Financial Accounting Theory and Analysis

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Introduction

Accounting process is one of the most complex one in organizational practice. Internal control is more than the act of regulation or governing the particular organization, It involves accounting intelligence as a fundamental to the development of effective controls, since they attempt to assure the leadership of a business to its predetermined accounting management objectives. For accountants and auditors, it is important to recognize monitoring and controlling principles and methods.

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The Elements of Internal Control

In accounting the elements of internal control involve segregation of duties, proper authorization, adequate documents and records and independent checks. The internal control will involve clear assessment of the risks and possible methods to monitor and predict accounting risks. In accounting practice, control encompasses the monitoring of management activities to see if plans are being carried out; the analysis of accounting performance in terms of standards and objectives; authority, force, or coercion to guide accounting practice to the achievement of objectives; and constraining and regulating decisions and actions (Schrieber et al 2005).

An internal-control system contains realistic standards against which accounting performance can be assessed. It also includes intelligence about current levels of achievement, an assessment and evaluation of accounting performance, recommendations for adjustments and realignments of resources, standards, or both, and the power to institute recommendations. Although a systems-based approach enabled auditors to provide an assurance on the adequacy of the accounting control systems, a full system examination might not necessarily be appropriate or efficient for all transactions (Bragg, 2007).

This is because some financial statement amounts might be too small to be material or alternatively very large and so are material. Furthermore, given the large quantity of transactions processed by most government organisations, it was almost impossible to be absolutely confident about the audit opinion formed, as there would always be some degree of risk associated with any given opinion (Bragg, 2007).

The Functions of Internal Control

Independent checks are dependent on information. Because of the spans of time, distance, and authority, management cannot personally manage all activities. For example, it is impossible to evaluate the performance of all accountants spread over a widely diversified geographic area, management must rely on information from reports to evaluate the efficiency of performance and determine whether adjustments are necessary.

The utilization of PCs and information technology is an effective tool for providing more up-to-date and adequate information for accounting control. The accounting practice is becoming more like the management of a research project, with the control of information becoming increasingly significant and internal control assuming an increasing proportion of the accounting management manager’s time (Schrieber et al 2005).

The necessity of achieving more efficient internal control operations, making better checks, and developing more economical methods of distributing goods implies effective control. To be responsible for a variety of Independent checks, or to be given responsibility for a profit center, implies that the management manager must control all the activities involved. But although control implies integration, coordination, and direction of decentralized activities through the systematic measurement, appraisal, and readjustment of performance, it does not mean centralization.

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Monitoring

Monitoring of accounting practice is intertwined with planning. Without a plan there is nothing to monitor, and without control, accounting management plans probably cannot be realized. Inseparable components of accounting practice both use many of the same tools, such as accounting forecasts and budgets. Accounting control is complicated by the impact of external factors and the existence of multiple goals.

Since accounting organizers have ambiguous, competing, multiple objectives rather than single, unmistakable goals, and since these goals form a hierarchy, one should also expect a hierarchy among controls. he audit methodology involves five major activity categories: co-developing and planning; understanding clients’ business environments; assessing clients’ business risks, carrying out audit procedures; and concluding results. An assessment of clients’ satisfaction is now carried out at the conclusion of the audit activities (Bragg, 2007).

Auditing Control

The team of auditors should recognize that monitoring may be differentiated on the basis of their scope and importance. As with plans, for instance, there are strategic, functional, and tactical controls. Strategic monitoring evaluate and adjust accounting objectives, directions, plans, and the total accounting management mix. Functional monitoring relates to adjustments in the functional areas, such as sales management, that are also longer range and broad in scope. Tactical monitoring, more minor and immediate, adjusts such matters as advertising schedules or package design.

The very need for accounting control arises from the requirements of the accounting management operation to manage change effectively. The adjustment of corporate effort to meet the demands of the marketplace, or the balancing of corporate resources with market potential, is the essence of control activity. Accounting control serves the end of redirecting and reshaping accounting management effort in order to maximize a firm’s impact and profitability. It is the area of corporate activity through which the resources and actions of a company make the most of changing accounting management opportunities. It is also the means for overcoming deviations from objectives, goals, and standards, for resolving inter[subsystem conflicts, and for achieving greater efficiency.

The control program will teach scientists and engineers that a total accounting management control system has two major components: a monitoring process and an adjustment process. Monitoring results from the generation of accounting intelligence and the use of criteria of accounting management performance. It attempts to check, evaluate, and ascertain whether performance quality is within proper limits. It is designed to search for symptoms that indicate that accounting operations must be directed, realigned, or rebuilt (Raihi-Belkaoui, 2007).

Sometimes monitoring is performed through a accounting management audit. It continuously gathers information about such aspects of accounting activity as costs, and the profitability of products, customers, and territories. In so doing, it assesses the effectiveness of salesmen in terms of quotas, number of calls, and volume; it ascertains the efficiency of various types of distribution channels by volume and profit ability; and it determines the cost of different techniques of storing and handling inventories, which it evaluates against established or implied standards.

Based on assessment of performance, some realignment of the accounting control may be made (Edmonds, 2004). Adjustment implies power — the power to control. Servo-mechanism theory provides a means for analyzing and improving control systems, for measuring the efficiency with which feedback information is used, and for determining the costs of system response time in terms of computers. This thinking is reflected in the electrical engineer’s notion of control. Managers view the control function in terms of the current state of a system, a desired state, the number of periods in which the desired state is to be reached, and the “driver” necessary to get the system there.

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The driver in accounting management may be thought of as the accounting management mix or part of it. Information, particularly feedback, is a significant part of any accounting management-control system, for the quality and quantity of knowledge available are fundamental to control performance. Feedback presents a way of shaping accounting management by taking into account the results of past performance and learning from it the actions to take in the future. The concept of planned appraisal auditing involved a critical evaluation of the accounting systems of an auditee (Raihi-Belkaoui, 2007).

For each identifiable audit, two sets of objectives would apply—the general and the specific. The general objectives were those which applied to each audit while specific objectives were those which applied particularly to the activity under review and would most likely vary from audit to audit. The degree of reliance the auditor could place on existing systems was determined by using compliance and substantive testing. In situations where compliance tests indicated few errors, it would be reasonable to conclude that the system was reliable, and substantive testing could be kept to a minimum.

However, more substantive tests would be conducted if the compliance testing disclosed errors in the system. An emphasis on the client’s business risks will lead to a more strategic and systematic approach to auditing. The auditor can use this knowledge of the client’s business and industry to develop a more efficient and effective audit. The auditor will then place less emphasis on routine transactions that are likely to be tightly controlled through the client’s internal control structure and concentrate on identifying non-routine transactions, accounting estimates and valuation issues that are much more likely to lead to misstatements in the financial statements (Evans, 2002).

Conclusion

In sum, the accounting control system has an external and an internal aspect. Control deals here with the progression of raw materials to finished products, and with such accounting correlates as the product specification and package design necessary to develop customer, and ultimately consumer, utility through brand and product lines that satisfy wants and needs of the accounting safety concerns

References

Bragg, S.M. (2007). Accounting Best Practices. Wiley; 5 edition.

Edmonds, Th. P. (2004). Fundamental Financial Accounting Concepts. McGraw-Hill.

Evans, Th. (2002). Accounting Theory: Contemporary Accounting Issues. South-Western College Pub; 1st edition.

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Raihi-Belkaoui, A. (2007). Accounting Theory. Cengage Learning Business Press; 5 edition.

Schrieber, R.G. Clark, M.W., Cathey, J.M. (2005). Financial Accounting Theory and Analysis: Text Readings and Cases, Eighth Edition. Wiley; 8 edition.

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