Question

Multi-part accounting question:

2a. Explain how double-entry bookkeeping and the accounting cycle contribute to the accuracy of financial reports and reduce the risks of fraud and error.

2b. Explain how the accounting system expressed in the balance sheet, income statement, and statement of cash flows contributes to the education of investors and other users of these financial statements.

2c. Explain how fraud and error are detected and prevented by an entity's internal control system.

Answer 1

2.a) Double entry book keeping is a method which considered  a transaction with two folds ,one is debit and another is credit. As per this approach every transactions or events at least affect two accounts at a time. One has to be debited and another has to be credited based on double entry rule of recording.

Where as accounting cycle starts With identification of transactions and comes to an end with communication of financial data to the users of accounting . Identification, measuring ,recording, classification ,summarizing ,interpretation and communication are the steps of book keeping.

Double entry book keeping system is a method of accounting and accounting cycle is the step by step outcomes of that.

Double entry book keeping records transactions and events chronology after identification and measurements with valid source documents. At the time of recording each journal entry needs proper explanation  as narration . Then after with recorded journal entries , accounting cycle starts to peddle up. Then after step by step ledger, trial balance, financial statements ,cash flows, ratios are made. Totally this system based  on arithmetics and only in very few cases there is a need of personal judgement,where in also accountant have international accounting standards ( like for depreciation IAS 16). So, by the above explanation it can be said that double entry book keeping and accounting cycle report accurate accounting data and reduce the chances of frauds and errors.

2.b) There are majorly two types of accounting system, a) double entry and b) single entry system. Almost every business maintain their financial records under double entry system because it is more scientific method.

Lots of transactions are recorded in the books of journal or in subsidiary book, but if all of these put together in financial statement then it can derived a meaningless fact towards the investors and other accounting information seekers.

To educate investors and other interested parties accounting system depicted in income statement as, net revenue ,cost of goods sold, operating income, operating expenses, non operating income and expenses, net income or net loss etc.

On the other hand in balance sheet accounting system depicted as majorly three segments like, assets ,liabilities and capital. Assets depicted as further classified form ,non current and current assets . Similarly liabilities are classified as non current liability and current liability .Capital is generally  expressed as owners contribution .

In cash flow statement total cash inflows and outflows categories in three part, a) cash flows from operating activities ,b) cash flows from investing activities and c) cash flows from financing activities. It gives a more prominent pictures to the investors about how cash flows from different segments.

2.c) By internal auditing fraud and error can be detected and prevented by company or organization. By detail test regarding transactions ,detail test regarding balances and analytical procedures , detection of fraud and error can be done .But for that management must have to support their internal audit team and adequate authority must have to be given .