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
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.
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
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.
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.
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.
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
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.
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
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.
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
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
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