1. the UNIVERSITY of GREENWICH 1 September 2009 L7 Audit and assurance J. E. Spencer-Wood Auditing and assurance Lecture 7a Introductory session Directors’ systems

2. the UNIVERSITY of GREENWICH 2 September 2009 L7 Audit and assurance J. E. Spencer-Wood Introduction to this session Up to now we have now looked at some conceptual and regulatory issues and the auditor This session is a revision from previous studies. It covers aspects of accounting systems, internal control, law and accounting matters… Not all students will have fully covered all of the areas so homework will involve reading up on matters not clearly understood…

3. the UNIVERSITY of GREENWICH 3 September 2009 L7 Audit and assurance J. E. Spencer-Wood Directors are ‘stewards’ (limited companies) CA06 requires directors to: Ensure all income is recorded Ensure all (and only) company expenses are recorded Safeguard and record company assets Record all company liabilities Directors’ and control

4. the UNIVERSITY of GREENWICH 4 September 2009 L7 Audit and assurance J. E. Spencer-Wood To ensure effective overall stewardship directors set up systems  Accounting systems  Production systems  Quality control (QC) systems… Directors’ and control (cont.)

5. the UNIVERSITY of GREENWICH 5 September 2009 L7 Audit and assurance J. E. Spencer-Wood Think for a moment… What does a production system do? What does a QC system do? What does an accounting system do? Directors’ and control (cont.)

6. the UNIVERSITY of GREENWICH 6 September 2009 L7 Audit and assurance J. E. Spencer-Wood What does a production system do?  A way to get something made What does a QC system do?  A way to identify sub-standard items or services What does an accounting system do?  A way to record business transactions that have a monetary value Directors’ and control (cont.)

7. the UNIVERSITY of GREENWICH 7 September 2009 L7 Audit and assurance J. E. Spencer-Wood ‘Transactions’ Where does an accounting ‘transaction’…  Start?  Finish? Using ‘sales’ as an example… Directors’ and control (cont.)

8. the UNIVERSITY of GREENWICH 8 September 2009 L7 Audit and assurance J. E. Spencer-Wood ‘Transactions’ Where does a sales ‘transaction’…  Start? –A customer will ring, write, e-mail or visit to place an order  And finish? –In the financial statements (the accounts) The IS (P&L a/c): ‘Sales’ and The B/S: Accounts payable (Debtors) Directors’ and control (cont.)

9. the UNIVERSITY of GREENWICH 9 September 2009 L7 Audit and assurance J. E. Spencer-Wood So… The ‘accounting system’ must be the pathway to link the initiation of a transaction to the financial statements Using ‘sales’ as an example again… What links the initial event (here an order) to the financial statements? Directors’ and control (cont.)

10. the UNIVERSITY of GREENWICH 10 September 2009 L7 Audit and assurance J. E. Spencer-Wood The links (trail) between the ‘initiating event’ to the financial statements? Order Factory or warehouse notified Accounts dept. notified Sales invoice issued Sales daybook entered Sales ledger / Nominal Ledger (S/L control a/c) TB > ETB Financial statements – IS and B/S This is the outline of an accounting system Directors’ and control (cont.)

11. the UNIVERSITY of GREENWICH 11 September 2009 L7 Audit and assurance J. E. Spencer-Wood Now, think again… Could anything go wrong? Directors’ and control (cont.)

12. the UNIVERSITY of GREENWICH 12 September 2009 L7 Audit and assurance J. E. Spencer-Wood Now, think again… Could anything go wrong? Omissions, errors, theft… These possibilities are know as INHERENT RISKS of an accounting system. Such things could lead to ‘material misstatement’ in the financial statements Directors’ and control (cont.)

13. the UNIVERSITY of GREENWICH 13 September 2009 L7 Audit and assurance J. E. Spencer-Wood To ensure the accounting systems work controls are added fe: Agreeing the cashbook to the bank statement ‘Compliance’ with these ‘Internal’ controls (IC's) assures the directors that the systems are working properly  Accounting systems IC's  Production systems IC's  QC systems IC's… Directors’ and control (cont.)

14. the UNIVERSITY of GREENWICH 14 September 2009 L7 Audit and assurance J. E. Spencer-Wood How do directors know what controls to set-up? Cost-benefit? They assess all risks to the business (BR's)  Entity-wide risk management  IC models –COSO and COSO2 Directors’ and control (cont.)

15. the UNIVERSITY of GREENWICH 15 September 2009 L7 Audit and assurance J. E. Spencer-Wood Communication and information Risk assessment Control environment Control activities Monitoring Directors’ and control (cont.) The COSO model for IC

16. the UNIVERSITY of GREENWICH 16 September 2009 L7 Audit and assurance J. E. Spencer-Wood Directors’ and control (cont.) The COSO 2 model for IC

17. the UNIVERSITY of GREENWICH 17 September 2009 L7 Audit and assurance J. E. Spencer-Wood Directors are responsible for the production of financial statements (FS’s) from the accounting records Directors assert that the FS’s are ‘fairly presented’ (‘true and fair’ – UK) and comply with the companies legislation (CA06 – UK) In ISA terminology the FS's must be presented ‘fairly, in all material respects’ and comply with ‘national’ statutory provisions Under UK and Irish legislation  ‘the concept of the "true and fair view” remains the cornerstone of financial reporting and auditing in the UK’ (FRC, 2005) Directors’ and financial statements (FS's) / accounts

18. the UNIVERSITY of GREENWICH 18 September 2009 L7 Audit and assurance J. E. Spencer-Wood ‘Assertions’ Explicit assertions  Lorry cost £40k  Profit ¥340k Implicit assertions  Going concern basis has been used  GAAP has been followed Directors’ and FS's (cont.)

19. the UNIVERSITY of GREENWICH 19 September 2009 L7 Audit and assurance J. E. Spencer-Wood SalesProduction Ordering Accounts MaintenanceTreasury Canteen Advertising R & DStoresPackingDeliveryQC… Control systems