Presented by: Mr. Raziq Chapter 3 Accounting Systems and Internal Control Slide 3.1

Presented by: Mr. Raziq Chapter 3 Learning Objectives Define an accounting system and identify its principal elements. Briefly describe how an accounting system is used to record accounting data for a business each accounting period. Identify the key components of internal control. Identify the principal differences between manual and computer-based processing of accounting data and the related internal control implications. Discuss recent trends in computer processing and the related implications for organizations’ accounting and control functions. Identify internal control issues stemming from the growing trend toward multinational business operations. Slide 3.2

Presented by: Mr. Raziq What is a “system? “ A coordinated network of plans and procedures designed to achieve a stated goal in an orderly, effective, and efficient manner.” Slide 3.3

Presented by: Mr. Raziq Okay, what is an “accounting system”? “A systematic approach to collecting, processing, and communicating financial information to decision makers.” Slide 3.4

Presented by: Mr. Raziq Principal Elements of an Accounting System Accounts Chart of accounts Journals and ledgers The accounting cycle Slide 3.5

Presented by: Mr. Raziq Accounts The basic storage units for financial data in an accounting system. Cash 4, Cash” balance”? $3,800 Slide 3.6

Presented by: Mr. Raziq Chart of accounts: An address book for a company’s accounts 101. Cash 102. Accounts Receivable 103. Supplies Accounts Payable Common Stock Rental Revenue 402. Interest Revenue Salaries Expense 502. Utilities Expense Slide 3.7

Presented by: Mr. Raziq Journals and Ledgers: The Accounting “Books” General journal: the accounting record in which the dollar amounts for transactions and other financial events are initially recorded by businesses that maintain only one journal. General ledger: the accounting record that contains each of the individual accounts for a business’s assets, liabilities, owners’ or stockholders’ equity, revenues, and expenses. Slide 3.8

Presented by: Mr. Raziq The accounting cycle: the set of recurring accounting procedures that must be performed for a business each accounting period. Slide 3.9 Task Accounting Activity Record financial data Journalize transactions Collate financial data Post transations to the general ledger Organize account Prepare trial balance balances Consolidate and Prepare financial classify account statements balances

Presented by: Mr. Raziq Internal Control for Business Organizations An accounting system is one element of a larger system that business executives use to maintain effective control over their organizations. Slide 3.10

Presented by: Mr. Raziq Internal control is a process-- effected by an entity’s board of directors, management, and other personnel-- designed to provide reasonable assurance that key entity objectives will be accomplished. Slide 3.11

Presented by: Mr. Raziq Key Components of Internal Control Slide 3.12 Accounting system Control environment: the degree of control consciousness within an organization Control activities: the policies and procedures established to help ensure that an entity’s primary organizational objectives are accomplished

Presented by: Mr. Raziq Examples of Control Activities vSegregation of key functional responsibilities vProper authorization of transactions vUse of prenumbered accounting documents vPeriodic counts of inventory vClerical tests vPeriodic reconciliations Slide 3.13

Presented by: Mr. Raziq Key Duties that Should Be Segregated in an Accounting System Authorization RecordkeepingCustodianship Slide 3.14

Presented by: Mr. Raziq Internal Control and Computer Processing Businesses, large and small, can benefit significantly by integrating computer processing into their accounting and control functions. Slide 3.15

Presented by: Mr. Raziq Computer Processing and Internal Control Implications 4Uniformity in the processing of transactions 4Initiation and execution of transactions 4Existence of transaction trails 4Ability to segregate key functional responsibilities 4Potential for errors 4Monitoring capability of management Slide 3.16

Presented by: Mr. Raziq Examples of Control Activities in Computer-based Accounting Systems oMaintain back-up copies of key computer programs oPeriodically process “test” transactions oData input controls oLimit access to computers oEstablish procedures to identify parties accessing and operating each computer oLimit access to key data files and computer programs Slide 3.17

Presented by: Mr. Raziq Two Key Trends in Information Processing Technology... and Their Implications for Accountants Outsourcing of information systems Electronic data interchange (EDI) Slide 3.18

Presented by: Mr. Raziq Internal Control: An International (Multinational) Perspective Recent years have seen a dramatic increase in multinational business operations This trend poses significant challenges for accountants Among these challenges is designing an internal control process for a business organization that cuts across several cultures Slide 3.19

Presented by: Mr. Raziq The Foreign Corrupt Practices Act of 1977 has Important Implications for U.S. Companies *Prohibits payments of bribes and related inducements to establish/maintain business relationships in foreign countries *Requires all public companies to establish internal controls that have a high likelihood of preventing and detecting bribes and similar payments Slide 3.20