1. 1. Topic 3: Accounting System and Control
2. Coverage 3.1 Development of Accounting System Factors Procedures: Principles, Phases,
Computerised/manu al Charts of accounts and accounts classification 3.2 Control in Accounting
Purpose Characteristics Audit: internal and external
3. Factors 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
4. What are the outputs? Summary of all the transactions – financial statements Quality of
outputs: Relevant, reliable, understandable, timely, comparable
5. Qualitative characteristics 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.
6. Qualitative characteristics…cont. Relevant and Reliable 1)Relevant means information that
is related to a particular decision, that is it can affect a decision made. For example, information
on the net assets and profitability are relevant for bankers to decide whether loan should be
approved to a particular business.
7. Qualitative characteristics…cont. 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.
8. Qualitative characteristics…cont. 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.
9. Qualitative characteristics…cont. 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.
10. 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: This means information that
affects decision making. Immaterial information should be excluded. iii. Conservatisms: This
means, the estimation chosen should have the probability to overstate the assets or profit.
11. Analysis Phases in the development of accounting system Design Implementation
Evaluation
12. Analysis Planning and identifying information needs of internal and external users Sources
of such information The records and procedures for collecting and reporting the data Analysed
present system – strengths and weaknesses Proposed new/ revised system
13. Design Specify systems requirements more precisely Where data would be captured The
required processing Where the output would be used
14. Implementation Install new / revised systems (e.g. hardware & software) Making the
system fully operational User manual Training users/personnel
15. Evaluation Assess the progress and status of new systems Monitoring effectiveness and
correcting any weaknesses. e.g. General acceptance by users, Cost and benefit
2. 16. 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
17. Computerised Accounting Information Systems (cont’d) Advantages Ability to process
large number of transactions quickly. Automatic posting of transactions. Error reduction. Fast
response time. Flexible and fast report production.
18. Computerised Accounting Information Systems (cont’d) 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.
19. Chart of Accounts A listing of all accounts and associated account numbers for a business
WONG PTY LTD – Chart of Accounts Assets Liabilities Equity Revenues Expenses No.
Account title No. Account title No. Account title No. Account title No. Account title 100 Cash
200 Accounts Payable 300 Share Capital 400 Service Revenue 500 Salaries Expense 104
Accounts Receivable 210 Interest Payable 300 Retained Profits 405 Commissions 505 Supplies
Expense 105 Commissions Receivable 213 Revenue Received 320 Dividends Revenue 510 Rent
Expense 110 Advertising Supplies in Advance 330 Profit and Loss 515 Insurance Expense 112
Prepaid Insurance 215 Salaries Payable Summary 518 Interest Expense 130 Office Equipment
230 Bank Loan 520 Depreciation Expense 131 Acc. Depreciation – Office Equipment
20. Accounts Classification Accounts are classified according to common characteristics:
assets, liabilities, capital, revenue and expenses Definitions of assets: Things of value which are
possessed by a business Resources that will bring benefits to the organisation
21. Types of assets 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 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.
22. 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 – 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”
23. 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)
24. Capital - the owner’s 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
25. Control in Accounting Detailed procedures adopted by the management to control the
operation of a business Means of controlling the entity’s activities to help ensure that they
accomplish the desired objectives
26. 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 entity’s 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
27. Types of Internal Control Administrative Control Procedures and records that assist
management in achieving business objectives Accounting Control Set of procedures and records
3. that are primarily concerned with the reliability of financial records and reports and safeguarding
of assets
28. 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.
29. Principles of Internal Control 1. Establishment of responsibility. 2. Segregation of duties.
3. Documentation procedures. 4. Physical, mechanical and electronic controls. 5. Independent
internal verification.
30. Principles of Internal Control (cont’d) 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
31. Principles of Internal Control (cont’d) 3. Documentation procedures All documents
generated by the business to be pre-numbered Documents to be initialled Provides a audit trail
for checking of transactions
32. Principles of Internal Control (cont’d) 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
33. Principles of Internal Control (cont’d) 5. Independent internal verification Checking
procedures to ensure segregation of duties Monitoring by supervisors Verification by internal
auditor Rotation of duties