Question

Case Study 04:

Geeta Rani is the treasurer of a local gymnastics club. As treasurer she is required to identify invoices for payment, prepare the cheque and in conjunction with the president sign the cheques, mail the cheque and update customer accounts.

Required:

a) Explain the weaknesses in the Accounting Information System that are not protecting Geeta in carrying out her duties.

b) The process of reviewing the recording procedures for an Accounting Information system should include three areas. What are they?

c) Define explanatory notes. Why companies need to prepare them?

d) Explain the key principles and practices of budgetary control and implications for

accounting systems.

e) Explain the key features of financial legislation relating to taxable transactions and

reporting requirements.

Answer 1

a) Explain the weaknesses in the Accounting Information System that are not protecting Geeta in carrying out her duties.

Ans :

The major weakness that could be in financial management or Accounting Information System( AIS) is lack of adequate documentation. Whether records are in paper or digital form, financial management or (AIS) has to be able to identify who initiated an action, such as a payment; who approved it; who modified it, if it was modified; who executed it; and what resulted from the action. Adequate documentation of activities establishes who was responsible for an action if a problem arises at a later stage.

There should be Segregation of critical activities, such as issuing cheques into multiple tasks carried out by different employees. Having the same employee handle the whole process constitutes a weakness in internal financial controls. Typically one person issues the check, while two or more others sign it and another employee sends it out and enters it into the books. Separating functions makes fraudulent activity more difficult.

In the present Geeta is performing all the activities from identification of invoices to updating the customer accounts. Hence, chances of errors, omission and fraud has considerably increases as there is no segregation of duties which following potential control weakness could arise

- Payments made without due authority.

- Payment made for goods/services not received.

- Payments made to the incorrect supplier.

- Duplicate payments.

- Late payment/breach of Public Sector Payment Policy.

- Fraud/theft.

- Payments are not correctly accounted for impacting on the customers’ ability to prepare statutory accounts.

- Payments are not in line with agreed contract/order values.

b) The process of reviewing the recording procedures for an Accounting Information system should include three areas. What are they?

The AIS is a subsystem of Management Information System that records, processes and reports information related to the financial aspects of business events

Recording transactions is the physical process of entering financial data into the company’s general ledger .Accounting software provides business owners with an electronic process for recording transactions and maintaining financial information. Recording transactions may require business owners to prepare journal entries based on financial transaction documents.

Review Procedures

Review procedures are an important part of the accounting process. Business owners implement these procedures to ensure financial information prepared by employees is correct. Larger organizations with accounting departments commonly use a controller or accounting supervisor to review an employee’s

work. This review process may discover errors and require changes prior to releasing financial information to business owners.

The Process of reviewing recording procedures should take into consideration the following areas

Transactions are analysed and accounted for completely and are correctly related to the accounting period.

Processes for recording and classifying transactions are communicated and promoted to support internal verification of records.

Sources of input data and documentation are standardised in structured formats to minimise errors Back-ups are maintained in an accessible location to safeguard data in accordance with organisational and audit requirements

Review reporting procedures: Sources of input data and documentation records are systematically checked for accuracy and reliability.

Reporting requirements are established and analysed regularly to identify variations and compliance with established processes for recording and classifying transactions.

Written reports, explanatory notes and financial results are maintained to support source documentation.

c) Define explanatory notes. Why companies need to prepare them?

Ans

Explanatory notes with respect to financial statements refer to additional information that helps in explaining how a company arrived at its figures and to explain any irregularities or perceived inconsistencies. Explanatory notes to the financial statements thus report the details and additional information that are left out of the main parts of reporting documents such as the balance sheet and income statement. This is done mainly for the sake of clarity because these notes can be quite long, and if they were included in the main text they would cloud the data reported in the financial statement.
These notes contain important information on such things such as the accounting methodologies used for recording and reporting transactions, pension plan details and stock option compensation information, all of which can have material effects on the bottom-line return that a shareholder can expect from an investment in a company. Footnotes also explain in detail why any irregularities such as a one-time charge has occurred and what its impact may be on future profitability. These are also sometime called Footnotes.

d) Explain the key principles and practices of budgetary control and implications for

accounting systems.

Ans.

CIMA defines budgeting control as “The establishment of departmental budgets relating to responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a firm basis for its revision”.

Budgetary control is therefore, simply means laying down in monetary and quantitative terms what exactly has to be done and how exactly it has to be done over the coming period and then to ensure that actual results do not deviate from the planned course. It computes the variances and alter that management takes necessary actions to maintain favourable variations through revision of the budgets Budgetary control is a tool of great potency for infusing forward looking dynamism and for harnessing the energies of people at all levels.

principles and practices of budgetary control and implications for accounting systems

A sound and clearly defined organization with managers’ responsibilities clearly defined.

Effective accounting records and procedures that are clearly understood and applied.

Support and commitment of top management for the system of budgetary control.

Education/training of managers in the development, interpretation and use of budgets.

Revision of budgets where amendments are needed, to make them appropriate and useful.

Recognition that budgetary control is a management activity and not an accounting exercise.

Participation of managers in the budgetary control system.

An information system that provides data for managers so they can make realistic predictions..

Correct integration of budgets and their effective communication to managers.

Setting of budgets that are reasonable and achievable

Budget center which is that section of the organisation for which the budget will be prepared should be clearly defned

Budget period or the time period for which the budget will be prepared and operated should be decided carefully.

It should neither be too long nor too short.

An efficient and proper system of accounting should be established so that the information required for the proper implementation for the budgetary control can be available on time.

A proper organisational chart should be prepared properly, clearly depicting the responsibilities and duties of each level of executive.