Unit 15 Financial Management Assignment

Program	Diploma in Business
Unit Number and Title	Unit 15 Financial Management
QFC Level	Level 5

Introduction

Since ancient times, accounting has been used by businesses to systematically record business transactions. There has been a huge change in the process of accounting, and at present, it is very convenient to record business transactions and use accounting records. Accounting provides information to various stakeholders and helps them in decision-making. Financial management assignments help management make informed decisions about business issues by using various accounting tools. This also reduces the complexity of recording transactions and helps in ascertaining the financial performance of the business. To increase the reliability of the financial statements, they are generally audited by experts who provide an opinion on the current functioning of the business. This helps in detecting fraud or misrepresentation made while preparing the financial statements.

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1.1 Explain the purpose and use of different accounting records. Briefly explain why it is needed and how it is used to record business transactions.

Accounting records help the business by providing various information regarding business operations. It is a statutory requirement for all businesses to maintain their accounting records for seven years. These records help various stakeholders in decision-making over the business. To increase the reliability of these human resources, they are generally examined by an independent auditor. The auditor uses these records as evidence while forming an opinion on the financial statements. They also serve as proof of monetary as well as non-monetary transactions of the business and prove ownership of assets for the creation of liabilities.

 

The purpose and use of various accounting records are as follows:

• Sales ledger: This is also known as a sold ledger and contains records of the personal accounts of the customers of the business. This helps in recording the sales of the business and finding whether the money is received from the customers and how much money is still due (Sonnenberg & vom Brocke, 2014).

• Purchase ledger: The purchase ledger provides records of the creditors of the business and the amount which is to be paid to them. The purchase ledger contains the individual accounts of the suppliers from whom goods are purchased on credit.

• Income statement: The statement helps in comparing the sales of a particular period with the costs incurred on the goods sold. The income statement of the business is divided into two parts. The first part contains all the expenditures which are of a regular nature, while the second part records transactions that are not regular to the business. The income statement helps the business ascertain profit during a particular period and control the expenses incurred during operations.

• Balance sheet: The balance sheet helps in determining the current position of the business at a particular point in time. These are tools used by various stakeholders to gain insight into the company's financial operations. They help managers make decisions by comparing statements from various years (Sonnenberg & vom Brocke, 2014).

• Cash flow statement: This statement records the inflow and outflow of cash within a particular period. This helps the organisation maintain liquidity within the business. The cash flow records separately the inflows from operating, financing, and investing activities, facilitating the company in making decisions for the business.

 

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1.2 Assess the importance and meaning of the fundamental accounting concepts.

The fundamental accounting assumptions are the rules organisations need to follow while preparing their financial statements. Organisations all around the world use these concepts to increase the reliability of accounting records. This helps in making comparisons between various businesses, as all organisations follow the same principles while preparing their financial statements. The details of key accounting concepts that businesses need to follow while preparing financial statements are as follows:

• Going concern concept: According to this concept, businesses record transactions by assuming they will run their operations for the foreseeable future. Due to this concept, companies do not write off all the expenditure incurred on the acquisition of machinery in the year of purchase but distribute the cost over several years (Swieringa, 2011).

• Consistency: According to this concept, companies need to be consistent in the methods used for preparing financial statements over the years. Companies often change methods to misrepresent facts in financial statements. A company can change its method only if a proper reason is provided for the change, and the new method will help present the information more appropriately. The auditor must mention the effect of the change in method on the financial statements in the notes to accounts.

• Prudence: According to this concept, companies must consider profits or revenues in their financial statements only when they are realised and account for all liabilities when there is a slight possibility of their occurrence. This concept prevents companies from showing excessive profit and ensures contingent liabilities are recognised by creating a provision against them (Swieringa, 2011).

• Historical cost: According to this concept, companies must record fixed assets at their value when acquired, including all expenditures incurred to bring the assets to working condition. This prevents companies from recording assets at inappropriate values to commit fraud.

 

 

1.3 Evaluate the factors which influence the nature and structure of the accounting systems of an organisation

The accounting system helps in collecting, storing, processing, and managing financial and accounting data for the purpose of making decisions related to the business. It is a computer-based system which helps in recording huge data and tracking various activities of the business. The manager needs to decide on the accounting system after considering the current structure of the business. The accounting system of the company should facilitate the business in attaining its goals and objectives. The system should be chosen after identifying the needs of the business and checking that it is able to satisfy those needs (Edison, Manuere, Joseph & Gutu, 2012).

The cost incurred on the accounting system also affects the decision in relation to the accounting system. The accounting system is generally not followed by small organisations as it adds extra cost to their activity. The manager needs to identify the costs and benefits of the accounting system before implementing it. This system involves huge costs and thus is generally followed by large businesses. The accounting system is generally followed by businesses which operate on a large scale as it helps them in recording and tracking their huge data in relation to the operation of the business. They also help in managing the company and making informed decisions about the business (Tamoradi, 2014).

The company needs to choose a system which is resistant to changes in the procedures of the business. Most often, there is a change in the operation and structure of the business, so the system should meet the change needs as there is a huge cost involved in implementing the accounting system. To avoid losses, the company should choose a system which is resistant to change.

 

 

2.1 Identify the different components of business risk associated with the strategic move of an organisation

Most of the time, the strategy followed by the business fails to provide the desired result. This may be due to changes in the internal as well as external conditions of the business or due to an inappropriate strategy being followed. The failure in strategy causes a huge loss to the business, so the manager needs to frame the strategy after considering all the factors which affect the business. The manager is required to make certain estimates in various areas of the business. The wrong estimate made by the manager will affect the organisation's ability to attain its goals and objectives. For example, the company is not able to satisfy the demand for the product in the market due to a sudden increase in the market as the wrong estimation of it was made by the business (Peltier & Lanoue, 2015).

The organisation may face failure due to the inappropriate strategy followed by the manager. This may be due to the wrong estimation of the factors which will affect the strategic decision. The strategy followed by the organisation may face the problem of a shortage of resources required for the strategy. These risks generally affect the long-term performance of the business.

The strategy may also be affected by the change in internal or external factors within the business. For example, if there is a sudden change in the demand and supply or government policy of the business, it may affect the strategy of the business in a positive or negative way. There may be a problem that the company's current operational process may not adapt to the change in conditions or the planned strategy has not helped in attaining the desired result. The company may face the problem that the strategy may be correct but the external factors affect its implementation. The strategy may face problems due to sudden changes in the business environment, such as the entry of a new product or competitor in the market (Adetiloye, Olokoyo & Taiwo, 2016).

 

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2.2 Critically Analyse the Control System in Place in a Business for the Purpose of Identifying Fraud

An organisation needs to design an effective control system to prevent fraud within the business. The system should facilitate the early detection of fraud and help avoid its occurrence. Fraud within a business has a significant impact on its functioning and profitability, sometimes leading to its closure. To avoid fraud, an organisation needs to incorporate the following activities into its control system:

The organisation must adopt a system of checks and balances to ensure that no individual has sole control over all aspects of a financial transaction. The receipt and deposit functions of the company should be separate from the record-keeping function to mitigate the risk of fraud. It should be mandatory for the accounting department to take mandatory vacations. The organisation should establish checks on all critical tasks within the business (Dimitrijevic, Milovanovic, & Stancic, 2015).

To control fraud, the company needs to reconcile bank accounts every month, as this is an area with a high risk of fraud. An independent person who does not have signing or bookkeeping responsibilities must perform the reconciliation.

The organisation must ensure that all transactions are related to the business's activities and not for the personal benefit of employees. There should be proper controls over payment transactions, including setting limits on expenditures for specific areas of the business. Regular monitoring of financial activities by comparing actual expenditure with budgeted expenditure is essential to control fraud. Additionally, the organisation should develop a fraud policy and communicate the consequences of violating any workplace policies. A reporting system should be established where employees feel free to report any concerns to senior management.

Internal controls must ensure that each employee’s work is reviewed by others, and financial transactions are conducted with proper authorisation. Assets of the business should be adequately monitored, as they are sometimes misappropriated or stolen by employees. The company should maintain accurate records of all assets used in the business and regularly verify their physical presence. The use of assets should be strictly limited to business purposes.

Management should scrutinise related party transactions within the business to prevent fraud. These transactions must be properly disclosed and approved by the board of directors. The company should discourage hiring relatives and engaging in business transactions with board members or employees. Hiring experts to conduct internal control audits can also help prevent fraud.

 

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2.3 Evaluate the Risk of Fraud within a Business, Suggesting Methods for Detecting Fraud

Fraud poses a significant risk to businesses, often leading to substantial losses and, in some cases, closure. To mitigate this risk, companies must regularly monitor key areas where fraud is likely to occur. The effectiveness of the internal control system should be assessed, ensuring that all transactions are properly authorised. The organisation can adopt the following measures to detect and prevent fraud:

• Internal Audit: The company should appoint an internal auditor to evaluate the effectiveness of internal controls and assist management in controlling fraud. By examining accounting records, auditors can identify areas of vulnerability and help prevent fraudulent activities.

• Segregation of Responsibility: Management should establish an internal control system with proper segregation of responsibilities to ensure that financial transactions are authorised appropriately. A lack of segregation of duties is a primary cause of fraud and theft in organisations (Lupasc & Baragan, 2016).

• Effective Reporting of Suspicious Activity: The organisational system should allow employees to freely report suspicious or inappropriate transactions. Management should periodically evaluate the effectiveness of the whistleblower hotline and encourage employees to report workplace issues.

• Unusual Behaviour: The organisation must monitor employees’ behaviour and investigate sudden changes. Employees involved in fraudulent activities often avoid taking leave due to fear of being caught. As such, mandatory annual leave and regular rotation of roles are crucial measures to prevent fraud.

 

 

3.1 Plan an Audit with Reference to Scope, Materiality and Risk

To increase the reliability of the financial statements, they are generally audited by the internal or external auditor of the company. The auditor generally analyses the financial statements to identify fraud and misrepresentation within the company. During the audit process, the auditor obtains evidence from the accounting records to frame an opinion on the financial statements. The auditor needs to follow these steps while planning the audit:

• Knowledge of the client's business: Before starting the planning, the auditor needs to obtain information and knowledge of the client’s business and the level of activity of the client’s business. This knowledge helps the auditor identify the key areas for the audit (Laufer, 2011).

• Review audit documents: The auditor needs to obtain the previous year’s audited documents from the client, which will help in creating the audit programme.

• Recent developments in the organisation: The auditor needs to enquire about recent developments, such as mergers or new product lines, to adjust the audit procedure from the previous year.

• Key areas of business: The auditor, while planning, should identify the key areas where there are significant chances of fraud and decide how to examine those areas.

• Staffing: The auditor needs to determine the audit staff required for conducting the audit based on the level of activity of the business.

• Time: After consulting with the client, the auditor needs to decide the period during which the audit will be conducted. Based on this, the auditor needs to prepare the audit schedule, which includes the areas to be examined and by whom (Laufer, 2011).

• Outside assistance: The auditor needs to determine the specialists required for the audit to obtain information about specific areas. The auditor also needs to determine the extent of their involvement during the audit.

 

 

3.2 Identify and Explain the Use of Appropriate Audit Tests

The audit test allows the auditor to collect sufficient audit evidence to conclude, with reasonable assurance, that the financial statements are free from material misstatement. The various audit tests which can be used by the auditor are:

• Test of control: During the audit, the auditor determines the effectiveness of the company’s internal control. Internal control generally refers to the policies and procedures the organisation follows to provide assurance to management. The auditor needs to check whether the internal control ensures the reliability of financial reporting, compliance with laws and regulations and increases the effectiveness and efficiency of operations (Poonia, 2015).

• Compliance testing: The compliance test involves a comprehensive review of the organisation's adherence to regulatory guidelines. The auditor generally checks whether the firm is following the rules and regulations prescribed by the authority and control system while performing its work.

• Substantive test: These tests are performed by the auditor to detect material misstatements or fraud related to account balances or transactions. This method helps in detecting fraud at the assertion level and involves the direct verification of financial statement figures. For example, the auditor may obtain confirmation of various transactions by communicating with the parties involved in the transaction (Poonia, 2015).

• Test of details: This method requires examining the supporting documentation to determine the validity, accuracy and completeness of the activity.

 

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3.3 Record the audit process in an appropriate manner

The audit procedure followed by the auditor helps guide them throughout the audit process and helps in collecting evidence for framing an opinion on the financial statement. The process provides the sequence of activities which the auditor needs to follow during the audit. The following steps are followed by the auditor during the audit:

• Collect documents: The auditor needs to collect all the documents which are required during the audit to obtain evidence. These documents generally include the previous year's audit report, bank statement, and other similar documents required during the audit.

• Audit plan: The auditor needs to plan their work in a way that facilitates the collection of evidence and examination of all the key areas of the business. The auditor must communicate the audit plan to all audit staff to effectively execute the audit.

• Scope of the audit: The scope generally includes the extent to which the documents will be analysed. It determines the amount of time and documents which are to be examined during the audit.

• Schedule: The auditor will decide the timing of the audit and the resources required during the process. The schedule needs to be decided after communicating with the client to ensure the required documents are available (Beattie, Fearnley & Hines, 2012).

• Conducting audit: At this stage, the auditor conducts the audit as planned and obtains evidence from it.

• Drafting report: The final step of the auditing process is to draft the report based on the evidence collected. The report generally contains the auditor's opinion on the financial position of the business.

 

 

4.1 Draft Audit Report

The auditor prepares the written report on their findings as per the format provided by the Generally Accepted Accounting Standards. The report generally contains the auditor's opinion based on the evidence obtained during the audit. The auditor typically provides the following types of reports on the financial statement:

• Qualified report: This report is prepared when the auditor feels that the financial statements have not adhered to the basic accounting policies but still represent the true and fair position of the business and are free from material misstatements. A qualified report does not significantly affect stakeholders' decisions regarding the company.

• Unqualified report: The auditor issues this type of report when the financial statements are free from errors and present the true and fair position of the business.

• Adverse opinion: An adverse opinion is issued when the auditor finds that the company has misrepresented certain facts and the financial statements are not true and fair. This opinion is provided to inform stakeholders about the business's current functioning.

• Disclaimer of opinion: This is issued when the auditor fails to obtain the required documents and cannot collect sufficient evidence due to a lack of cooperation from the management. This reporting highlights the absence of necessary documentation (Guénin, Malsch & Paillé, 2014).

 

 

4.2 Draft Management Letter in Relation to a Statutory Audit

The auditor generally obtains a letter from the management, which acts as evidence that all the information provided by the management is accurate and that they are responsible for this information. This letter is usually signed by the CEO and the senior accounting personnel of the company. The management letter typically includes the following points (De Martinis, Fukukawa & Mock, 2011):

• The management has prepared the financial statements as per the applicable accounting framework.

• All records required for the audit have been provided to the auditor.

• All board of directors' minutes are complete.

• The management possesses all letters related to financial reporting non-compliance.

• There are no unrecorded transactions.

• The effect of uncorrected misstatements is immaterial.

• Proper disclosure of all transactions has been made.

 

Conclusion

In conclusion, accounting helps businesses record all transactions and facilitates decision making by the management. These records also help in controlling fraud within the organisation and monitoring all activities. To enhance the reliability of financial statements, they are usually audited by an independent auditor. Audits help prevent fraud and misrepresentation of facts. The auditor forms their opinion based on the evidence obtained during the audit.

 

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References

Adetiloye, K.A., Olokoyo, F.O. & Taiwo, J.N. 2016, "Fraud Prevention and Internal Control in the Nigerian Banking System", International Journal of Economics and Financial Issues, vol. 6, no. 3.
Beattie, V., Fearnley, S. & Hines, T. 2012, "Do UK audit committees really engage with auditors on audit planning and performance?", Accounting and Business Research, vol. 42, no. 3, pp. 349.
De Martinis, M., Fukukawa, H. & Mock, T.J. 2011, "Exploring the role of country and client type on the auditor's client risk assessments and audit planning decisions", Managerial Auditing Journal, vol. 26, no. 7, pp. 543-565.
Dimitrijevic, D., Milovanovic, V. & Stancic, V. 2015, "The role of a company's internal control system in fraud prevention", e-Finanse, vol. 11, no. 3, pp. 34.
Edison, G., Manuere, F., Joseph, M. & Gutu, K. 2012, "EVALUATION OF FACTORS INFLUENCING ADOPTION OF ACCOUNTING INFORMATION SYSTEM BY SMALL TO MEDIUM ENTERPRISES IN CHINHOYI", Interdisciplinary Journal of Contemporary Research In Business, vol. 4, no. 6, pp. 1126.
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Laufer 2011, "Small Business Entrepreneurs: A Focus on Fraud Risk and Prevention", American Journal of Economics and Business Administration, vol. 3, no. 2, pp. 401-404.Lupasc, I. & Baragan, L. 2016, "Aspects Concerning the Relationship between Internal Audit and Fraud Risk", Risk in Contemporary Economy, vol. 3, pp. 291-296.
Pajak, W. 2012, "Personnel Audit Process", Business, Management and Education, vol. 10, no. 1, pp. 25-37.
Peltier-Rivest, D. & Lanoue, N. 2015, "Cutting fraud losses in Canadian organizations", Journal of Financial Crime, vol. 22, no. 3, pp. 295-304.
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