TOPIC 5: ACCOUNTING SYSTEM AND CONTROLS

1. 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

2. DESIGNING THE ACCOUNTING SYSTEM REPORTS LEDGER JOURNALS DOCUMENTS

3. 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.

4. 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.

5. 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. 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

6. 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.

7. Internal Audit Audit is performed by company’s staff to be presented/reported to management as internal report, and not publicly disclosed. External Audit Audit is performed by the Independent bodies and certified public accountant.

8. Internal Control over Cash Receipt Internal Control Over Cash Receipt Independent Internal Verification Establishment of Responsibility Documentation procedures -supervisors count cash receipt daily; treasure compares total receipt to bank deposit daily -only designated personnel authorizes to handle cash receipts (cashiers) -use remittance advice (mail receipt),cash Register tapes& deposit slip Other controls Segregation Of duties Physical, mechanical, and electronic controls -bond personnel who handle cash; required vacations; All cash deposited in bank daily -different individuals Receive cash, record cash receipts, and hold the cash -store cash in safes and bank vaults: limit access to storage areas; use cash register

9. Internal Control over Cash Disbursement Internal Control Over Cash Disbursement Independent Internal Verification Documentation procedures Establishment of Responsibility -use prenumbered Cheques and account for them in sequence; each heque must have approved invoice -only designated personnel authorizes to sign Cheques (treasure) -compare cheques to invoices; Reconcile bank statement monthly Other controls Segregation Of duties Physical, mechanical, and electronic controls -stamp invoices PAID -store blank cheques in safes, with limited access;print cheque amounts by machine in indelible ink -different individuals Approve and make Payments; check signers Do not record disbursement

10. DESIGNING ACCOUNTING SYSTEM Factors to be Considered: 1. Nature of the activity and the associated product Records kept are influenced by nature of activity (manufacturing, merchandising/trading or service business) 2. 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) 3. 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.

11. 4. 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. 5. 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.

12. 6. 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) Bursa Malaysia listing Requirements (companies listed under Bursa Malaysia) Guidelines of Central Bank (Banks and Financial Institution licensed under BAFIA)

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 Specilised Journals) and their format.

14. 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

15. 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)

16. Example of Question on Topic 4 & 5 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?

17. Example of Case Study on Internal Control Case 1 Encik Mahmud has recently been hired as the manager of Big Apple Co. During the first month as store manager, Encik Mahmud encountered the following situations: Situation1 Big Apple Co. Has one cash register; each employee working on a shift would take customer order, accept payment and then prepare the order. Employees that use the cash register is responsible for counting the cash at the end of the shift and verifying that the cash in the drawer matches the amount of cash sales recorded by the cash register. Situation 2 Big Apple Co purchased supplies from Lemon Enterprise and store them in a locked room for which storekeeper (Rahim) has the key. He is also responsible for distributing these supplies to employees upon request. At the end of each month, Rahim takes the supplies on hand and notifies the accounting department of amount for the adjusting entry for supplies used. Required: If you are En Mahmud, state whether you agree or disagree with Big Apple Co. method of handling each situation and explain your answer.

18. Case 2 Zizi just appointed her old friend, Mina to work as an account clerk at her new, Company Gagah Sdn Bhd. Zizi took over the company from her father. The size of this company is small and does not have many workers. Therefore, most of the office works are done by Mina alone. After one year of taking over the operation, the performance of the company went down. Following her father’s advice, Zizi appoints you as an accountant to identify the problems of the company. You discovered that: a. Before Mina deposited the daily sales money into the bank, she would take some of the money for personal use. Sometimes she does not return back the money and will record this amount as ‘money cannot be collected’. b. Customers make payment to the company by issuing cheques; but sometimes these cheques are not crossed. Mina took these cheques for her personal use. In order to hide her wrong-doing, she will credit the correct customer account and debit false customer account. This is to balance the account. c. There were 18 cheques paid to the false creditors where all these cheques were issued under Mina’s name. d. Mina took the money from the petty cash fund and issued the vouchers under the miscellaneous expenses by pretending that all the expenses were made by the company. These vouchers were not attached with the supporting documents. There were repeat payments on the same invoice.