FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010

Table of contents

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010

Introduction
AC Company operates in purchasing and selling processed fish and meet, and fresh vegetables and fruits. There are three store of AC in Dong Da, Hai Ba Trung and HoanKiem districts. Accounting system of AC includes cash ledger, creditor ledger, debtor ledger, inventories ledger and others relevant ledger. Company applies straight line method to calculate depreciation at 1 ! of total asset and "#"$ method to calculate cost of goods sold. %rofit is calculated based on recorded revenue and record cost of goods sold. AC issued provision policy &hich price of goods &ill be reduced &hen 'uality is degraded and generally reduced &hen (ept more than three days. %urchase is conducted by purchase department based on notice from stores. "oodstuff is delivered from AC to stores and counted by transporter. Cash received from stores is collected by AC cashier in the ne)t day &hile cash record is sent to AC accountant at the end of &or(ing day. After that, AC accountant compare inventories sold &ith cash received by AC cashier. The report &ill provide the information about purpose and use of different accounting records, importance of fundamental accounting concepts and ho& AC apply the. *oreover, it &ill give the factors &hich influence the nature and structure of accounting systems. "inally, the report sho& AC business and fraud &hich company might have and evaluated AC control systems in order to suggest the suitable methods to detect and prevent business ris(s.

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010

A. Explain the purpose and use of different accounting records relates to purchase and keeping inventories
All transactions done in business are recorded in the double boo(,(eeping &hich is considered as an accounting method. #t is useful tool for all companies, not only small, medium but also large companies. AC foodstuff trading company is not an e)ception. The meaning of double,entry must be understood first. #f there is any certain business transaction bet&een AC company and a customer -*inh, for e)ample., it is recorded t&ice in debit side and credit side &ithin the specific account relates to *inh. Debit side is on the left and credit side is on the right. Due to the nature of the AC Company &hich operates in purchasing and selling processed fish and meat, fresh vegetables and fruits, in order to record their business transactions relates to purchase and (eeping inventories, different accounting records need applying are purchase day boo(, purchase /ournal, purchase ledger, inventories ledgers, inventories subsidiary ledgers. 0ach of these boo(s has different uses and purposes &hich &ill be presented belo&. 1. Purchase day book and Purchase Journal %urchase day boo( is used for recording daily purchase orders on credit of fish, meat, vegetables, fruits of AC company and the purchase invoices &ith those food received to compare &hether it match to each other. Besides, the net amount of each invoice is calculated and recorded in the purchase day boo( &ith specific headers. Theirs total sum &ill be posted to the purchase ledger &ee(ly. #f there is any transaction &hich is non,routine in nature such as purchase of fi)ed assets or correction of errors, it records in purchase /ournal &hich is one of the important boo(s for AC company. Because errors may affect to the business of the company, recording in purchase /ournal helps cler( have clear vie& about &here the errors and minimi1e ris(s. Also, recording errors in different boo( li(e purchase /ournal, not in purchase day boo( helps the boo( clearer and more convenient for AC cler(s to chec( it. 2. Purchase edger %urchase ledger is used to record all the information from purchase invoice and credit notes &hich received by accounts department from suppliers. The purchase ledger cler(s &ill match the purchase invoices, credit notes &ith relevant received notes -234. &hich are re'uired to

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 see before paying suppliers6 invoice. 234 is used to record a receipt of goods, store staff chec(s it in terms of 'uality and 'uantity of meat, fish, vegetables. #n addition, purchase ledger is to compare &ith the suppliers6 statements are received in order to ensure the balance of debit and credit. Also, the balances of purchase ledger are computed and produced by the AC cler( monthly. !. Inventories edger and Inventories "ubsidiary edger AC inventories ledger is used to record all four types of inventories such as processed fish, processed meat, vegetables, and fruits &hich means those inventories are recorded in one boo(, called inventories ledger. #n order to control each type of inventory better, the inventory subsidiary ledger is used &hich means each type of product is recorded in each inventory subsidiary ledger7 fish is recorded in fish inventory subsidiary ledger, processed meat is recorded in processed meat inventory subsidiary ledger, vegetables is recorded in vegetables inventory subsidiary ledger, and fruits is recorded in fruits inventory subsidiary ledger. The number of fish, meat, vegetables, and fruits received by suppliers and deliver to AC1, AC+, and AC5 are recorded in detail. At the end of the day, the inventories are chec( to compare the in and out of products. The fish, meat, vegetables, fruits inventory subsidiary ledger are recorded in AC inventories ledger &ee(ly or monthly. By this &ay, it is convenient for AC store(eeper to chec( the information of AC inventories to control, and &hen need to inform and re'uire the purchasing department to purchase more foodstuffs in order to supply three stores in time and avoid delaying delivery products or products shortage for three stores to serve customers best and it also minimi1e the bad effects for AC company as a &hole. According to the case, 8processed foodstuff &hich approaches their e)pired dates and fresh vegetables and groceries &hich have been (ept more than 5 days are sub/ected to be reduced in their prices.9 Thus, it is important to chec( inventories of foodstuff to ensure the e)piry date of products, and then AC can sell them first in order to avoid the out of date. 0specially AC cler(s should follo&s vegetables and fruits inventory subsidiary ledger to chec( the time received from suppliers to sell them to avoid over,5,day products &hich lead to the reduction in prices, thus affect to the revenue of the company.

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 ;nderstanding the purpose and use of different accounting records for AC company as e)plained above, AC managers and cler(s can control the purchasing and inventories of AC &ell. Besides, the fundamental accounting concepts of AC company is one of the important factors &ill be presented in the ne)t part.

#. The $eaning and the i$portance of the funda$ental accounting concepts of A% %o$pany
Accounting standards, called "3<s and <<A%s, are one of the ma/or sources of accounting regulation. Accountants have traditionally regarded four concepts as being fundamental to the preparation of accounting information. They comprise of7

1. &oing concern' 8The going concern concept implies that the business &ill continue to operate in the foreseeable future, and that there is no intention to close the company do&n or to ma(e drastic cutbac(s to the scale of operations.9 The main significance of the going concern concept is that the assets of the business should not be valued at their =brea(,up6 value, &hich is the amount that they &ould sell for if they &ere sold off piecemeal and thus, the business &ere bro(en up.

>

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 #n the case of AC Company, there is one obvious evidence that can sho& the company has used 2oing concern concept in accounting &or(s. This is AC Company applies the straight, line method to calculate depreciation. The depreciation rate is 1 ! for all fi)ed assets. The yearly reduction in the cost of the asset is called depreciation. As the asset has an estimated useful life, it is normal to gradually &rite off the cost of the asset over the time of its useful life. This helps to ensure that as the asset physically or operationally deteriorates, its cost in the accounting records is also reduced to reflect the physical or operational deterioration. ;sing going concern concept, AC implies that it &ill continue its operations and so the assets &ill live out their full years in use. #n this case, a depreciation charge at the rate of 1 ! &ill be made each year, and the value of the assets &ill be reduced each year by the amount of yearly depreciation. According to this, AC Company intends to run the business in the foreseeable future surely. 2. Accruals or $atching' 8The accruals concept states that in computing profit, revenue earned must be matched against the e)penditure incurred in earning it.9 This concept is very important in operations of any companies, especially in accounting &or(s. The errors or differences in record and calculation &ill lead to incorrect results and then, the items in the balance sheet cannot be valued. 0specially, AC Company has three stores, the records of revenue and e)penses must be matched highly. Concretely, in the AC Company6s situation, profit is calculated based on recorded revenue and recorded cost of goods sold. 3evenue is recorded &hen money is received. Together &ith recording revenue from a sale, AC6s accountant calculates and records cost of goods sold based on "#"$ -first in first out. method. #t means that cost of goods sold is only calculated &hen revenue from a sale is recorded. This &ill ensure the relevance bet&een revenue earned and cost incurred. !. %onsistency' The consistency concept states that in preparing accounts consistency should be observed in t&o respects7 -a. similar items &ithin a single set of accounts should be given similar accounting treatment? -b. the same treatment should be applied from one period to another in

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 accounting for similar items. This enables valid comparisons to be made from one period to the ne)t. The consistency concept helps the company operate uniformly. Hence, accounting &or(s can be implemented and monitored easily. This facilitates for high accuracy and efficiency of accounting system. <ince AC has three stores &ith three accountants along &ith the company6s accountant, consistency &ill ma(e the correct records and boo(s in day,to,day operations. "or instance, in AC Company, as mentioned above, the depreciation rate is 1 ! for all fi)ed assets. #t ma(es ease in calculating deterioration of all assets. Additionally, together &ith recording revenue from a sale, AC6s accountant calculates and records cost of goods sold based on "#"$ -first in first out. method. #t means that cost of goods sold is only calculated &hen revenue from a sale is recorded. "urthermore, at the end of &or(ing day -Apm., cashiers at 5 stores send recorded files of sales to AC accountants. (. Prudence' Historically, the prudence concept has been seen to mean that in selecting bet&een alternative procedures or valuations, the one selected should be the one &hich gives the most cautious presentation of the business financial position or results. Ho&ever, "inancial 3eporting <tandard -"3<. 1A Accounting policies has subtly changed its emphasis. %rudence should be applied in conditions of uncertainty to ensure that more confirmatory evidence is re'uired about the e)istence of an asset or gain than is re'uired about the e)istence of a liability or loss. #t is not necessary to e)ercise prudence if there is no uncertainty. #n AC Company, there is provision policy issued. This policy allo&s accountants to reduce historical values of inventories &hen the 'uality is verified to be degraded. Buality of inventories is chec(ed by store staff every day. %rocessed foodstuff &hich approaches their e)pired dates and fresh vegetables and groceries &hich have been (ept more than 5 days are sub/ect to be reduced in their prices. #t means that &hen loss can be foreseen, it should be anticipated and ta(en into account immediately.

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010

%. The factors )hich influence the nature and structure of accounting syste$s of A%
1. #usiness si*e and structure' AC foodstuff trading company operates in purchasing and selling processed fish, meat, fresh vegetables and fruits. The company has 5 stores in Dong Da, Hai Ba Trung and HoanKiem Districts. #t can be considered as a small enterprise. Dith this si1e, there &on6t be a huge number of transactions every day. The nature and structure of the accounting system doesn6t have to be very comple). Thus, it &ill be easily conducted and managed by the company6s accounting department. #n term of business6s structure, AC Company has a very clear structure and is departed by functions. There are three departments in the company7 %urchasing department -in charge of conducting every purchases base on plan and notices from company6s stores., Accounting department -in charge of financial stuffs. and Delivering department -responsible for delivering goods to stores and to customers.. Dith this clear and speciali1ed structure, each department in the company can concentrate in their tas( to achieve the best result. #t also brings the company many advantages in conducting and managing its accounting system. "irst of all, it is very easy for the Accounting department to collect data about company6s purchases because there is a %urchasing department &ho conduct all the purchases. <econd of all, &ith only three departments in the company, the manager of accounting department can easily meet and communicate &ith the managers of other departments to e)amine and evaluate the financial data. "inally, &ith this simply structure, the management of the company can easily issue the procedures in &hich provide the functional authority for the accounting department in order to support them in collecting and evaluating financial data - for e.g. At the end of every day, the managers of the other t&o departments have to submit the daily report to Accounting manager.. 2o along &ith the advantages, there are also the disadvantages that the si1e and structure of AC Company bring to its accounting system. Dith the small si1e and simply structure, the accounting system of the company mainly conducted and managed by the Accounting Department. There are no other parties to e)amine the data li(e in the big company -the ris(s management or the accounting director.. Hence, The Company6s accounting system mainly

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 depended on the accounting department. #f the accounting department does their &or( &ell, the accounting system &ill provide accurate output and vice versa. 2. %o$pany+s financial policies The financial policies that decided by the management also influence the accounting system of AC Company in many &ays. "irstly, purchases are fist recorded in %urchase Eournal then recorded in #nventories Fedgers and #nventories <ubsidiary Fedgers. #t provides detail information about the purchases of the company. Ho&ever, to ensure the accuracy of every ledger, the accountants of the company have to comprehensively &or( &ith each other. The misunderstanding bet&een accountants may cause errors in the ledgers. <econdly, suppliers of utilities used at 5 stores send invoices directly to AC accountants and the accountants do payments. Thus, they can easily manage the e)penses of the company and directly record to the ledgers. The chance for errors and frauds is reduced. Thirdly, cash received and paid is recorded on the same day. At the end of &or(ing day, cashier at the 5 shops send recorded files of sales to AC accountants. By recording financial data daily li(e this, the accountants are able to avoid errors cause by dealing &ith too many data if they do it &ee(ly or monthly. Ho&ever, the accuracy of the data also depended on the cashiers of the stores. #f they ma(e errors or frauds, the data &ill not ade'uate or incorrect. "inally, revenue of the company is recorded &hen money is received. #t ensures no variances bet&een information in the ledgers and in reality. !. Accountants+ skill and attitude The accounting department of the company is divided into t&o groups, one group in charge of Debtor and one in charge of Creditors. 0ach accountant in each group responsible for different tas( such as7 #n debtor group, *ai in charge of loans from ban( and Hoang in charge of capital. Thus, each accountant is an important lin( in the accounting system. #f any of them doesn6t have good s(ill or good attitude, they can conduct errors or fraud? the output of the &hole accounting system &ill be not accurate. Therefore, the management of AC has to consider carefully in recruitment and training their accountants.

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010

,. Identify the co$ponents of business risks

There are three types of business ris(s &hich every company might meet, i.e. operational ris(, financial ris( and compliance ris(. 1. -perating risk $perating ris( can be defined as the chances of errors or mista(es being made &ithin the operations of the business. The first ris( occurs for AC companyis that suppliers sometimes cannot deliver goods to AC &hen the company needs. There is no authority is re'uired for the inventory re'uisition. The re'uisition might not be ade'uate. <ome goods do not re'uired by business and demand of customer might be purchased. 4e)t, re'uisition is sent to purchase department and purchase department raises purchase order into three parts. The process is correct. Ho&ever, &hen supplier delivers goods to AC &arehouse, purchase department also receives goods and raise goods received note. 4o authority is re'uired to chec(ed 'uantity and 'uality of received goods &ith re'uisition, goods might not be e)act as re'uirement. The 'uantity might over re'uirement and 'uality might under standard. #n addition, there is one more operational ris( &hen paying utilities invoices. <upplier utilities send invoice directly to accountant and accountant do the payment. There is no another person involving in payment process and chec( utilities invoice. The accountant and utilities suppliers might collude and amount of payment might be &rong. #t also related to financial ris(s. Beside cash payment process, cash receipt process occur operational ris(s. Although, cash is received by AC cashier and cash is recorded by accountant, the time recorded and received is different. At Apm of &or(ing day, AC accountant records received cash but until Gam in the ne)t day, AC cashier collects cash. 3eceived cash might be use in personal purpose overnight. "inal operational ris(s might occur in AC business is in inventory transaction. Because of e)pired dates of vegetable and fruit is short, more than three days, their price is reduced. Buality of inventories is chec(ed by store staff, not AC supervisor. Therefore, after three days, store staff might sells those goods at high price but records them to AC Company at decreasing price and gain e)tra amount of money. "urthermore, it is possibly that ris(s might occur during the transportation from suppliers to AC company &arehouses or from &arehouses distributed to three AC stores. Drivers might be got accidents that lead to affection on goods transported. Along &ith that, if drivers might
1

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 directly ma(e the accidences, the drivers might be sued, it influences on AC company6s prestige, not only the drivers but also the company have to compensate for the accident the made. #n addition, if there is a case that the drivers violate the traffic la&, drivers &ill be fined for money. #t seems that it does not affect to the revenue of the company because drivers are the one &ho bear the money fined. 4evertheless, that violation may lead to the late transportation to AC &arehouses that might affect to the goods 'uality, and the late deliveries to three AC stores. Fast but not least, there is another operating ris( raised from AC &arehouses is that fire. #f fire occurs unfortunately in the company, it &ill lead not only foodstuff but also the &arehouses are destroyed. Thus, this affect directly to the revenue of the company. The control of operating ris(s should be considered carefully in AC company to minimi1e those ris(s presented above. The AC store(eeper should pay attention more about the inventories, chec( &hich products need to sell first to avoid the reduction in price and spoiled products. Besides, for the distribution process, the company should buy insurance for cars, vans, and drivers to minimi1e ris(s. #t is necessary for the company to issue strict policies and raise a&areness of AC transporters to prevent the carelessness of drivers. #n addition, AC should e'uip more fire prevention systems, train employees ho& to deal &ith them in emergency situations. #t is decisive factor for the company to minimi1e ris(s from fire and protect &arehouses and goods better. 2. .inancial risk Due to the chance of collusion bet&een accountant and supplier of utilities, the ris(s of incorrect utilities payment might occur. Besides, money form store does not be collected in time? it is used for personal purposes, or at &orst, the money is misappropriated. Besides, &ith fresh food and vegetables, the using date is short, especially for vegetables and fruits &hich may be spoiled 'uic(ly after fe& days. Therefore, if the company can not sell them 'uic(ly or out of date, it might be unused &hich affect to the profit of the company. Besides, &hen the company &ants to e)pand business, need more capital to run business, or in any time the company has to loan money from ban(s, the ris( of the company might meet based on the interest rate. Dhen loaning from ban(s, AC has to pay interests. AC is the purchasing and selling foodstuff trading company &hich is a medium enterprise. The current

11

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 rate for <*0s -small medium enterprises. in Hietnam is 1+! per year &hich is not really easy to pay bac( if the company has problems in running business. #n the future, it is predicted that this interest rate is go up. Therefore, if the business of the company is not good that lead to the payment possibilities for ban(s. At &orst, the company may go ban(rupt. "urthermore, AC currently has three debtors, i.e. Fan, *ai, Hoang. #f the company can only collect some parts from those debtors or cannot collect anything, it becomes bed debts. #t affect directly to the revenue and profit of the company, this is also considered as one of the most important AC financial ris(s. <ummary, financial ris( is very important factor that AC have to care about because it affect to the revenue and profit and the running business of the company. "oodstuff in inventories should be chec(ed carefully to decide &hich goods should be sold first to avoid the out of date. The store staff can have some signals for products, e.g. stic(er green is for fresh and ne& products, yello& is should,sell, and the red one is emergence that means AC should sell them as soon as possible. By this &ay, the company can minimi1e the ris(s from out of date or spoiled products. AC managers should update the interest rate fre'uently in case AC &ants to loan from ban(s and select the time &hich the interest rate is advantage for the company to borro&. #n terms of debtors, AC should issue some strict policies to select debtors and based on the situation, relationship of AC and the debtors to decide &hether lend them or not. Those are e)pected to reduce the financial ris(s for the company. !. %o$pliance risk $ne compliance ris( might occur in AC company &hich is all bill of selling might not be recorded in accounting records. #t might help company reduce the revenue and ta) payment. Additionally, if AC company violates environment legislation and not satisfy environment standard, they might be fined. Depend on company policies, AC can response to business by some &ay such as7 accept the ris( if it is lo&, reduce the ris( by internal control, avoid ris( by not engaging in that activities or transfer the ris( by ta(ing out insurance.

1+

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010

E. ,escribe and evaluate the control syste$s in place in a business

All companies have chances to meet ris(s &hen running business. Company cannot eliminate the ris(, but can control and manage it. Business ris(s can be managed by internal control systems. Depend on the design and operation of different internal control systems, control procedures and ris( management policy in company, the ris(s can be reduce and manage effectively. There are five interrelated elements included in internal control system are7 control environment, ris( assessment, control activities, information and communication and monitoring. By identifying ho& the company applies them in practice, &e can evaluate the effectiveness of internal control of organi1ation.

Control environment7 it reflects the attitude and a&areness of broad director. #f top managers care about fraud and errors, they &ill give the strict policies, culture and structure to prevent company from business ris(s, and have serious attitude and a&areness about business errors. #f board managers do not concern about business ris(s, &ea(nesses in management and control may occur. "or AC Company, purchase department record and process all purchase transaction stages. Accountants only record and process all the stages of utilities payment. Besides, there is no e)tent &hich management and operation supervised is e)ercised. Thus, it can be inferred that control management in AC Company is not really strict.

15

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 To control the business ris(, it should (no& ho& accounting and internal control systems are. There are four techni'ues to record accounting and internal control systems7 narrative note, flo&charts, 'uestionnaires and chec(lists. #n AC company case, &e use flo&chart and narrative notes to describe the internal control system of organi1ation as follo&ing. There are three main transactions in Ac performance7 purchasing goods and selling goods. Purchasing and pay$ent process Purchase goods There are three stores in AC Company called AC1, AC+ and AC5. Base on the notice of those stores, they &ill give re'uisition to AC purchase department. Dhen the re'uisition is made, there have been many ris(s occurred such as goods for personal use, raising &rong order, incorrect in amount of goods or lo& 'uality. Thus, before re'uisition come to purchase department, it should be chee(ed and signer by stores manager or someone else. Then, purchase department &ill conduct the purchase process &ith supplier. %urchase order is prepared, given to supplier and filed. Dhen goods arrive, 'uantity and 'uality is chec(ed against the purchase order directly by purchase department. %urchase department &ill receive and record those. 2oods received note is raised and filed. Because it is credit selling, purchase is recorded in purchase /ournal and then inventories ledger. There is no segregation of duties in purchasing products. All activities are conducted by purchase department. #t is a mista(e in internal control system. %urchase department might collude &ith suppliers about 'uality and 'uantity of goods. 2oods received may be &rong about items, amount and 'uality? goods can be damaged during delivering. There should be goods in&ards chec(ing goods before they come to &arehouse in order to approve the transaction. All documents related to receiving goods must be chec( and compare &ith the purchase orders and re'uisitions by goods in&ards. Payment of utilities Accountant &ill received utilities invoice directly from supplier and pay the cash. #t is no doubts that internal control system here is too &ea(. Accountant carries out all the utilities payment and record. There is no segregation of duties. Accountant may collude &ith utilities

1:

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010 suppliers to overcharge on purchase invoices and gain some e)tra money. ;tilities should be approved and recorded by accountant and then give to AC cahier to pay the invoices. "elling and $oney receipt process 0very >a.m goods &ill be transported to three stores &ith re'uired 'uantity. AC &arehouse &ill prepare the order from three AC stores. AC &arehouse records inventory in stoc( issued doc(et and give one to transporter. Dhen goods arrive to three stores, they &ill be recorded in bill of lading by transporter. $ne bill of lading is given to accountant and another is field. The sales and cash receipts are recorded in bill by AC1, AC+ and AC5 cashiers. After that, bill is sent to accountant in the same day. Ho&ever, cash is collected by Ac cashier and recorded in receipt slip in the ne)t day. The cash control system of AC Company is &ea(. Cashier from stores might use received cash form customer for personal purpose until ne)t day. Ac cashier should collect the money at the same time &hen stores send the record to AC accountant. "inally, AC accountant compares inventories sold in bill of lading &ith cash received by AC cashier? it means company has compared the results of cash and stoc( counts &ith accounting records. Control procedure in this part of AC is 'uite tight.

1>

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 December 13, 2010

AC company_ purchase system_ ordering and receiving goods

Stores
$e%uisitio

AC Purchase department (AC

arehouse!

Accountant Direct "rom supp#ier uti#ities

n 3 2 Purchase 1 order 3 2 'ood 1 received note

2

&nvoice

Supp#ier

$e#evant (ourna# and #edger

1@

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 Dece AC company_ sa#es system_ se##ing and receiving cash
AC arehouse
$eceive stores re%uisit ion Prepare re%uested goods order

)ransporter
3

Stores (Cashier!
Sa#es

AC cashier
$eceived stores* cash 3

)ranspo rt to stores Prepare bi## o" #ading

3 2
-i##

3 2 $eceipt 1 s#ip

3 2 Stoc. issued 1 doc.et

3 2 -i## o" #ading 3 1

+
)o custom er )o stores )o $e#evant (ourna# and #edger

.. The risk of fraud )ithin A% %o$pany and $ethods for prevention and stores* detection of fraud
1. /isk of fraud )ithin A% co$pany "raud is intentional act that serve benefits of the conductor &ith preparation in advance, thus it is difficult to find out. ;nderstanding types of frauds possibly occur? the company may detect and prevent the frauds. There are some possible frauds that AC company can be committed, i.e. asset misappropriation, collusion &ith e)ternal parties, teaming and lading, altering che'ues and inflating e)pense claim, and stealing unclaimed &ages Asset misappropriation The first possible fraud is asset misappropriations &hich are company vehicles and inventories. "or instance, AC vehicles -AC company6s cars, vans., &hich are means for
1C
cashier

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 Dece transporting goods from suppliers to three AC stores, can be used for private purposes &ithout permission for private uses or leasing cars for other to embe11le money. Besides, AC transporter can misappropriate fuel for running vehicles by reporting the &rong information about fuel consumption, or consuming less fuel than e)pected but heIshe does not pay bac( the remaining amount to manager in order to misappropriate the money e)ceeded as follo&7
0oney appropriation 1 Provided a$ount 2 Actual using

"or e)ample, A, a AC transporter &as provided >, only used :, -1, , ,

H4DImonth for fuel running but he

H4D and did not report to the director and the rest of money

H4D. goes into his poc(et. Another e)ample is that A &as not provided fuel fees

in advance but paid based on his reporting or the (ilometers driving. The number of (ilometers driven is difficult to chec( because there are many une)pected factors lead to the increasing in (ilometers, i.e. traffic /am, generated /ourneys, etc. #n order to avoid the detection of AC managers, transporters may collude to each other to do fraud. "urthermore, AC issued provision policy &hich allo&s reducing the historical values of inventories if the 'uality is verified to be degraded that is 8processed foodstuff &hich approaches their e)pired dates and fresh vegetables and groceries &hich have been (ept more than 5 days are sub/ected to be reduced in their prices.9 Hegetables, meat, and fishes are considered as AC assets. Based on this, AC employees may misappropriate those assets by change e)pired dates of vegetables and groceries. #t means that &ith vegetables and groceries &hich are over 5 days are still informed that they are still fresh -less than 5 days.. By doing so, employees can get the misappropriation money by subtracted from less than 5 day,food, price and over 5 day,food,price as the follo&ing formula7
0oney $isappropriation 1 ess than ! day2food2price2 -ver ! day2food price

"or instance, AC apple price of over 5 days is 5@, of less than 5 days &hich has : ,

H4DI(g &hich is less than apple price H4DI(gJ -: , , 5@, .

H4DI(g. By informing those apples are ne& apples

&hich are less than 5 days, AC employees misappropriate :,

4ot only asset misappropriation, there is other fraud is collusion &ith e)ternal parties.
1A

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 Dece Collusion with external parties This factor is one of the important factors affect to AC revenue. #t can be occurred in all departments. AC employees may sha(e hands &ith AC6s competitors to sell or reveal secrete information relates to AC6s business that may affect to the business or prestige of the company based on the importance of the information revealed. 0specially, the collusion &ith e)ternal parties is easy to occur in AC purchasing department. The e)ternal parties in this case are suppliers. 0mployees and suppliers are arranged to each other to increase the price of foodstuff or machineries, and AC has to pay more for suppliers. An employee &ho has arrangement &ith suppliers is got commission from this. "or e)ample, B &ho responsible for purchasing pomelo from supplier C, because there is scarcity of pomelo in this case and AC has to buy from supplier C. C arranged &ith B in advance to higher the pomelo price and AC has to accept on that price. B can receive +! from the e)ceeded price from actual price and arranged price as the formula belo&7

%o$$ission 1 23 exceeded price 1 23 4Actual price 2 Arranged price5

"or e)ample, the actual price selling for AC is +>, is increase to +C, H4DI(g. B only increases +, e)ceeded price in this case is +,

H4DI(g. After arrangement, the price H4DI(g to avoid AC6s suspect. The H4D that

H4DI(g. B received +! commission from +,

means + H4DI(g from suppliers. + H4DI(g seems to be a small amount but AC tends to purchase in bul(, thus the more AC purchased, the more B can received from the price arrangement. #n addition, B also can collude &ith C in another e)ample. B can base on his close relationship &ith C to overcharge the purchase invoices delivered to AC company. "or e)ample, AC purchased C -J C 1C,> , ) +>, H4D to 1A,> (g. , (g pomelo &ith +>, H4D for C H4DI(g that means 1C,> , , H4D H4D . in total. B arranged &ith C to change the invoice delivered from (g. #t means that B corrupts 1,

from purchasing C

Teaming and lading Teaming and lading is other fraud can be committed &ithin AC. #n this case, AC cashier is the one &ho collects cash from AC1, AC+, AC5 cashiers, has the high opportunities to
1G

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 Dece commit fraud. HeIshe can ta(e the money received for private use such as lending &ith high interest, storing in ban( for interest in short term and then pay the money bac( for the company after a short time. By doing so, the cashier can get the interest from lending or ban(. Cler( can also e)ploit directors6 signature to issue che'ues for his purpose uses. Although the money got out &ill be paybac( for the company, especially before audit performed, the director still does not (no& anything about the cler(6s fraud. The teaming and lading can be occurred in AC1, AC+, and AC5 cashiers if those cashiers lend money for really a short time, bet&een Apm of the previous day to Gam of the ne)t day because on the ne)t day -about Gam., cash at 5 stores &ill be collected by AC cashier. Ho&ever, if there is collusion bet&een AC cashier and one of the 5 stores cashiers, teaming and lading is easy to occur. They can ta(e money for their private uses although they &ill pay the money bac(. Altering cheques and inflating expense claim "urthermore, in some case director issue che'ues &ith his signatures, and cler( is the one &ho (eep those che'ues. Therefore, heIshe has high chances to change the amount of money on the che'ues to put the e)ceeded amount in his poc(et. #n addition, on purchase ledger balance and suppliers6 statement, cler( can add up certain number to ma(e it balance in order to increase the payment re'uired for the company. Thus, the cler( can earn benefit from this.

Stealing unclaimed wages The last fraud may occur in AC is the opportunity of steal unclaimed &ages. #t happens &hen there is an employee in AC as a &hole, including AC1, AC+, and AC5 is fired or give up the &or(. 4ormally, the employee -K, for e)ample. is paid &ages based on the &or(ing time, or the company compensates him. Ho&ever, K is not informed about this -or in some case employees forget to ta(e the &ages., plus, AC accountant -L, for e)ample. does not inform him and does not report to the director. As a result, L can get K6s &age and pretend that K received the &ages already. Those are some possible frauds &ithin AC that the company have to pay attention. #n order to prevent and detect frauds, there are some possible methods &hich are presented in the ne)t part. 2. 0ethods for prevention and detection of fraud

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 Dece #n order to prevent frauds for AC in the future, the important thing is that the company has to improve the internal control system. There should not only store staff chec( inventories, it should have e)perienced and s(illed supervisors to chec( to inventories after the store staff inform the status of inventories, i.e. chec( the 'uality of products, &eigh them randomly -because it is not enough time to &eigh all goods. reduce the chances of stealing foodstuff for private use or &rong purposes. #n addition, the director has to pay attention and read carefully before signing &hich cler( gave him, chec( the che'ues issued to reduce the teaming and lading and altering che'ues and inflating e)pense claim by the cler(. Additionally, director should inform fired or given up &or( employees to get &ages before leaving in order to reduce the chance for AC accountant to steal unclaimed &ages. "urthermore, the company should pay attention to recruitment. AC ne& employees should not be recruited based on only s(ills, e)periences but also honest, trust, and loyalty. By doing so, fraud can be prevented at the early stage. Ho&ever, &ith the recruiting ne& employees &ith those factors above, AC &ill not succeed if the company concern to their e)isting employees, gain more loyal employees. Dhen have more and more loyal employees, frauds in AC &ill be reduced and the company can also save cost for recruiting and training ne& employees. #n order to achieve this, the company should issue some policies or sho& concerns and respect to AC employees by some motivations, e.g. re&ard for employees, give them bonus if they have good performance in &or(ing or &hen the company achieve the targeted sales, celebrate company annual parties, give holiday vacations for AC employees as a &hole, including three stores of AC7 AC1, AC+, and AC5 can rela) before going to &or(, can understand to each other more to corporate better. Dith the respects and concerns, a&ards and bonus, AC employees &ill have no intention to commit fraud. Directors can sho& concern to their employees by as(ing them about their family, their situation, standard of living, and so on. This is not only a concerning behavior but also considered as one of the good &ays to prevent frauds by understanding employees6 standard living, situation, or behavior. Based on the changing of employees6 life style, e.g. e)pense more for their daily life through clothes, accessories, shoes, bags, etc. &ith unusual behavior, &hich helps directors to consider and determine better &hether there is any employee ma(e fraud or not. Besides gain loyal employees, AC should build close relationship &ith suppliers in terms of meat, fishes, vegetables and fruits by issuing some policies, also give them incentives, i.e. give them the higher price than other competitors, responsible for transportation fees, share some parts of AC6s plan, invite e)pert to instruct them more ho& to improve 'uality and
+1

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 Dece 'uantity of output, etc. By doing so, the company can gain both loyal suppliers and employees. Thus, collusion bet&een e)ternal parties &ill be reduced. Fast but not least, along &ith motivation as # presented above, it is suggested that strict regulations on employees should provided if AC employees commit fraud based on the level of the commitment, i.e. punishment -cut bonus, a&ard or minus on salary., direct fire, or even at &orst, call police and sue them. # e)pect that &ith some fraud ris(s identified and methods to prevent and detect them, AC company can run business better.

++

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 Dece

%onclusion
#n conclusion, this report presents the purpose and use of different accounting records relates to purchasing and inventories. Also, the importance and meaning of the fundamental accounting concepts is e)plained details in part + of this report. #n addition, factors &hich influence the nature and structure of accounting system for AC Company along &ith the analysis of management control systems in business ris(s are also assessed in this report. Fast but not least, the ris(s of fraud &ithin AC Company are also mentioned in the last part of this report. Besides, some suggest methods for prevention and detection fraud are also presented in order to help AC company to improve the business performance. # e)pect that this report &ill be helpful for AC Company in running business and management control systems of the company.

+5

FINANCIAL SYSTEMS AND AUDITING ASSIGNMENT 1 Dece

/eferences

B%% %rofessional 0ducation, + 0ducation B%% %rofessional 0ducation, + %rofessional 0ducation Coenen, T. -+

:, Financial Reporting, Fondon7 B%% %rofessional

:, Financial System and Auditing, Fondon7 B%%

A., Three Basic Fraud Types, MonlineN, available at

Ohttp7II&&&.allbusiness.comIcrime,la&,enforcement,correctionsIcriminal,offensesI@@5>5@1, 1.htmlP Mvie&ed on 1 December + 1 N Coenen, T. -+ A., Three Basic Fraud Types, MonlineN, available at

Ohttp7II&&&.allbusiness.comIcrime,la&,enforcement,correctionsIcriminal,offensesI@@5>5@1, 1.htmlP Mvie&ed on 1 December + 1 N Dyson, E.3. -+ :., 8Accounting rules9, Accounting for Non Accounting Students, @thed,

chapter +, pp. 5 ,5C, "inancial Times7 %rentice Hall, 0ngland #n easy steps, Nominal !edger, MonlineN, available at Ohttp7II&&&.ineasysteps.comIresourcesIsamplesIGCA1A: CA5>::.pdfP Mvie&ed on + December + 1 N #nvestopedia, Accounting records, MonlineN, available at Ohttp7II&&&.investopedia.comItermsIaIaccounting,records.aspP Mvie&ed on 5 4ovember + 1 N Ho&To, The Purchase "ay#oo$, MonlineN, available at Ohttp7II&&&.ho&to.co.u(IbusinessIboo((eeping,boo(sItheQpurchaseQdayQboo(P Mvie&ed on + December + 1 N *oney #nstructor, Fundamental concepts of accounting, MonlineN, available at Ohttp7II&&&.moneyinstructor.comIlessonIaccountingconcepts.aspP Mvie&ed on 5 December + 1 N
Kit <adgrove,The complete guide to #usiness ris$ management, second edition, + 2o&er %ublishing Fimited, 2o&er house, Croft road, 0ngland +: >, public by