Table of Contents
Financial reporting is a communication based on financial records of a given organization. Financial reporting aims at giving a clear view of the users of accounting information on how the operation of activities takes place. Some of these users include the owners of the business, shareholders, creditors, auditors as well the legal authority. Examples of the financial records include the income statement, equity reports and the balance sheets of other documents. Purpose of the study is giving a wider understanding of the importance of keeping active systems of accounting for the companies. In addition, this study aims at elaborating the factors that influence the accounting systems and possible control systems that can be used in an organization.
Singleton, Singleton, Bologna, and Lindquist (2006) assert that the accounting records refer to all the documents necessary for the preparation of financial statements. The examples of accounting records are journals, ledgers, and cashbooks. According to Demski (2008), the primary purpose of such documents is the recording of the assets and liabilities. Another goal of the accounting records is facilitating the financial transactions of a company during the audit. Different accounting records have different uses. The ledgers, for instance, are useful for the corporations such as Tesco in the preparation of the trial balance. The purpose of trial balance is checking the accuracy of the book of accounts. It is mandatory for all organizations to maintain the ledgers. In addition, the ledgers books in the organizations such as Tesco play a fundamental role in the preparation of the final financial statements and accounts.
The books of the original entry in similar to Tesco corporations are the accounting records of a great significance. They are financial records, in which transactions are initially recorded. The examples of the prime entry books include the purchase return books, sales daybook, purchase daybook, sales return daybook, cashbook, as well as the general journal. The books of original entry help in reducing the bulkiness in the final accounts and financial statements.
Accounting records are of much significance for the efficient management and planning for the progress of the organizations (Dransfield & Coles 2001). For instance, the accounting records help in comparing the organization’s financial performance of different periods during the year. Through such comparison, an organization can understand the sectors that are generating much revenue. Moreover, through analyzing the accounting records, an organization can be able to forecast the future income and expenses, as well as the losses, hence, making the necessary steps aimed at improving the performance.
The accounting records are also needed in similar to Tesco organizations since they are helpful in detecting the fraud. In the case of any unlawful financial transactions, the accounting records can be presented in the court of law as the evidence. As the similar to Tesco organization grows, its transactions and expansion are difficult to remember; hence, there is a need for the financial records.
The accounting records employ various concepts of accounting in recording the financial transactions. These concepts are important in the preparation of the final financial statements. They help in ensuring that there is consistency, as well as accuracy, in the preparation of the accounts. Some of the accounting concepts include the accrual concept, going concern, consistency concept, prudence concept, and business entity concept (Albrecht 2008). The accrual concepts involve recording of the non-cash dealings to be reflected in the financial statements of a given time. The payments for these transactions take place in a different fiscal period.
The going concern occurs when the accounting records are prepared on the assumption that the authority in place will remain in operation in the anticipatable future. The prudence concept means that the accounting records contain the actual information. The business entity concepts entail that the owners of the company and the organization itself are treated as the two separate entities. It implies that all profits or losses that accrue to the organization are charged with the organization. The consistency concept means that, if the Company decides to use a given concept in one period, the same concept must be used throughout the specified period. Another concept is the realization. The realization concept means that the organization’s revenue is recognized after they are earned.
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The Tesco management considers various factors before deciding on the appropriate accounting system. The factors considered include the complexity of the Tesco business process. Since Tesco Company is large and has many branches in different countries, the management chooses to use the computerized accounting systems. Secondly, the management puts in consideration the cost of the accounting system. The primary aim of this evaluation is to enable the business acquire an economical, efficient, and effective system. Another factor considered by the management of Tesco is the ease of the data access via the accounting system. The system acquired must be able to ensure that there is maximum security of the organization’s data in order to avoid the risk of fraud. Before the Tesco management obtains an accounting system, it must also consider its flexibility. It, therefore, means that the system purchased does not resist the change especially in technology. Other factors that influence the accounting system acquired include the maintenance cost, as well as the implementation and consultation costs (Bhattacharyya 2006).
According to Jolly (2003), the business risk is the possibility of uncertainty in the flow of cash of a given enterprise in the future. The operations, as well as the environment, in which a company operates, cause the business risks. For instance, when Tesco Company diversifies its operations by opening the new branches, its risks also increase. Since Tesco has a long history of a stable cash flow, it requires less compensation for the business risk than the companies with unstable cash flow. The risks in an organization occur due to various reasons (Cumming 2010). First is the operation risk. These risks arise when the company fails to comply with the law or lacks prudent ethical principles and contractual obligations. During the diversification, Tesco may face the compliance risk. These risks occur in an organization when some of its operation or products sold are unclear. Through the compliance risks, Tesco Company can easily be fined by the court of law for failing to abide by the rules. Third is the liquidity risk. The liquidity risks arise when Tesco Company incurs the losses due to the failure to understand the changes in the market. These risks, in addition, occur when the organization fails to manage the changes in its source of funds.
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Tesco Company uses the control system in its corporate governance. The corporate governance means a system used to control and manage the businesses. In this particular case, the shareholders have the responsibility of appointing the external auditors and directors (Calder 2008). In addition, it is the duty of the shareholders to evaluate the governance of the company in order to detect and report any possible fraud. The corporate governance ensures that there is a good relationship between the shareholders and the management, as well as all stakeholders.
The corporate governance further provides the business structure that facilitates the formation of the organizations’ goals and helps in achieving them by using the corporate governance. The provision of the organizations’ leadership is the primary duty of the directors. The director is also responsible for setting the aims of an organization, as well as giving the reports to the shareholders on the progress of the business activities. The corporate governance, therefore, plays a primary role in the prevention of the fraud in the similar to Tesco organizations. The detection of fraud will be possible when the outcome does not meet the expected results. In addition, through a good relationship between all the segments of the organization, it becomes difficult for a fraud to take place since every employee is aware of all the activities taking place in an organization.
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In the case of a similar to Tesco corporation, for preventing itself from the fraud effectively and efficiently, the management has to understand the possible areas and actual risks that can be experienced. In order to avoid the likelihood of a fraud in the payroll, for example, an organization needs to carry out a structured fraud risk assessment in the system. The payment system needs a regular update. The evaluation of the amount should be integrated by conducting a standalone or overall organizational risk assessment.
Some risks of the fraud possible to an organization in the payroll system include the financial loss through unauthorized or invalid payments and transactions. The second likelihood of the fraud is the losses due to low morale due to the failure of the prompt payments. An organizations’ payroll system also faces the fraud risks resulting from the incorrect payments, as well as errors made in the payroll records. Another pay risk arises from the fines imposed by the tax authorities when an organization uses improper payments or calculations (Bragg 2004).
There are various ways used in the identification of fraud in an organization. First, a company can use both external and internal control tools such as regular reconciliations, as well as the audit of the accounts. An organization can use a method of unusual adjustments and write-offs in order to check whether there are points in the accounts that need special scrutiny. The other means of detecting fraud is through monitoring the employees suspected of stealing from the organization.
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When preparing an audit plan of an entity, many factors have to be put in place by an auditor in order to have an efficient and effective program. First, the auditor must be able to understand the internal control system of an entity, as well as a vast knowledge of accounting. The auditor needs to seek an understanding of the entity’s accounting policies, as well as their changes. The understanding of these systems and the accounting knowledge help the auditor come up with the substantive procedures in the audit plan (Ravinder & Sharma 2011).
Another factor to be addressed is the review of the issues raised during the previous audit of an entity that might have a continuing significance in the current year of audit. The review is done by going through the last year’s audit reports. The study helps the auditors in identifying the areas that were noted as having particular problems in accounting, as well as weak controls. Such problem needs to be addressed during the preparation of the current audit plans.
For an efficient drafting of an audit plan, the auditor needs to consult the staff, as well as the management of an entity, concerning the trading circumstances and the changes that have taken place in the company. In order to come up with an effective audit plan, the auditors need to assess the effects of the legislation changes on the accounting practice of an entity that may influence its financial statements. The auditor also needs to consider the significant changes in the accounting procedures of a client. Some of these changes include the installation of the new systems of computer information. Other changes in the organizations might result in the weak control systems of an organization.
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Ravinder and Sharma (2011) assert that the auditors also need to consider the conditions that require special attentions like the relationship between the parties. The current financial difficulties that could easily affect the smooth learning of an entity also need consideration. Other factors that the auditor need to consider is the timing of the audit plan. The schedule means that the auditor should be concerned with finding the date when the annual general meeting was held, when the stock taking was done, as well as when the reports to the management were presented.
The audit scope is the determination of the types of the entity’s activities and the period of the entity’s records that need to be subjected to the audit examination. The department managers of an organization, upon their discussion, commonly agree on the scope of the audit. The common objectives of the audit scope are reviewing the activities of an entity within the recent period, mostly the past twelve months. The audit scope aims at determining the validity of the accounts recording the entity’s revenue collection and expenditure. The audit scope, in addition, aims at reviewing the conflicts of the interests procedures in order to enhance an effective monitoring of an organization (Vallabhaneni 2013).
The materiality in auditing and accounting is concerned with whether the financial statements of an organization are prepared according to the framework of the financial reporting. The accounting information is said to be material if omitting or mistaking it in the financial statements can have any effects on the economic decisions of the users.
The audit risk is the risk of an auditor giving out unqualified report due to the failure of detecting the materials misstatement. The audit risks are caused by either fraud or errors. It comprises the control risk, inherent risk, and detection risk. The inherent risks are the ones involved with the nature of the transactions in a business. The control risk arises where the misstatement occurs, but it is not detectable and preventable by the internal control systems of an organization. The detection risk, on the other hand, is the chances that an organization’s audit procedures might fail to detect the material fraud or error (Gramling & Johnstone 2012).
There are various audit tests involved in the accounting system of an organization like Tesco. According to Puncel (2007), some of this audit tests include the risk assessment procedures, test of controls, substantive tests of transaction, analytical procedures, and the tests of the specifics of balances
The risk assessment procedures involve an understanding of the internal control of an entity, as well as its environment. The test controls are used in assessing the control risk of each transaction that is an objective of the audit. Substantive analysis of the operation aims at determining the misstatements of funds that directly affect the financial statement. The analytical procedures aim at indicating any possible error, as well as providing a substantive evidence of the fraud or errors. The test of details of balances aims at establishing the accuracy of the financial records.
Four stages are involved in the audit process. They include planning, fieldwork, preparing the audit report, and the follow-up (Kymal, 2011). In regards to planning, an auditor contacts the clients and notifies them on the possible and convenient for both time of the year when the audit will be carried out. The auditor sends the preliminary checklist to the clients. The list comprises the required documents like the financial statements and the organizations charts. These reports help the auditor learn about the organization before commencing the audit. The next step is understanding the checklist; the auditor prepares a review. The auditor conducts a risk workshop in order to familiarize with the principal risk, as well as to raise the risk awareness. The next thing in the planning stage is drafting an audit plan and finally preparing for an opening meeting.
The next stage is the fieldwork. Kymal (2011) asserts that the fieldwork involves transactions of testing and revenue cycle. Under the revenue cycles, there are two checking procedures, which include the cash receipt transactions, as well as the sales process. The sales process of a company involves the sales quotation that is helpful in providing the estimate of the costs involved. The cash receipts, on the other hand, help in acknowledgment of the cash payments. Most customers make payments using the electronic means or through checks. In this case, the lockboxes and cash registers are the ones used in safeguarding. For an auditor to determine the legitimacy of the cash receipt transactions, the monthly bank reconciliation is conducted for detecting any errors or fraud.
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The third stage of the audit process involves the audit report. After the collection of the evidence from the financial statements, the auditor checks the closing balances of the trial balances and the balance sheet and those of the ledgers whether they are compatible or not. After this stage, the audit assistant prepares the audit report that expresses their opinions. In this report, the auditors give the evidence of the audit, as well as the recommendation for the improvement of the information.
The fourth stage of the auditing process involves the follow-up. The aim of monitoring is ensuring that the desired results of the audit report are achieved (Kymal 2011).
The audit record system concerning the audit working papers and documentation are the written records based on the conclusions of the auditors made from the financial records. The working documents and documentation provides supports to the auditor’s representations whether those representations are enclosed in the auditor’s report or not. The documentation is essential in facilitating the performance and planning, as well as the supervision of the engagement. The documentation, in addition, provides the evidence that supports the significant conclusions of the auditors.