSTAL ADRESS 2643456 CHICAGO KINGSMEAD PLC, ADDRESS 4343434 LONDON. The company needs to evaluate its authorization procedures in order to avoid cases of fraud, the management should oversee the change of selling on credit to cash basis and for the goods sold on credit, the firm should institute measures to recover the debt. The internal control system regarding bad debts is not sufficient and there is no proper authority for declaring debts as bad. There should be regular rotations of staff managing the internal control of the company.If the recommendations are not implemented it will have an adverse effect on the financial statement of the company. The purpose of the management letter is to report to management about the accounting system and the related forms of control. It provides advice to the management on how to ensure reliability of the companys records. It enables the auditor to bring to the attention of management areas of weaknesses that might lead to material errors and fraud. It enables the auditor to communicate matters relating to internal control system that may have an impact on the future audit. The letter also provides the basis of planning subsequent audits through identification of risk areas. If the management is not willing to sign the letter, the auditor should consider discussing the issue with the management and if the management is still reluctant in signing the letter, the auditor should consider qualifying the report. Buy custom The Financial Statements of the Company essay