Accounting Theory and Control Systems
Financial Accounting is often referred to as?
What is external accounting?
The TWO methods of accounting
What is: Cash basis and Accrual Basis
The Levels of the Conceptual Framework
Level 1 - objectives
Level 2 - qualitative characteristics and elements
Level 3 - assumptions, principles, constraints
What are the different types of adjusting entries?
Prepaid expenses, Unearned Revenues, Bad Debts, Depreciation, Closing Entries
What is the purpose of the internal controls?
Prevention, detection and correction of fraud and errors
What are the two types of auditors?
Internal and External
This involves the recording of financial transactions by hand in physical books, ledgers and journals
What is the Manual Accounting System
This form of business is owned by one person and has unlimited liability
What is a sole trader?
Two roles of the Accountant in Financial Accounting
What is:
1. Recording Financial Transactions
2. Preparing Financial statements
3. ensuring compliance with relevant accounting standards
4. Financial analysis
5. Ensuring proper Internal Controls
6. Budgeting and Forecasting
7. Auditing
8. Financial Advisory
The purpose of the standards
What is to ensure compliance with the true and fair view concept.
The ______ characteristic states that accounting information should be complete and a faithful representation, neutral and free from material error and bias.
Reliability (Faithful Representation)
_________ is when an expense is incurred but not yet paid. It is recorded as a ________ on the balance sheet.
Prepaid Expense, current asset
What are the Objectives of the internal controls?
Safeguarding of assets, prevention and detection of fraud, timely preparation of financial statements and to promote compliance with management's policies and procedures.
What is the role of the auditor?
To express an opinion on whether the financial statements are of true and fair view of the entity's affairs.
Easy to understand and use and low set up costs are advantages of …
What is the Manual accounting system
This business organization consists of two or more persons who share profits and losses.
What is a partnership?
The different Accounting Standards Setting Boards are?
FASB - Financial Accounting Standards Board
IASB - International Accounting Standards Board
The following acronyms stand for: IFRS, GAAP, IAS
What is
IFRS - International Financial Reporting Standards
GAAP - Generally Accepted Accounting Principles
IAS - International Accounting Standards
What are THREE more qualitative characteristics?
Relevance, Comparability, Consistency, Understandability, Substance over form, prudence, timeliness.
What is the journal entry to record Accrued Expenses?
Dr. Expense and CR. Accrued expenses (liability)
What are the Internal Controls Principles?
Segregation of Duties, establishment of responsibilities, documentation procedures, PME, IIV, other controls
The internal auditor is hired by _______ whereas the external auditor is hired by ________ at the AGM.
Management (HR) and shareholders
The manual accounting system has a higher risk of human errors in _______________ and _____________
What is data entry and calculations
This form of business has shareholders and exists as a separate legal entity
What is a corporation/company?
TWO internal and TWO external users of accounting information
Internal: Management, Employees
External: investors, creditors, government agencies, customers, banks, regulatory agencies
a. The IASC was first created in? b. The IASC became ______ in 2001 c. The IASC created ______ in 2001 to replace the ______
a. what is 1973
b. what is IASB
c. what is IFRS and IAS
Which accounting assumption states that the economic life of the business is subdivided into months, years, quarters etc.
Time Periods
What is a Bad Debt and how is it recorded?
A bad debt occurs when an account receivable is no longer collectible and must be written off. We Dr. Bad Debt and Cr. Acc. Rec or All. for Bad debt.
Employee rotation and mandatory vacation are examples of ________.
Other controls
What is the relationship of the internal auditor and external auditor to the company they are auditing?
Internal - an employee of the company but separate from management
External - not an employee and only hired for a specific task.
This is the use of accounting software to record, process and manage financial transactions
What is the computerized accounting system
This business organization is democratically controlled, focuses on service to its members and provides patronage refunds.
What is a co-operative?
The steps in the accounting cycle are?
What is: Analysis of business transactions, make journal entries, post to the Ledger accounts, Prepare the trial balance, make adjusting entries, adjusted trial balance, prepare financial statements, close accounts, post closing trial balance.
This IASC became this standard setting body in 2001
What is the IASB
What does the Monetary Unit assumption state?
States that only transaction data that can be expressed in the term of money, be included in the accounting records.
What are the two methods of depreciation and what is the journal entry to record depreciation?
Straight line and reducing balance. To record we Dr. Dep'n expense and Cr. Acc. dep'n or provision for dep'n
The Sales manager checking over the work of the salesclerk is an example of ___________.
Independent Internal Verification
Which auditor's responsibility is it to detect error and fraud?
Internal Auditor
Quickbooks, Sage 50 and Excel are all examples of which system?
What is the computerized accounting system
This organization focuses on social improvement rather than profit and is mainly financed through donations and grants.
What is a Non-Profit Organization/NGO?
The four branches of accounting are:
What is financial accounting, Cost and management accounting, tax accounting and auditing
The IASC created this in 2001 to replace the IAS
What are IFRS
What are the Accounting Principles and explain ONE?
Revenue recognition - revenue is recognized in the period in which it is earned and follows the accrual basis of accounting, matching principle - expenses should be matched with the revenues they helped generate in the same period, Full disclosure - requires that circumstances that make a difference to financial statements users be disclosed, Historical Cost - Assets should be recorded at their historical cost of the cost aid to acquire the asset.
What are temporary and permanent accounts?
Temporary accounts are closed off at the end of the period because they are only used to track accounting activity during the period. Eg. income and expense accounts. Permanent accounts are not closed off at the end of the period because they are used to track activities that will last longer than the period. eg. balance sheet accounts.
If the CEO is the only person authorized to sign off on cheques, this is an example of?
Establishment of responsibilities
The internal auditor reports to _______ and the external auditors report to ________.
Board of directors/audit committee and audit committee
What are 2 advantages and 2 disadvantages of the computerized accounting system?
Advantages: rapid data entry and revival of information, reduces the risk of errors and fraud, handles large volumes of information and complex accounting tasks, generates detailed and customizable reports, electronic storage enhances data security
Disadvantages: high initial set up costs and maintenance costs, susceptible to cybersecurity hacks and bugs, requires staff to be trained
This type of organization is created by an act or Parliament, provides essential public services and is accountable to the government rather than shareholders
What is a Statutory organization?
The 5 key financial statements are
What is Statement of comprehensive income, statement of financial position, statement of cash flows, statement of changes in equity, notes to the financial statements
What are TWO benefits of Accounting Standards?
Increased transparency, use of common accounting language, prevents fraud and accounting manipulation, improves the reliability of financial statements.
This Constraint states that it is apples when there is uncertainty of whether a choice should be understated rather than overstated in terms of income or assets and overstated in terms of expenses and liabilities.
Conservatism
If the cost of an asset is $15,000, the estimated salvage value is $1,000, the useful life of the asset is 5 years and the value of the useful life is $100,000, what will be the depreciation expense using the straight-line method?
15,000-1,000 = 14,000
14,000/5 = 2,800
An accounts receivable clerk does the invoice, collects the cash, gives the customer their product and records the cash. This is a violation of which principle?
Segregation of Duties
If an accountant shared the private information of ABC manufacturing with its competitor, BCA manufacturing, this is a violation of what?
Confidentiality
This control entails user authentication and role based access
What are Access Controls
This type of business is most affected by the death or withdrawal of an owner, often requiring dissolution or reformation.
What is a partnership?
List the steps of the accounting cycle
The IFRS for SMEs were developed because?
They are less complex, they reduce compliance costs, make financial statements ore user friendly, they improve the success of international funding, and enhance comparability.
Name and explain TWO other Constraints
Materiality - information is considered material if its omission or misstatement could influence economic decisions. Cost benefit - the benefit derived by external users should outweigh the cost incurred by internal prepares, Industry practice -when certain accounting policies are peculiar to a particular industry.
The petty cash box is left in an unlocked drawer where anyone can access it. This is a violation of which principle and what can management do to ensure this is avoided?
PME. Place it in a locked drawer in a locked office.
Mary is an internal auditor and is in a romantic relationship with Tom in Sales. The HR manager reprimands her because this is a violation of
Conflicts of Interest
This controls talks about input validation, data encryption and audit trails
What is data integrity controls
This form of organization is best suited for large scale operations due to its unlimited capacity to raise capital.
What is a corporation/company/PLC?
The steps for developing the International Accounting Standards
What is:
1. The IASB sets up a steering committee who identifies financial reporting issues
2. The steering committee identifies and analyses issues and makes recommendations to the board.
3. The board deliberates at one or more public meetings
4. the board issues an exposure draft to get stakeholder input
5. The board holds roundtable meetings on the exposure draft
6. the staff analyses feedback and makes any adjustments
7. After comments and revision, the exposure draft becomes an IAS.
The accounts receivable clerk maintaining detailed records of all customer invoices and payment receipts is an example of which principle?
Documentation Procedures
Jill took an unauthorized $300 from the petty cash voucher and bought lunch for herself and Joan. Joan forged the signature of the Purchasing manager on the voucher. This is an example of?
Collusion
This controls talk about regular backups and disaster recovery plan
What is backup and recovery controls
An individual who wants full control, simple formation, but accepts high personal risk would most likely choose this form of business.
What is a sole trader?
Continuous monitoring entails using automated tools to continuously monitor ____________________, detect _______________ and respond to potential ______________ in real time
What is system performance , anomalies, security breaches
This form of organization is least suitable for profit maximization but most suitable for addressing social problems and community development.
What is a non-profit organization/NGO?