Financial Systems and Auditing

Analysis of Accounting Systems

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Introduction to Financial Systems and Auditing

Financial systems can be defined as systematic procedure of preparing statements for the disclosure of financial status of organisation to several stakeholders. Process of auditing is accomplished through implementing accounting and auditing tools. Present project report aims to develop skills for the evaluation of accounting systems in commercial organisation. For this purpose selected entity is Tesco. It is one of the major private sector employers in UK. Report will include description of different accounting records along its concept and significance. Further analysis of management control systems of Tesco will be done. In the last part of the project, audit report will be prepared by considering financial figures. 

Task 1 Significance Of Effective Accounting Systems

1.1 Explanation of the purpose and use of different accounting records

Income statement

Income statement is a combined form of trading account and profit & loss account. It is used to record income and expenditure of business over a period of time. It is prepared by following principle of accrual system (Shahwan, 2008). Income statement can be prepared on daily, monthly, and quarterly or on yearly basis. This statement is prepared to determine profit or loss generated by organisation through their commercial activities. Through the figures of income statement, management of Tesco will be able to plan for budget surpluses and shortfalls. 

Position statement

Position statement is also known as balance sheet. It shows balances of assets and liabilities on particular accounting date. Usually it is prepared at the end of the financial year. For better presentation, assets and liabilities of organisation are categorized into non-current and current categories. Balance sheet is prepared to determine financial position of business (Stendardi, and O’Reilly, 2006). It helps lenders and investors in making their decisions to assure secure return.

Cash flow statement 

Cash flow statement is prepared to record inflow and outflow of cash in particular accounting period. This statement can be prepared on daily, monthly, and quarterly or on yearly basis. It is prepared by following principle of cash accounting. It is comprised of three activities i.e. operating, financing and investing (Ho, Liu and Tsay, 2008). In operating activities daily transactions are recorded such as sales, revenue from debtors, payment to creditors etc. In investing activities, transaction related to purchase or sale of non-current assets is recorded. In financing activities, transaction regarding change in debt and equity is recorded. Through this statement inflow and outflow of the cash can be monitored. 

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1.2 Assessment of significance and meaning of fundamental accounting concepts

Fundamental accounting concepts are the basic principles which are required to be followed by all commercial entities. These fundamental concepts are formed on the basis of Generally Accepted Accounting Principles (GAAP) for uniformity. Through the applicability of these concepts, users of the financial statements do not have to make assumption in the process of interpretation (Drake and Fabozzi, 2012). For example through the entity concepts, users can be ensured that owners are different from the business and they will not be liable for negligence or omissions of business. By the concept of going concern general assumption can be made by the user regarding indefinite continuation of operations of entity. 

Objectives of fundamental accounting concepts are to make the accounting information useful, relevant and comparable for the users. For comparison, uniformity of financial statements is essential to make viable decisions. Thus principles such as cost, dual aspect, matching and consistency are introduced. By these principles organisation will be able to make similar accounting treatments of the transaction (Galloway and Deakins, 2012). For reliable information, principles such as materiality, realization and conservatism are developed. By the applicability of these principles commercial organisation will not be able to show future profits but they will be under compulsion to show expected loss. Further disclosure of information will be on the basis of materiality. 

1.3 Evaluation of factors that influence the nature and structure of  accounting systems of Tesco Plc

Accounting systems are at the core of the well-functioning and success of business. All the companies are free to make choice regarding enterprise resource planning systems and transaction processing accounting systems. These systems provide a systematic computerized method for the recording of business transactions (Cohen, and Kaimenaki, 2011). These systems are generated on the basis of requirements and objectives of the entity. In the context of Tesco following factors affects nature and structure of accounting systems-

Compatibility with business- Functions of the accounting system are affected by the nature of operations of business. Tesco is dealing in retail industry thus they have their specific goals and objectives. Their accounting system is required to be compatible with their daily business needs such as storing and retrieval of client information, creation of invoices, keeping track of inventories (Hirsch, 2000).

Perception- Effectiveness of accounting system is also affected by the fact that how it is received by their employees and management. There might be possibilities of resistance to the alteration in accounting system due to complexity. Thus support of management is essential for the implementation of accounting system (Lucey. 2003). Further this factor will enhance validity of decision-making functions.

Level of training- Another factor that influences nature and structure of accounting systems is level of training. Introduction of accounting system should be supported by training. If these lack adequate training than accounting system will act as problem instead of solution to the financial department of Tesco (Portz and Lere, 2010). In addition to this, user in Tesco will feel ease in financial and accounting functions of these systems is implemented by proper training.

Task 2 Analysis Of The Management Control Systems Of A Business

2.1 Identification of several sources of risk associated with diversified strategic move of Tesco

Several risks are associated with the diversified strategic move of Tesco. Some risks are highly severe which can cause serious damages to the company and management of this risk can be cost or time consuming (Sisaye and Birnberg, 2010). Business risk can be bifurcated into external and internal risks. External risks occur due to events taking place outside the entity and occurrence of internal risks is due to events taking place within the entity. Description of these risks is as follow-

1.Strategic risks- These risks are associated with the operational activities of Tesco. These risks arise due to environmental factors such as change in supply and demand, introduction of new technologies and competitive structures. These risks affect the operational strategies of entity. In this aspect, transaction (relocation of assets through acquisitions and mergers, alliances, joint ventures and spin-offs) and investor relations are also covered (Vaivio,  2008). 

2.Financial risks- These risks are connected to financial structure and transactions of the Tesco. These risks enhance the probability of loss inherent in method financing. Further it may impair the ability of Tesco in providing sufficient return to the Tesco (The conceptual framework for financial reporting. 2013).  These risks should be assessed by management of Tesco on priority basis else it will have adverse impact on return on investment.

3.Operational risk and compliance risk- Operational risks of Tesco are connected with the administrative procedures of the retail industry. In present environment these are the most are general risks to be occur. Further compliance risks are related to legislative norms and regulations. If statutory obligations are not fulfilled by Tesco then company be liable to pay penalty charges.

4.Other risks- Other risk are associated with the scale of retail industry. It can be occurred due to the uncertain situation such as natural disaster or economic events like deflation (Shahwan, 2008). 

2.2 Analysis of control system for detection of fraud

Control system is developed for the identification of potential or actual risk within the corporate entity. This process is relied upon the implementation of appropriate system and procedures to prevent such activities. Control system of Tesco is comprises of following techniques- 

Physical controls

Initially risks are assessed by the management of company to detect potential or actual fraud within the corporate entity. In reactive measures, management responds to reports of fraud. For this purpose physical controls are implemented. According to the American Institute of Certified Public Accountants, physical control creates barriers for the prevention of fraud (Lucey. 2003). Tesco had implemented policy of regular check. Through this policy company is able to prevent convenient access to cash. Further logs, keyed entries and video cameras are established to suspect fraud in organisation.

Internal controls

In control system of Tesco, two major internal controls are categorized that are detective and preventive. Detective controls are implemented by Tesco to reveal suspicious circumstances, errors and inconsistency in operational activities. Objective of these control systems is to mitigate losses or make changes in the existing policy of organisation. Preventive controls are taken to prevent occurrence of fraud or error. Basis principles of the internal control are segregation of duties in control system (Sisaye and Birnberg, 2010). Further all the transaction will be divided in various steps and each step are required to be completed by different person. Control points in Tesco where segregation of transaction is done is processing sales,, preparing deposits, issuing checks, approving purchases or processing payments and custody of cash.

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2.3 Evaluation of risk of fraud in payroll system of organisation

Risk of fraud in payroll system is evaluated though the Risk and Process Assessment. Initially resources are evaluated through software in payroll process for the identification of possible risk. For this purpose duties are segregated between staff members and assessment of system is made. These processes are then followed in payroll office than same is aligned with the complexities of entity. Further external and internal audits are conducted for the detection of fraud and errors. A fraud risk assessment is performed in Tesco on periodical basis for the identification of potential schemes and events which are required to be mitigated. According to the management of Tesco, best defence against the payroll fraud is a good offence (Lucey. 2003). Due to this fact company is having strong internal controls supported by appropriate monitoring techniques for the prevention and detection of the payroll fraud.

Task 3 Contribution For The Planning And Execution Of Audit

3.1 Report to line manager

Following factors are required to be considered for preparation of Audit plan-

1.Preliminary work- Prior to the conduct of audit, entity should complete preliminary work for accomplishment of real audit work. It will include factor such as cash count, stocktaking, review of previous year’s working papers and debtor’s circularisation (Galloway and Deakins, 2012). Through this preliminary work auditor of the Tesco will be able to remind crucial matters from previous year to be resolve in current year.

2.Changes in statutory norms and legislation- Auditor is required to consider impact of changes in statutory norms on the financial statements. For this purpose they are required to evaluate compliance with the applicable ethical requirements. This will include independence, in accordance with ISA (UK and Ireland) 220. In addition to this, auditors are required to have clear understanding of the engagement term as per the ISA (UK and Ireland) 210. 

3.Audit strategy and audit plan- In the ISA 300 it has been stated that activities of audit planning should establish overall strategy for engagement. On the basis of these activities audit plan should be prepared. In strategy- time, scope and objectives of audit is required to be described (Shahwan, 2008). Further this strategic plan will contain detail description of risk assessment by the auditor.

4.Other factors- Auditor should also consider change in business, accounting system or management policies in preparation of audit plan. Through this information auditor will be able to asses internal control system to determine the viability of provided facts.

3.2 Description of various types  of audit tests that can be used within the accounting systems 

Description of various types of audit tests is enumerated below

Risk assessment procedures

Risk assessment procedures of auditor are represented by process implemented for understanding of entity and their environment. Objectives of these test is to assess the risk of the material misstatement in financial statements of Tesco (Cohen and Kaimenaki, 2011). This is one of the crucial tests performed to avail better understanding of internal control. 

Substantive tests of transaction

Substantive test of accounting transaction can be defined as systematic process used for the identification of dollar misstatement which can affect the accuracy of balances of financial statement. These tests are applied to ensure that objectives of audit are satisfied. For this test evidence is collected from the Verification of the recording and summarizing of gross revenue and cash receipts. Further it is ensured that all the transactions are recorded for the purpose of auditing.

Tests of details of balances

This test is basically focused on the ledger balance of the income statements and balance sheet. However it is mainly emphasized on figures of balance sheet. This test helps organisation in monetary correctness of the accounts (Sisaye and Birnberg, 2010). Extent of this test is based on the substantive analytical procedures, substantive tests of transactions and tests of controls. For this purpose evidence of manual examination of inventory and confirmation from customers is taken for the balances of account receivables. 

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Analytical tests

In this test comparison is made of recorded amounts to the expectations of the auditor. This test is mandatory to be conducted during the planning and completion of the audit process. Basic objectives of this test are to indicate asserted misstatements and to provide substantive evidence for auditing.

3.3 Analysis of the stages of audit process and explanation of the audit record system

Stages of Audit report is as follow-

1.Planning- Initially audit plan is developed by auditors to determine that which documents will be required for audit. This information can be collected from the previous audit reports and preliminary statements collected by the involved parties. In addition to this, during the planning phase auditor will describe the scope and objectives of audit (Burns,  Hopper  and Yazdifar, 2004). Further in some critical situations official letter is sent to the internal organization's auditing committee to declare that audit is forthcoming.

2.Preliminary review- In this step evaluation is done by auditor regarding internal control process. In this step, auditor is allowed to make changes in difference between assumption made by him and actual operational process of organisation (The conceptual framework for financial reporting. 2013). For this purpose meeting will be conducted by auditor to discuss vital facts and process as per the relevancy. 

3.Field work- After the preliminary review auditor will start their field work. This will be initiated through conduct of interview with employees of different departments to develop understanding of general practices of company (Reid, 2002). In addition to this, areas will be identified which are not in accordance with compliance.

4.Audit report- This is the last stage of audit. In this step audit report is prepared by cumulating all the work done in previous three phases. In this report areas will be identified where there is scope of improvement. This description will be supported by recommendation and expert advice by auditor (Shim and, 2008). At last, documentation will be done of report and working papers for future references and legal evidence. 


From the present project report conclusion can be drawn that procedure of financial reporting is accomplished through implementing accounting and auditing tools. Fundamental accounting concepts are developed to make accounting information useful, relevant and comparable for the external and internal users. Accounting systems are at the core of the well-functioning and it provides a systematic computerized method for the recording of business transactions. These systems are created by considering requirements and objectives of the entity. Several risks are associated with the diversified strategic move of Tesco thus Control system is developed for the identification of potential or actual risk within the corporate entity.


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