TOPIC 3: ACCOUNTING SYSTEM AND CONTROLS

1. TOPIC 3: ACCOUNTING SYSTEM AND CONTROLS

2. The accounting process Accounting “links” decision makers with economic activities ¾ and with the results of their decisions. Accounting information Economic activities Actions (decisions) Decision makers

3. TOPIC 5: ACCOUNTING SYSTEM AND CONTROLS Accounting System A system of collecting and processing transactions data to be accounting information and communicate the information to the interested users. Control: Functioning as internal control of the business in producing more reliable financial information

4. Objectives of Accounting System • To process information efficiently (low cost). • To obtain reports quickly. • To ensure a high degree of accuracy. • To minimize possibility of theft or fraud.

5. DESIGNING ACCOUNTING SYSTEM Factors to be Considered: • Nature of the activity and the associated product • Records kept are influenced by nature of activity • (manufacturing, merchandising/trading or service business) • Size of the business • Size of the business has important effects: The numbers of accounts varies between firms  manual or computerized? the type and form of journals used differs. control over internal procedures may differ between large and small firms. the type of recording system maintained (single entry system versus double entry system)

6. DESIGNING ACCOUNTING SYSTEM Factors to be Considered: • Location and Dispersions • If a business has many branches or subsidiaries located throughout the country, accounting system must be designed to collect information from branches or subsidiaries. • Reports should highlight the activities of branches/subsidiaries and the organization as a whole.

7. DESIGNING ACCOUNTING SYSTEM Factors to be Considered: • Management • Information required by management should be readily/easily obtained. • Eg: management wants to know sales of different department or sales of every salesman, the sales journal and sales account must be designed to provide this information.

8. Factors to be Considered: • Ownership • Sole proprietorship/partnership or company • Certain legal provision dictate the information a company must give its shareholders and this influence what is recorded. • Accountants need to take into account the number and type of accounts, the method of profit sharing and information required by owners.

9. Factors to be Considered: • Effects of Law • Company Act 1965 (business incorporated under Act) • Income Tax Act (all business enterprises with assessable income) • Approved Accounting Standard (all reporting enterprises) • Guidelines of Securities Commission (all public company listed or unlisted) • KLSE listing Requirements (companies listed under KLSE) • Guidelines of Central Bank (Banks and Financial Institution licensed under BAFIA)

10. Accounting System • Consists of: • Journals • book of original entry • Alltransactions are originally recorded chronologically • Contains accounts and amounts to be debited and credited. • Ledgers. • A book of financial accounts • Recorded by account type • Charts of accounts • Rules for using them.

11. Accounting System • Manual, computerized, or anything between. • In a computerized system: • Bookkeeping steps are done electronically.

12. DESIGNING THE ACCOUNTING SYSTEM REPORTS LEDGER JOURNALS DOCUMENTS

13. DESIGN OF REPORTS: Reports prepared for 2 groups of users; • External users – creditors, shareholder, government. • Internal users – management An examination of all reports required will indicated what information is to be presented in them  Requirements of the various legislation may have to be considered (eg. Co. Act 1965) DESIGN OF THE LEDGER: • Information to be presented in the reports must be contained in the ledger as the final reports are prepared from the ledger. DESIGN OF JOURNALS:  Journals collect information for posting to the ledger. Decide which journals are needed (General Journal and Specialized Journals) and their format.

14. CHART OF ACCOUNTS AND CLASIFICATION OF ACCOUNTS Definition : • Chart of account is a listing of the complete account titles and their related numbers, and is maintained in both manual and computerized systems. (Simple numbering system and flexible numbering system) • How many? Depends on information needs

15. The General Ledger

16. DESIGN OF SOURCE OF DOCUMENTS:  Source documents provide the input into the system. The content and usefulness of the final report depends on these data.  Forms should be easy to complete and contain all the necessary information (often the people who fill out the documents are not trained in clerical procedures)  Consideration in designing source of documents: size and color number of copies each format

17. CONTROL IN ACCOUNTING Purpose: • To safeguard asset or resources against waste and fraud and inefficiency • To enhance the accuracy and reliability of accounting data • To promote operational efficiency • To encourage adherence to prescribed managerial policies.

18. Types of control • Internal Control internal control consists of the plan of organization and all the related methods and measures adopted within a business to: safeguard its assets from theft and unauthorized use. enhance the accuracy and reliability of its accounting records by reducing the risk of errors and irregularities in the accounting process. • performed by company’s staff to be presented/reported to management as internal report, and not publicly disclosed

19. Types of control • External Control • external control done by outside entity (bodies) that are responsible to review the financial statement either it’s follow the standard and act or not. • performed by the Independent bodies and certified public accountant.

20. Principles of Internal Control  Establishment of responsibility control is more effective when only one person is responsible for given task this includes the authorization and approval of transactions.  Segregation of duties the responsibility for related activities should be assigned to different individuals. the responsibility for keeping the records of assets should be separate from the physical custody of the assets. Eg: Sales activity. Deliver  Billing  Receive Payment

21. Principles of Internal Control Documentation Procedures documents should be pre-numbered and all documents should be accounted for, as the documents provide evidence that transaction and events have occurred. the documents should be promptly forwarded to ensure timely recording of the transaction and event. Mechanical, physical and electronic control make a physical count to safeguard the assets. mechanical and electronic control require the business to prepare time clock, television monitor and safety alarm. Independent internal verification steps in making verification involves the review, comparison and reconciliation of data prepared by one or several employees. It’s done periodically or surprise basis. Eg: reconciliation the cash register tape with of cash collected for the day.

22. Internal Accounting Controls • Basic Principle: make it as difficult as is practical for people to be dishonest or careless. • Activities that reduce possibility of theft, or intentional or unintentional mistakes.

23. Example of Question on Topic 2 & 3 1.Bandingkan tiga bentuk perniagaan. Bincangkan kelebihan dan kelemahan setiap bentuk perniagaan. 2. Terangkan apa yang dimaksudkan dengan analisis KKPA (SWOT analysis). Bagaimanakah analisis ini dapat membantu seorang pengusaha pada peringkat penubuhan perniagaan? 3. Bincangkan faktor yang perlu dipertimbangkan dalam mereka bentuk sistem perakaunan untuk sebuah firma bersaiz kecil. 4. Apa yang dimaksudkan carta akaun? Adakah carta akaun perlu disediakan oleh semua perniagaan? Jika ya/tidak mengapa? 5. Dengan ringkas terangkan kepentingan kawalan dalaman dalam sesebuah organisasi. Bincangkan dengan ringkas ciri-ciri utama satu sistem kawalam dalaman yang baik. Bincangkan juga limitasi sistem kawalan dalaman. Siapakah yang bertanggungjawab ke atas kawalan dalaman sesebuah perniagaan?

24. Zaidah telah melantik kawan lamanya, Mina sebagai kerani akaun di Gagah Sdn Bhd, iaitu sebuah syarikat yang baru diambil alih olehnya dari ayahnya. Oleh kerana syarikat ini kecil, ia tidak mempunyai ramai pekerja, dan Mina telah ditugaskan untuk menjalankan pelbagai kerja. Selepas setahun, prestasi syarikat didapati merosot. Atas nasihat ayahnya, Zaidah telah melantik anda sebagai akauntan untuk mengenalpasti masalah kewangan syarikat yang kian meruncing. Anda mendapati: a) Mina telah mengambil duit dari jualan harian untuk tujuan peribadinya sebelum duit tersebut didepositkan ke bank, kadang-2 duit tersebut tidak dipulangkannya semula dan dia telah merekodkan amaun tersebut tidak dapat dipungut. b) Cek yang diterima dari pelanggan yang tidak berpalang telah diambil oleh Mina. Ia cuba menyembunyikannya dengan mengkreditkan akaun penghutang yang betul dan mengdebitkan akaun penghutang palsu untuk memastikan akaun adalah seimbang. c) Terdapat 18 keping cek yang telah dikeluarkan kepada pemiutang palsu yang mana semua cek tersebut atas nama Mina. d) Duit dalam dana runcit telah diambil oleh Mina dengan menulis baucer bagi berbagai perbelanjaan yang kononnya telah dibuat oleh syarikat, tanpa apa-apa dokumen sokongan, dan terdapat juga perbelanjaan yang dijelaskan lebih dari sekali.