TASK 1
Description and purpose of different accounting records
There are different types of accounting records, and such records are important in any organization. One of the common account records is the income statement. An income statement provides one with an accurate description of the company’s profitability over a set period of time. It could be described as an accounting statement that matches a company’s revenues with its expenses over a given period of time usually a quarter or a year. An income statement is composed of several items, including sales, costs, increase and decrease in intangible value, taxes, and outstanding shares. Another key accounting record is the balance sheet. A balance sheet categorizes a company’s resources such as assets, liabilities and owner’s equity. According to Pandey (2002), the components of a balance sheet are divided into current and long-term categories. Pandey (2002) further observes that these components are listed in order of liquidity. Besides a balance sheet and income of statement, a statement of cash flows is also very important in a business. A statement of cash flow provides one with information about a company’s cash receipts and cash payments during a period. According to Khan and Jain (2003), a statement of cash flow has several objectives. Firstly, it is effective in predicting the amounts timing and ascertaining of future cash flows. Secondly, it indicates how cash is used and generated. For these reasons, it also helps the creditors, stockholders and customers to determine the flow of cash in a business. Thirdly, it helps an entrepreneur to understand the differences between net income and net cash flow from operating activities. Finally, it helps an entrepreneur to examine a company’s investing activities and financing transactions.
Importance of accounting concepts
It is important for an entrepreneur to understand different accounting concepts the common of which are business entity, matching concept, money measurement, going concern, accounting period, cost concept, realization concept and accrual concept. To understand the importance of each of these concepts it is instructive to examine their roles. To start with, the business entity treats business and owner as two different entities. In other words, a business entity is the very basis of accounting concepts, conventions and principles. The money measurement concept allows an entrepreneur to distinguish between transactions that can be expressed in terms of money and those that cannot. The going-concern concept assumes a business entity can carry out its activities for an indefinite period of time. This concept is important as it facilitates the preparation of financial statements. The accounting period concept is important in calculating tax, predicting future prospects of a business and helping an entrepreneur to procure credit from financial institutions. The accounting cost concept requires all assets to be recorded in the books of account at their purchase price. This requirement is helpful in the sense that it allows an entrepreneur to calculate depreciation of fixed assets. Another key concept is the dual aspect concept which allows an entrepreneur to detect errors. Another key concept is the realization concept which makes accounting information more objective. Equally important is the accrual concept which helps an entrepreneur to know the actual expenses and income during a particular period of time. In addition, using this concept an entrepreneur should be able to calculate the net profit of his or her business. Finally, there is the matching concept which states that revenue and expenses should be recorded in the same accounting period. This concept should help an entrepreneur to ascertain the exact amount of profit or loss of the business.
Factors influencing the structure of accounting systems
In order to effectively business it is also important for an entrepreneur to understand the factors that influence the structure of accounting systems adopted by a business. One of the factors is the company’s need for accounting information. Accounting information that is generated in a company could be useful not only to the investors but also the creditors and the management. It is also worth noting that accounting systems are influenced by the nature of the business and the operations of that business. Other factors that come into play include the perception of the employees and the management, the level of training accorded to the users, the nature of implementation and the implementation partners, and the resources available for the operation of the system.
TASK 2
Importance of business risk management
Risk in any business could affect both primary and supporting assets.
Failing to manage risk can lead to litigation. Litigation can end being costly as businesses are forced to incur a number of injurious costs, including attorney fees, out-of-pocket expenses, and foregone revenues. Failure to manage risk could also lead to sanctions from private and public regulatory bodies such as the Securities and Exchange Commission. It could also lead to impaired professional reputation as a result of adverse publicity.
In any organization, there is a possibility of risk occurring. Fraud in an organization manifests itself in many hours. For instance, fraudulent financial reporting could occur due to improper revenue recognition, overstatement of assets and understatement of liabilities. Other actions that are fraudulent include misappropriation of assets, revenues or assets that are gained fraudulently, expenses and liabilities that are avoided fraudulently, conflict of interests, discrimination, antitrust practices and environmental violations.
Bad financial conditions lead to too much lending and credit standards. Financial sector supervision could have reduced the excesses but this was not the case anywhere in the world. Innovations in financial engineering have been partly blamed, but they existed even in the past (Moshirian, 2011). In most cases, the innovations were not clearly understood, thus leaving the risks involved unnoticed, which is important in financial risk management. Financial innovations did not cause the crisis, but they intensified through market dynamics and distorted the incentives for financial institutions (Moshirian, 2011). As such, large private financial institutions which operated globally had an upper hand in this because they played a significant role in exacerbating the crises. The failure of these institutions was not due to lack of national supervisors, but because they absconded their responsibility. Furthermore, their global scope was not the cause of failure, but their large size and complexity.
Identification and detection of fraud and risk
In an organization, fraud and risk can be prevented and detected through a number of ways. Firstly, fraud and risk can be managed through auditing and monitoring. However, according to Prasanna (2006), it is impossible to audit every fraud and misconduct risk, and so it becomes necessary to perform a risk assessment before hand. For this method fraud detection and prevention to work, it is imperative to have competent employees who should have a comprehensive understanding of what fraud is and what its red flags are.
Beside auditing and monitoring, fraud and risk can be prevented and detected through proactive data analysis. Proactive data analysis has been found to be effective in identification of suspicious transactions, assessing the effectiveness of internal controls and monitoring fraud threats and vulnerabilities. Organizations could choose to either use continuous transaction monitoring or retrospective based analysis. The former allows organizations to continuously monitor areas that pose strong risks while the later allows organizations to analyze transactions in one or two-year increments.
Another prominent of fraud prevention and detection is the use of process controls. According to Prasanna (2006) process, controls are effective in detecting fraudulent activities. In his view, Pandey (2002) observes that to effectively manage risk and fraud in an organization, the management should put in place internal controls. But what are internal controls? According to Charles, Gary and John (2009) internal controls refer to the procedures and policies that are adopted by the management to ensure a business entity operates in an efficient and profitable manner. In addition, internal controls safeguards both physical and in-physical assets. This is achieved by conducting reliable and safe back-up procedures, clearing assignment of duties and controlling operating environments. It is also worth noting that one of the other roles of an internal control system is producing accurate and complete accounting records and timely preparation of financial reports. Most importantly a control system is composed different component. The first component is maintenance of a control environment. In order to avoid risk and fraud it is important for all the stakeholders to understand, be aware and commit themselves to the policies and procedures established. A strong control environment should be implemented with tight budgetary controls and effective internal audit functions. The second component is risk assessment, which is the act of identifying, prioritizing and implementing risk management strategies, policies and procedures. The third component is control activities, which include accounting systems and specific control policies and procedures……………………………………………………………………
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